02
Aug
10

Financial Statements for the International Accounting Standards Committee Foundation – a U.S. incorporated nonprofit organization with IFRS based financial statements.

In a previous post , my colleague wrote a great intro to the question of IFRS relevance to not-for-profit accounting. Here is my attempt at a follow up.

I was reading through the Center for Audit Quality – Guide to International Financial Reporting Standards , and found out that the International Accounting Standards Board (IASB) is based in London and is overseen by the International Accounting Standards Committee (IASC) Foundation, which is a not-for-profit corporation. The existence of the IASC as a not-for-profit organization piqued my interest and led me to search for the IASC financial statements (FS) to see what basis was used for their financial statements. In reading through the FS, I was further surprised to note through the IASC’s annual report , that the IASC Foundation is a nonprofit charitable organization incorporated in the State of Delaware, USA. The financial statements are prepared in accordance with International Financial Reporting Standards. The following questions came to mind:

1. What do the financial statements for IASC look like and how are they different from U.S. GAAP NFP Financial Statements?

2. Does the IASC have to file a Form 990 and are the disclosures on the Form different for IFRS based FS compared with GAAP based FS? Here are some observations from my cursory look at their Form 990:

a. Part IV – Question 12 –Did the organization receive an audited financial statement for the year for which it is completing this return that was prepared in accordance with GAAP? Answer given – Yes (although on their annual report, it shows that their financial statements are IFRS’ based. Maybe they have a GAAP version?)
b. Part IX – Statement of Functional Expenses is completed
c. Part X – Balance Sheet – Checked box for organizations that do not follow SFAS 117 (i.e. does not break out net assets by unrestricted, temporarily restricted and permanently restricted)
d. Schedule A – Part III – Support schedule is completed

Here are some interesting observations from the IASC financial statements:

a. Terminology differences – Statement of comprehensive income vs. statement of activities
b. Functional expenses – Expenses are broken out by program function on the statement of comprehensive income but other administration and fundraising costs are not specifically broken out or transparent on the face of the financial statements. Unable to calculate program to overhead ratio.
c. Functional expenses – Fundraising expenses are included in other costs
d. Net asset classification – Net assets are not broken out by restriction type. Unable to decipher the portion of net assets that are ‘committed’ and the portion that is available for support services/operations.
e. Functional expenses – There is no statement of functional expenses
f. Statement of cash flows – There is no reconciliation of change in net assets to change in cash
g. Revenue recognition for contributions – Contributions are recognized as revenue in the year designated by the contributor. Contributions received to be used in a subsequent year are recognized as current and non-current liabilities. Contributions not received but to be used in the current year (i.e. pledges?) are recorded as contributions receivable.
h. Approval of financial statements is formally stated in the financial statement notes

 

These differences are primarily a result of nonprofit specific accounting standards (FAS 116 (ASC 958-605), FAS 117 (ASC 958-205), FAS 124 (ASC 958-320,325) and FAS 136 (ASC 958-605)) that are in GAAP and not in IFRS.

In thinking through some of these differences, it made me wonder if these specific nonprofit accounting standards in GAAP really were valuable for the readers of the financial statements. I did some background reading of FAS 116 (ASC 958-605) to understand better the origin of and rationale behind creation of the standard.

FAS 116 (ASC 958-605)

Scope – Requires NFPs to distinguish between contributions received that increase permanently restricted net assets, temporarily restricted net assets, and unrestricted net assets. It also requires recognition of the expiration of donor-imposed restrictions in the period in which the restrictions expire. FAS 116 applies to contributions of cash and other assets, including promises to give. Particular areas that FAS 116 sought to address, clarify and make consistent was accounting for pledges and contributed services.

Purpose – The purpose of FAS 116 was to increase comparability, consistency, and credibility of financial reporting that will result from eliminating some of the inconsistencies in the then existing accounting guidance.

On restrictions – The FASB Board concluded that although an unrestricted gift and a restricted gift are similar events, information about the nature and extent of donor-imposed restrictions is relevant to users of financial statements. A donor-imposed restriction imposes special responsibilities on the management of an organization to ensure that it uses donated assets as stipulated. The limits imposed by those restrictions may impinge upon an organization’s performance and its ability to provide a satisfactory level of services.

On non-cash contributions and unconditional promises to give – The FASB Board (in FAS 116 appendix) believes that non-recognition or delayed recognition of non-cash contributions and unconditional promises to give generally omits relevant information about an entity’s economic resources and obligations and about its activities during a period, making financial statements unnecessarily incomplete.

So here is my take on why these specific nonprofit accounting standards matter (of course I am biased to GAAP because it is what I know!):

– (Theoretically) Increases the comparability of financial statements
– FAS 116 provides guidance on distinguishing between a contribution and an exchange transaction – IRS public support test
– Distinguishing between a contribution and a transfer (e.g. GIK) – impacts revenue and ratios
– Accounting for in-kind donations – impacts revenues and ratios, captures the true cost of doing business.

I know this is a short list and there are many more. What are your thoughts?

With the latest issuance of Accounting Standards Update 2010-07 related to Not-for-Profit Entities Mergers and Acquisitions, we have seen movement of nonprofit accounting standards closer to that of the commercial sector, and of GAAP to IFRS. However, for some of the specific nonprofit GAAP accounting standards, there is no IFRS equivalent. Could that mean that there would be IFRS conversion to GAAP for nonprofit accounting standards? This is all conjecture at this point and it remains to be seen what the future of nonprofit accounting looks like with the probable U.S. move to IFRS.

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1 Response to “Financial Statements for the International Accounting Standards Committee Foundation – a U.S. incorporated nonprofit organization with IFRS based financial statements.”


  1. 1 brwillia
    August 5, 2010 at 9:33 pm

    First off, I love FAS 116 and 117. I grew up with them. They were being promulgated when I was first starting in accounting, so I have come to know them very well. That said, I have some issues with them. For boards of small not-for-profits, the statements do not clearly show where the organization is operationally, especially in cases of multi-year pledges or long-term contributed space. There can be a huge increase in revenue which really has nothing to do with what happened to the cash flow that year. Of course, it is temporarily restricted revenue, but many users of financial statements aren’t used to mentally backing out the temp restricted in order to come to an understanding of where they are today. The statements may not be useful for making management decisions.

    It will be interesting to see where we go with this with the IFRS convergence.


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