The Future of Not-For-Profit Financial Statements

There are several recent developments which are likely going to have a significant impact on how nonprofit financial statements will look in the future: The establishment of the Private Company Council, the future of IFRS, and new projects added to the FASB agenda as a result of the efforts of the Not-for-profit Advisory Council.

I wrote previously about the debate about how FASB and the FAF should accommodate the needs of private companies. After the debate, letter writing campaigns, and press releases, the conversation settled down to what seems like a compromise: There is a new Private Company Council (PCC) which does not have any FASB member on it. This PCC will examine current and new GAAP standards looking for changes, exceptions and practical expedients for private companies. The PCC’s recommendations are subject to a simple majority approval by the FASB. It is important to note that Not-for-profits are not considered private companies and will not directly be affected by the work of the PCC. However there are two ways the PCC could impact NFP financial reporting. First, I suspect that the work of the PCC will highlight the resource constraints of private companies which will also bring attention to NFP resource constraints. Second, I think that the PCC work will result in practical expedients which will be logical for FASB to extend to NFPS as well.

Another area of change has been the broader talk of US entities moving to IFRS. It seems like it has been years that we have been waiting for the SEC to state a clear direction for public companies. We are still waiting, but there has been a shift in the perceived direction of the conversations. (Here is a great article on the latest IFRS developments, if you are interested) While it may still be possible that the US will go to IFRS at some point, if we do I think that we will likely retain a strong “US flavor”. It is likely that the FASB will retain independent standard setting authority. This may mean that some of the areas where US GAAP has more detailed guidance will remain in effect. ASC 958 for nonprofits is a great example of this.

The most industry specific changes are likely to come from the latest work of the FASB’s Not-for-profit Adversary Council (NAC). The NAC just completed a review of the not-for-profit financial reporting model. There has been some thought in the industry that FAS 116 & FAS 117 should be reviewed and perhaps refreshed or updated. The NAC divided their efforts into three areas:

  • Reporting Financial Performance – This group focused on reporting the results of the period paying particular attention to the statement of activities and statement of cash flows. The group agreed that there was room to improve the reporting of finance performance. One topic often raised for discussion is the idea that NFP’s should have some sort of operating measure (like net income) rather than merely reporting changes in net assets. The challenge with this concept is to find an operating measure(s) which is relevant across the diversity of NFPs. What is meaningful for a university is likely not as relevant for a conservation organization or food bank.
  • Liquidity and Financial Health – There is general agreement that liquidity information is both important, and not as clear as it could be under current GAAP. The NAC recommended that the FASB revisit the current net asset classifications and also consider alternate methods of improving liquidity information.
  • “Telling the Story” – Donors are very interested in what an NFP does, and how effective it is. These interests sparked a conversation about whether GAAP should require some form of MD&A for not-for-profits to expand the story of the organization in the financial statements. Of course organizations can voluntarily do this now, and many organizations produce annual reports highlighting programmatic accomplishments. However, the question is if there is value in standardizing and requiring this information under GAAP.

As a result of the NAC’s recommendations the FASB has added three new NFP standard setting projects on its agenda. These are:

  • Reexamine net asset classifications and improve liquidity information
  • Improve reporting of financial performance
  • Streamline and improve NFP-specific disclosures

In addition, the FASB has committed to do further research on the concept of an MD&A for NFPs. This research may or may not result in a future standard setting project.

So, it appears we are in the beginning of a season of change in nonprofit financial reporting. Now is a great time to make yourself heard. Be aware of these projects, and provide feedback and comments as you have them.


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