0August 24, 2016August 24, 2016
In News

FASB Releases New Accounting Standard for Not-For-Profits



Shutterstock_238756393On August 18, 2016, the Financial Accounting Standards Board issued a standard that affects all not-for-profit entities issuing GAAP-basis financial statements. The new standard simplifies and improves how a not-for-profit entity classifies its net assets as well as the information it presents in financial statements and notes about its liquidity, financial performance and cash flows.

One goal of the standard is to improve how not-for-profits (like charities, foundations, colleges and universities, health care providers, religious organizations, trade associations and cultural institutions) communicate their financial performance and condition to their stakeholders.

 

Why a New Standard?

The current not-for-profit financial reporting model has held up well for more than 20 years, however, the FASB’s Not-for-Profit Advisory Committee and other stakeholders have reported that, while existing standards were sound, they could be improved to provide better information to users of not-for-profit financial statements.

Specifically, stakeholders voiced concerns about the following issues:

  • Complexities in the use of the required three classes of net assets

  • Deficiencies in the transparency and utility of information in assessing an organization’s liquidity

  • Inconsistencies in the types of information provided about expenses and investment return

  • Misunderstandings about and the limited usefulness of the statement of cash flows, particularly with regard to the reporting of operating cash flows

 

What Does the Standard Do?

The standard requires not-for-profits to improve their presentation and disclosures.

This will foster the provision of more relevant information about their resources (and the changes in those resources) to financial statement users.

Generally, the qualitative and quantitative requirements fall in the following areas:

  • Net asset classes

  • Investment return

  • Expenses

  • Liquidity and availability of resources

  • Presentation of operating cash flows

 

What Are the Benefits?

By simplifying the face of the financial statements and enhancing the disclosures in the notes, not-for-profits will provide more relevant information about their resources and the changes in those resources.

This will be helpful to donors, grantors, creditors and other users, in assessing a not-for-profit’s:

  • Availability of resources to meet cash needs for general expenditures

  • Liquidity and financial flexibility

  • Financial performance

  • Service efforts and ability to continue providing services

  • Execution of its stewardship responsibilities and other aspects of its management’s performance

 

When Is the Standard Effective?

The standard is effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018.

Application to interim financial statements is permitted but not required in the initial year of application. Early application of the amendments in this Update is also permitted.

 

What’s Next?

This standard is actually the first phase of the FASB’s project to improve financial statements for not-for-profit organizations.

The second phase of the project is expected to address issues such as:

  • The requirement and/or definition of a measure of operations

  • The realignment of certain line items in the statement of cash flows to better match a required measure of operations

  • Whether or not segment reporting is a viable alternative to an analysis of expenses by nature and function for business-oriented health care not-for-profits.

Additionally, on September 13, 2016, the FASB is hosting a free webcast taking place live from 1:00 p.m. to 2:15 p.m. EDT, discussing the new standard and answering questions submitted by viewers. There are also some educational opportunities available through the AICPA’s Not-for-Profit Section online community that is being led by AICPA’s technical staff.

On behalf of FASB, I am looking forward to answering questions our stakeholders may have on the standard. In the meantime, you can find more information on the standard on the FASB website. 

Larry Smith, Member of the Financial Accounting Standards Board (FASB). Prior to being appointed as a Board member in 2007, Larry served five years as FASB’s Director of Technical Application and Implementation Activities. Mr. Smith joined the FASB staff in 2002 after a distinguished 25-year career at KPMG.

 College campus image courtesy of Shutterstock

 



Source: AICPA