Thomson Reuters Tax & Accounting News

Featuring content from Checkpoint

Back to Thomson Reuters Tax & Accounting News

Subscribe below to the Checkpoint Daily Newsstand Email Newsletter

Proposed Changes for Not-for-Profit Reporting May Come in March

Significant financial reporting changes could be in store for universities, charities, museums, and other not-for-profit groups.If the changes are adopted in a set of final amendments to U.S. GAAP, they’ll alter how not-for-profit organizations tell donors, creditors, and watchdogs how they spend and invest their money.

The FASB expects in late March to propose the first major changes to not-for-profit accounting in more than 20 years.

If the changes are adopted in a set of final amendments to U.S. GAAP, they’ll alter how universities, museums, charities, and other not-for-profit groups tell donors, creditors, and watchdogs how they spend and invest their money.The document will cover several broad areas and make the organizations’ financial statements more transparent, said FASB project manager Richard Cole in a December 15, 2014, webcast.

The FASB plans to weigh the costs and benefits of the proposed changes in the first quarter, Cole said.If the standard-setter agrees that the benefits outweigh the costs, it will release the proposal for public comment.

The proposal is expected to be a significant change from current accounting guidelines, which were established in 1993 with the publication of SFAS No. 116,Accounting for Contributions Received and Contributions Made,(FASB ASC 958), and SFAS No. 117,Financial Statements of Not-for-Profit Organizations.

At the time, the standards represented significant improvements to the financial reporting for not-for-profit organizations.But in the past two decades, the standards’ shortcomings have become apparent to many people in the not-for-profit sector, Cole said in an October podcast.

Neither SFAS No. 116 nor SFAS No. 117 set a uniform operating measure for not-for-profit organizations that included the expenses that went toward fulfilling their purpose and the available funds.Instead, not-for-profit groups are allowed to independently define how they measure their operations, which makes it difficult to compare the various organizations’ financial results.

The 2008 financial crisis drew attention to this information gap and increased the demand the interested groups had for more details about the organizations’ performance and the cash they have available.

“We always knew financial statements were a little bit lacking with liquidity information, but that really became highlighted in the crisis,”┬áCole said.

In November 2011, the accounting board started examining ways to update the standards and make the accounting more transparent.

To address the concerns about the organizations’ access to funds, the FASB plans to cover several areas designed to offer more insight about the cash groups have on hand in the forthcoming proposal.The accounting board wants to shrink the group of net asset classes to two from three.Instead of permanently restricted, temporarily restricted, and unrestricted assets, the FASB wants assets to be classified as either unrestricted or restricted.

Access to funds is a key aspect of financial reporting for not-for-profit organizations.For example, some college alumni may donate money for scholarships, others may earmark donations for a new science laboratory, and still others give money to a general fund that the administration has discretion over.The FASB wants not-for-profits to be clearer in how they report the restricted funds relative to the total amount of funds.

Second, the FASB wants to improve reporting about financial performance, which includes the statement of activities.The current statement of activities doesn’t include the presentation of an operating measure, which includes the expenditures related to an organization’s mission and donated funds available to be spent

Third, the FASB is calling for changes to the statement of cash flows.Most not-for-profit groups use the indirect method of presentation, which starts with net income, adjusts for all noncash transactions, and then makes a second adjustment for cash-based transactions.

The FASB heard, however, that this method doesn’t provide enough useful information.The board instead wants all groups to use the direct method of presentation, which calls for the separate reporting of cash receipts and payments tied to operating activities.

In addition to these changes on the face of the financial statements, the FASB wants new disclosures in the footnotes that will focus on an organization’s access to immediate cash.

The FASB also wants more information about endowments, particularly those that may be considered under water.

Not-for-profit groups are similar to businesses in that they have assets and liabilities.But given their dependence upon government grants and donations from businesses and individuals, they’re subjected to a different manner of public accountability.

Tagged with →