Not-for-Profit Financial Reporting: Potential Changes on the Horizon
Approximately 20 years ago, the Financial Accounting Standards Board (FASB) issued standards related to the current presentation requirements of financial statements of a not-for-profit organization. The primary purpose of those standards issued approximately 20 years ago, was to provide reporting consistencies in external financial statements.
Fast forward to the present! The Not-for-Profit Advisory Committee (NAC), an advisory group to the FASB, is considering ways for the FASB and other standard setters to improve financial reporting for not-for-profit organizations. An enhanced model!
On November 11, 2011, the chairman of the FASB, Ms. Leslie Seidman, announced the addition of agenda projects intended to improve financial reporting of not-for-profit organizations. Ms. Seidman stated “that while sound, the existing standards for financial statements of not-for-profit organizations can be updated and improved to provide better information to donors, creditors, and others.”
Specifically, these standard-setting projects will focus on the financial statements and related notes that are distinctive to not-for-profit organizations.
Improve Current Net Asset Classification
One of the goals is to improve the current net asset classification (unrestricted, temporarily, and permanently restricted) structure and information provided in the financial statements and notes, particularly about a not-for-profit organization’s liquidity, financial performance, and cash flows.
In relations to the net asset classification structure, the FASB will review how net assets may be relabeled or redefined as it relates to liquidity, improving how it is portrayed in the statement of financial position and related notes. NAC found that many users of not-for-profits’ financial statements were confused by certain categories of net assets. Net assets have been used by credit analysts to help in determining liquidity. The current presentation does not adequately assist a potential user in determining liquidity. Therefore, the project will focus on looking at how liquidity is conveyed in the financial statements.
Another area of focus relates to the form of the financial statements. The goal of the committee is to provide better disaggregation, emphasizing operating vs. nonoperating in the statements of activities and cash flows. By moving the financial statements in this direction, the financial statements of a not-for-profit organization will more closely resemble a for-profit entity’s financial statements.
Tell our story! NAC unanimously recommends implementing a form of the Management Discussion and Analysis (MD&A) similar to that which is required of public reporting entities. NAC’s chairman stated: “members felt strongly that adding this section [MD&A] to financial reports is important in helping not-for-profit organizations in fulfilling the public accountability that is so central to the sector.” In implementing a MD&A requirement for not-for-profits, the key will be to make sure that it is appropriate for the size of the organization.
After twenty years, improvements to the existing model are probably warranted to provide better transparency and address concerns of users of not-for-profit financial statements. Let’s hope that the improved model that eventually prevails will be as solid as the one that has existed – stay tuned.