FASB’s First Steps in Revising NPO Financial Reporting

FASB-logoAt its meeting on May 29, the FASB made a tentative decision to define intermediate operating measures in the financial statements of non-profits. It decided on two key dimensions – mission and availability. Expenditures related to mission and donated money currently available would be included in its operating measure. Donations subject to donor restrictions would not be counted. However, the Board also determined they would look more closely at the definition of “currently available” to determine whether the availability dimension should be limited to liquid resources.

The FASB is also considering whether to allow non-profits to write commentary in their financial statements, similar to the management discussion and analysis section in SEC filings.

FASB plans to release a proposal for public comment about the same time it releases its potential changes to the presentation of non-profit financial statements.

AICPA Guide Chapter-by-Chapter: 3 – Financial Statements, the Reporting Entity, and General Financial Reporting Matters

As a member of the task force that drove the overhaul of the recently-released AICPA Not-for-Profit Entities Audit and Accounting Guide, I am providing weekly, chapter-by-chapter summaries to help users preview the guide.

Chapter 3 includes a comprehensive discussion of NFP financial statements:AICPA guide

  • Statement of Financial Position
  • Statement of Activities
  • Statement of Functional Expenses
  • Statement of Cash Flows

Who Should Prepare Expense Statements

While the FASB Accounting Standards Codification (FASB ASC) requires only voluntary health and welfare entities to provide a statement of function expenses, FinREC recommends that all NFPs that are supported by the general public (italics added) present a statement of functional expenses as a basic financial statement or in the notes to the financial statements.

–> An NFP could be presumed to be supported by the general public if contributions are 20% to 30% or more of total revenue and support, including both cash and in-kind contributions, but excluding government support.

When There’s a Gap in GAAP

When an NFP presents summarized prior-year financial statements that do not include sufficient detail to constitute a presentation in conformity with GAAP, FinREC recommends including all the disclosures required by GAAP for the prior year.  Therefore, the notes to the financial statements would be identical to those where full comparative financial statements are presented.

Relationship Guidance

Chapter 3 also includes an expansive discussion on reporting related entities, consolidations, mergers, acquisitions, and collaborative arrangements.  New to Chapter 3 is a table summarizing the guidance for 22 different relationships an NFP entity may have with other NFP entities, for-profit entities, or special entities, which is followed by 20+ pages of guidance and examples.  Appendix A presents flowcharts to help determine when another NFP or for-profit entity must, may, or may not be consolidated.

Fair Value Measures

Next, the Chapter identifies and discusses the pervasive use of fair value measures in the financial statements of NFP entities, and refers to the 2011 AICPA white paper, Measurement of Fair Value for Certain Transactions of Not-for-Profit Entities, which discusses:

  • Unconditional promises to give cash or other financial assets
  • Beneficial interests in trusts
  • Split-interest agreements

Disclosures and Related Parties

Finally, the Chapter discusses disclosures not covered elsewhere in the Guide, including noncompliance with donor restrictions, risks and uncertainties, subsequent events, and related party transactions.  In addition to those traditionally thought of as related parties, such as officers and directors, and their immediate family members, related parties also include:

  • Parties providing concentrations in revenues and receivables
  • Supporting organizations such as 509(a)(3) organizations
  • Financially interrelated entities
  • Affiliates, defined as a party that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with an entity
  • Any party that can influence the other to an extent that the transacting party might be prevented from fully pursuing its own separate interests.

Although material contributions from related parties must be disclosed, FinREC believes the NFP does not need to identify the party making the contribution by name.

Deadline Coming Soon for OMB Circular Proposal Comments

The extended timeline for comments on the proposed updates of the OMB Circulars is coming to a close. All comments must be submitted by June 2. The full OMB proposed requirements can be read here.

Changes include:

  • The consolidation of eight existing OMB Circulars into one document, with the goal of erasing duplication and improving efficiency.
  • Single audit requirements, including a change in the threshold of federal awards from $500,000 to $750,000.

More details on the changes are summarized on the AICPA Governmental Audit Quality Center’s Summary of Proposed Guidance. If you are the recipient of Federal Grants, now is the time to voice your opinion on the proposal. You can do so here.

AICPA Guide Chapter-by-Chapter: 2 – Auditing Considerations

As a member of the task force that drove the overhaul of the recently-released AICPA Not-for-Profit Entities Audit and Accounting Guide, I am providing weekly, AICPA guide
chapter-by-chapter summaries to help users preview the guide.

Chapter 2 is a “must-read” for auditors, NFP boards and managers. The chapter takes the reader through the entire audit process, start-to-finish, and explains the roles and responsibilities of the auditor and management of the auditee.


The chapter explains the scope, authority, and structure of Generally Accepted Auditing Standards (GAAS) and includes requirements establishing the general responsibilities of the auditor applicable in all audits, including the obligation to comply with GAAS.


The purpose of an audit of an NFP’s financial statements is to provide financial statement users with an opinion by the auditor about whether the financial statements are presented fairly, in all material respects, in accordance with an applicable financial reporting framework, the most common being U.S. GAAP.


An auditor must exercise professional judgment and maintain professional skepticism throughout the planning and performance of the audit and, among other things:

  • identify and assess risks of material misstatement, whether due to fraud or error, based on an understanding of the entity and its environment, including the entity’s internal control
  • obtain sufficient appropriate audit evidence about whether material misstatements exist, through designing and implementing appropriate responses to the assessed risks, and
  • form an opinion on the financial statements, or determine that an opinion cannot be formed, based on an evaluation of the audit evidence obtained

An auditor must develop an understanding of the NFP entity’s business, the environment in which it operates, and its internal control.


The operations of NFPs differ from those of for-profit entities in several significant ways, and those differences affect the risk of material misstatement. NFPs also:

  • are required to comply with numerous other provisions of statutes, contractual agreements, terms of grants and trust agreements, and similar limitations
  • often have revenue and expense transactions that are unique to the industry
  • are required to recognize agreements for future nonreciprocal transfers of cash, other assets, and services that are unconditional (i.e., promises to give)
  • have unique reporting requirements under GAAP – for example, they must report their expenses by function
  • face pressures that are unique to entities that seek revenues in the form of contributions and grants, transactions that often depend on the state of the economy


Appendix A at the conclusion of the chapter consists of an expanded discussion of fraud risks unique to NFPs and, in addition to being indispensable to auditors, would make a highly useful and instructive text for audit committees, boards of directors, and senior management members of NFPs.

All Non-Profits Can Learn from IRS’ College and University Compliance Project

Whether your organization identifies with the Tea Party or not, the IRS may be taking a deep dive into your financials, hunting for data related to key concerns identified after completing the Tax-Exempt College and University Compliance Project.

The Project started with a questionnaire distributed to 400 colleges and universities in 2008. Since, 34 of these institutions have been examined – 24 of which were issued written advisories – and the implications for all non-profits have been identified:

Underreporting of Unrelated Business Income (UBI) on Forms 990 and 990-T is rampant.  Common offenses?  Classification of advertising, facility rentals, and recreation venues.

  • The IRS will be taking a closer look at UBI, specifically focusing on recurring losses and expense allocation.

Comparability Data used for setting salaries is often weak. Those reporting compensation data (private colleges and universities) encountered compensation surveys that contained data for non-similar institutions, or data that did not take into account all types of compensation – not just salary.

  • The IRS will be addressing this issue through education and examinations.

If you think the recent IRS scandal will mean a lenient next couple of years for exempt organizations, best to rethink that position. There are no guarantees and better to proactively avoid examinations and penalties.

OMB Proposes Changes to Data Collection Form

omb_0The OMB has released proposed changes to the Data Collection Form (DCF) and its instructions. The DCF is used to summarize and submit the results of a single audit, with input from both the auditee and the auditor.

Proposed changes include a new section that will require additional information regarding the findings reported by the auditors.

A summary of the proposed changes and a copy of the proposed form and instructions can be found on http://www.whitehouse.gov/omb/financial_default under the heading “Recent News”.

AICPA Guide Chapter-by-Chapter: Starting with 1

AICPA guideAs a member of the task force that drove the overhaul of the recently-released AICPA Not-for-Profit Entities Audit and Accounting Guide, I am providing weekly, chapter-by-chapter summaries to help users preview the guide.

Chapter 1

Establishes that the Guide covers entities that meet the definition of a Not-for-Profit entity (NFP), which is an entity that possesses the following characteristics, in varying degrees, that distinguish it from a business entity:

a. Contributions of significant amounts of resources from resource providers who do not expect commensurate or proportionate pecuniary return
b. Operating purposes other than to provide goods or services at a profit
c. Absence of ownership interests like those of business entities.

Entities that clearly fall outside this definition include the following:

a. All investor-owned entities
b. Entities that provide dividends, lower costs, or other economic benefits directly and proportionately to their owners, members, or participants, such as mutual insurance entities, credit unions, farm and rural electric cooperatives, and employee benefit plans.

The Guide specifically applies to the following nongovernmental NFPs:

• Animal protection and humane organizations
• Cemetery organizations
• Civic and community organizations
• Colleges and universities
• Elementary and secondary schools
• Federated fund-raising organizations
• Fraternal organizations
• Labor unions
• Libraries
• Museums
• Other cultural organizations
• Performing arts organizations
• Political action committees
• Political parties
• Private and community foundations
• Professional associations
• Public broadcasting stations
• Religious organizations
• Research and scientific organizations
• Social and country clubs
• Trade associations
• Voluntary health and welfare entities
• Zoological and botanical societies

Providers of health care services follow the AICPA Audit and Accounting Guide, Health Care Entities.
The Guide applies to financial statements prepared in accordance with accounting principles generally accepted in the United States of America, and does not include guidance on special purpose frameworks such as cash and tax-basis financial statements, or IFRS.

NFPs should follow the guidance in the FASB Accounting Standards Codification (ASC) unless specifically exempted, even if the application of certain provisions may be unclear because elements or items are included in the ASC without considering the net asset reporting model included in ASC 958, Not-for-Profit Entities.

NFPs are specifically exempted from ASC guidance on:

a. Earnings per share
b. Reporting comprehensive income
c. Segment disclosure
d. Variable interest entities

Certain other provisions of the ASC simply do not apply to NFPs because they do not have ownership interests similar to business entities:

a. Common stock
b. Convertible debt
c. Stock purchase warrants
d. Share-based payments
e. Certain hybrid financial instruments convertible to equity

NFPs are permitted to utilize fund accounting as long as the required aggregated amount for each of the three net asset classes of net assets and total nets assets are displayed in the statements of financial position and activities as required by the ASC.

Chapter 1 concludes by referring the reader to sources of example financial statements.

Up Next: Chapter 2 – Auditing Considerations