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.

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