FASB Issues Long-Awaited Nonprofit Financial Reporting Standard

By: Tim McCutcheonTim McCutcheon

The Financial Accounting Standards Board (FASB) has issued its long-awaited and much debated Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements for Not-for-Profit Entities. The ASU is the first in a two-phase project, and will change the way all not-for-profits (NFPs) classify net assets, prepare financial statements, and disclose certain liquidity and other information. The ASU is effective for fiscal years beginning after December 15, 2017 (i.e., for years ending December 31, 2018 and beyond). Early application is permitted by FASB. The amendments should be applied on a retrospective basis in the year that the ASU is first applied, with some optional exceptions. Obtain the ASU from FASB by clicking here.

FASB believes the new standard will improve NFP financial reporting by:

  • Reducing the complexity in net asset classification by eliminating the concept of permanently restricted net assets; this better aligns with the provisions of the Uniform Prudent Management of Institutional Funds Act (UPMIFA)
  • Improving the transparency and utility of information regarding liquidity and availability of cash to meet general expenditures
  • Increasing information as to what is and is not included in an entity’s financial performance measure
  • Eliminating inconsistencies in the type of information provided in reporting of expenses by function and nature across NFPs
  • Eliminating the requirement to prepare the indirect method reconciliation if an NFP chooses to use the direct method of presenting operating cash flows

For more information, read the full article here.

Accounting Standards You Should Consider When Closing Your Books for the Fiscal Year

As non-profits with June fiscal year ends start the process of closing their books for the year and begin the financial reporting process, there are new accounting standards that should be considered.  There is one new accounting standard in 2014 financial statements, and some that will affect 2015 financial statements, but should be applied to operations beginning in July of 2014. A summary of these accounting standards follows.

Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows
In October 2012, the FASB issued an accounting standard that requires a non-profit to consistently classify, within a statement of cash flows, cash receipts from the sale of donated financial assets with cash donations received for similar purposes. The cash receipts from the sale of donated financial assets must, upon receipt, have been directed without any non-profit imposed limitations for sale and converted nearly immediately into cash. Accordingly, the cash receipts from the sale of those financial assets should be classified as cash inflows from operating activities, unless the donor restricted the use of the contributed resources to long-term purposes, in which case, those cash receipts should be classified as cash flows from financing activities. Otherwise, cash receipts from the sale of donated financial assets should be classified as cash flows from investing activities by the non-profit.

The accounting standard provided a decision tree to illustrate the process that can be used to help determine the appropriate presentation of the cash receipts in the cash flow statement. This accounting guidance is effective prospectively for June 30, 2014 fiscal year ends. Retrospective application to prior periods is permitted but not required in the case where comparative financial statements are presented.

Obligations Resulting from Joint and Several Liability Arrangements
In February 2013, the FASB issued an accounting standard to provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date. Examples of obligations within the scope of this accounting guidance include debt arrangements, other contractual obligations, and settled litigation and judicial rulings.

This accounting guidance requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors, and any additional amount the reporting entity expects to pay on behalf of its co-obligors.

Entities are also required to disclose the nature and amount of the obligation as well as other information about those obligations.

This accounting guidance is effective for December 31, 2014 fiscal year ends. The changes required by this accounting guidance should be applied retrospectively to all prior periods presented if comparative financial statements are presented, so non-profits that present comparative financial statements should determine the applicability of this accounting guidance to determine what effects it may have on the current year financial statements when it is required to be adopted in the upcoming fiscal year.

Recognizing Services Received from Personnel of an Affiliate
In April 2013, the FASB issued accounting guidance which addresses the situation in which employees of a separately governed affiliated entity regularly perform services (in other than an advisory capacity) for, and under the direction of, the recipient entity. This new accounting guidance requires a recipient non-profit to recognize all services received from personnel of an affiliate that directly benefit the recipient non-profit. Generally, those services should be measured at the cost recognized by the affiliate for the personnel providing those services. However, if measuring a service received from personnel of an affiliate at cost will significantly overstate or understate the value of the service received, the recipient non-profit may elect to recognize that service received at either the cost recognized by the affiliate for the personnel providing that service, or the fair value of that service.

This accounting guidance is effective for fiscal years ending June 30, 2015, so non-profits that receive services from personnel of an affiliate will need to consider how the services are being recorded beginning this July.

Service Concession Arrangements
In January 2014, the FASB issued an accounting standard which provides specific accounting guidance related to service concession agreements. This accounting guidance clarifies that an arrangement should not be accounted for as a lease when it contains both of the following conditions:

  • The grantor controls, or has the ability to modify or approve, the services that the operating entity must provide with the infrastructure, to whom it must provide them, and at what price.
  • The grantor controls, through ownership, beneficial entitlement, or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement.

This accounting guidance is effective beginning with December 2015 fiscal year-end entities, so December year-end non-profits will need to begin following this accounting guidance January 1, 2015.

If you have questions about any of these new accounting standards, please contact an Eide Bailly professional. They will be happy to answer your questions.

FASB Board Meeting Tentative Decisions on Financial Statements of Not-for-Profit Entities

FASB

FASB

On May 28, FASB continued its discussions on changes to the financial statements of not-for-profit organizations, focusing on the presentation and disclosure of information useful in assessing liquidity. The Board decided that an entity should define the time horizon it uses to manage its liquidity (for example, 30, 60, or 90 days) and disclose the following information:

  1. Quantitative information about:
    1. The total amount of financial assets
    2. Amounts that are not available to meet cash needs within the time horizon because of restrictions (limits) imposed by contract (or law), donors, or actions of its governing board
    3. The total amount of financial liabilities that are due within that time horizon.
  2. Qualitative information about how the entity manages its liquidity. For example, an entity might disclose:
    1. Its strategy for addressing entity-wide risks that may affect liquidity, including its use of lines of credit
    2. Its policy for establishing liquidity reserves
    3. Its basis for determining the time horizon used for managing liquidity.

The decisions are tentative and may be changed at future Board Meetings.

FASB Continues Deliberations On Not-for-Profit Financial Statements

May 14, 2014 FASB Board Meeting

FASB

FASB

Financial Statements of Not-for-Profit Entities. The Board continued its deliberations about the presentation and disclosure of investment expenses and an intermediate measure of operations in light of the results of staff outreach with stakeholders of foundations and health care entities. The Board decided that:

  1. All not-for-profit (NFP) entities would be required to disclose identifiable, direct external investment expenses and the amount of direct internal investment expenses incurred during the period.
  2. An NFP business-oriented health care entity would be required to present an intermediate measure of operations as previously defined by the Board in this project. Those entities would have the option of also presenting the performance indicator that is currently required by paragraph 954-225-45-4. As a result of this decision, all NFP entities including health care entities would be required to present the same intermediate measure of operations.

FASB to Conduct More Research Before Making NFP Liquidity Recommendations

At a recent FASB meeting, the Board instructed staff to conduct more research into the implications of providing liquidity information on an NFP’s financial statements and notes.  Many of the suggestions were met with support AND reservations.  Board members were concerned that there could be overlap that would result in redundant disclosures.

The Board has taken on this discussion with the objective that clarity is achieved in how not-for-profits provide information that allows donors, creditors, and other users to assess the liquidity of an NFP.

 

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.

What’s Ahead in NPO Accounting?

bigstock_Change_6084877Management and finance teams in nonprofit organizations often ask for an update as to what is ahead in the world of nonprofit accounting. As of now, we see a couple of things that may be issued or clarified in the coming months.

The long-awaited revised AICPA Audit and Accounting Guide for Not-for-Profit Entities will be issued in the spring. The Financial Reporting Executive Committee (FinREC) of the AICPA issued a working draft of the accounting content of the guide. This proposed guide addresses many new accounting issues that have emerged over the years and includes guidance dedicated specifically to not-for-profit entities. There will be sections that address reporting relationships with other entities, reporting and measuring noncash gifts, programmatic investments and microfinance loans, reporting the expiration of donor-imposed restrictions, and a discussion of the legal and regulatory environment.

The FASB has requested comments on its EITF Issue 12-B “Not-for-Profit Entities: Personnel Services Received from an Affiliate for Which the Affiliate Does Not Seek Compensation”. A final document is expected during the first half of 2013.

The FASB also has a couple of projects in process. Non-for-Profit Financial Reporting: Financial Statements is a standards setting project and Non-for-Profit Financial Reporting: Other Financial Communications is a research project. Currently there are no expected dates of completion for these projects.