Spring 2013 issue of Horizons

Not-for-Profit FASB Update The FASB currently has two ongoing projects that could impact not-for-profit financial statements. The first is a standard-setting project that is looking at the not-for-profit financial reporting model. The overall consensus of the FASB is that this model is in need of “refreshing;” however, a major overhaul is not needed. Rather the FASB is focusing on three specific aspects of the reporting model: 1. Net asset classification and presentation of an organization’s liquidity Questions that the FASB is considering include: Can the current three classes of net assets based on donor-imposed restrictions be improved? Are they still relevant and useful? Are there opportunities for re-definition or re-grouping to make the statements more understandable to financial statement users? Acknowledging that is difficult to assess an organization’s liquidity using the current presentation, is there a better way to show liquidity and financial flexibility? 2. Reporting of financial performance The FASB is evaluating how the statement of activities and cash flows could be improved to better convey the financial performance of the organization. On the statement of activities, should an intermediate measure of operations be required? Could a model be developed that could be used for all not-for-profits? Should the statement of functional expenses be required for all organizations except those that receive only a minimal amount of contributions? Should the direct method be required for the statement of cash flows or should the statement just focus on operating/ unrestricted activity? 3. Streamlining and improving not-for-profit specific disclosures This is part of a larger FASB project

designed to reduce disclosure overload while making disclosures more relevant, comparable and effective. The final standard is expected to be issued in the second half of 2014. The second project is a research project exploring best practices for enhancing financial communications. FASB is considering suggesting the inclusion of some form of management commentary, which would accompany the financial statements and provide an explanation for the financial information presented. The FASB is still considering whether this would be required or just encouraged as well as how this would apply to the various types and sizes of not-for-profit organizations. A broad framework with lots of flexibility may be needed to ensure this is meaningful, but not burdensome, especially for small organizations. A decision on whether this research project will move to the next level and become a standard-setting project is expected in mid- 2013. In addition to the not-for-profit specific projects noted above, the FASB also has numerous other standards which are in various stages of adoption and implementation. One that has not received a lot of press in not-for-profit circles is the standard related to revenue recognition. As donations are specifically excluded from the project, it was presumed to have little impact on not-for-profits. However, under this standard, bad debts would be reflected as contra-revenue, not as an expense. Since bad debts are often reported as management and general (M&G) expenses, this change could impact certain key ratios for not-for-profit organizations such as M&G expenses as a percentage of total expenses; resulting in a higher program percentage and a lower overhead percentage. The final revenue recognition standard is expected in the second quarter of 2013 with implementation effective in 2015 or 2016.

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