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Not-for-Profit Advisory Committee: Changes Are Coming

January 17, 2012

Reed W. Risteen, CPA

The big news in the non-profit organization (NFP) world these days is the establishment by the Financial Accounting Standards Board (FASB) of a Not-for-Profit Advisory Committee (NAC).  The NAC is charged with evaluating current non-profit accounting and financial reporting standards and proposing changes to the FASB.

The NAC is organized in three subgroups handling the following areas:

  • Reporting Financial Performance
  • Liquidity/Financial Health
  • “Telling the Story”

Although the NAC is in the beginning stage of the project, we are able to see the direction the NAC is taking in each of the subgroups.  Also note that each of the subgroups is working independently at this point so some recommendations are not consistent between the subgroups.

Reporting Financial Performance Subgroup

Preliminary recommendations of this subgroup include:

  1. Continue with a single presentation model for NFPs, rather than establishing different models for different types of NFPs.
  2. Require presentation of an “operating measure” in the statement of activities.
  3. Seek better linkage between operating items in the statement of activities and statement of cash flows.  Consider requiring the direct method of reporting cash flows.
  4. Require or encourage a two-statement approach to the statement of activities:
    • Operating revenues and expenses
    • Non-operating revenues and expenses
  5. Increase the applicability of the statement of functional expenses to NFPs that do not receive a significant amount of public contributions.
  6. Revise net asset classification to the following:
    • Donor restricted net assets
      • Time
      • Purpose
      • Perpetuity
    • Other net assets

Liquidity/Financial Health Subgroup

Preliminary recommendations of this subgroup include:

  1. Require, through additional disclosures and presentation on the statement of financial position, more liquidity information, such as:
    • Net assets available for immediate liquidation without penalty
    • Net assets required to be maintained by loan covenants
    • Net assets invested in property and equipment
    • Net assets required to satisfy statutory or other external requirements
    • Net assets designated by the Board for general and/or specific purposes
  2. Revise net asset categories as follows (note that this is inconsistent with the preliminary recommendations of the Reporting Financial Performance subgroup):
    • Unrestricted net assets
      • Spendable
      • Designated
      • Non-spendable
    • Restricted net assets
      • Spendable
      • Limited
      • Non-spendable
  3. Improve linkage between investment and endowment notes.

“Telling the Story” Subgroup

Preliminary recommendations of this subgroup include:

  1. Requiring NFPs to provide a “Management’s Discussion and Analysis” (MD&A) preceding the financial statement.  Currently, SEC registrants and state and local government entities are required to include MD&A with their financial statements.  Major sections of the MD&A being considered are:
    • Introduction and overview
    • Financial health
    • Operations
    • Liquidity
  2. Require reporting on the NFP's major segments or lines of business, which includes describing or presenting how the NFP’s program expenses relate to its various sources of revenue and support.
  3. Requiring all NFPs to present a statement of functional expenses.
  4. Including the use of nonfinancial information e.g., program service accomplishments, that relate to NFP performance.

Please note that the above preliminary recommendations are subject to change, and that the Committee’s final conclusions and proposed new standards must be approved by the FASB, then exposed to public comment prior to finalization.  Once finalized, the standards would be effective a year or two later in order to give auditors and NFPs time to implement systems to capture the new required information.  Therefore, it will probably be several years from now before the new rules would take effect.


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