FASB Looking to Revamp Nonprofit Financial Reporting
The Financial Accounting Standards Board (FASB) has taken on the task of improving financial statement reporting for nonprofits. On November 9, 2011, at the recommendation of its Non-Profit Advisory Committee (NAC), FASB added a standard-setting project to its agenda, planning to tackle it in the second quarter of 2012. The board will focus on re-evaluating net asset classifications and improving how liquidity is portrayed in financial statements and footnotes. Changes, if enacted, will provide better information to creditors, donors, and other stakeholders.
FASB intends to clarify and improve:
- Reporting model for the statement of activities
The board will try to more clearly define and segregate operating and non-operating activities. Currently, organizations do not have to present an operating measure. Organizations may be required to identify the change in net assets due to operating activity, which could also lead to a separate statement of changes in net assets. This change, when proposed by FASB, would help in comparing the operating activities of nonprofit organizations.
- Net asset classification
The project also includes reviewing definitions in order to clarify certain terminology, including the definition of unrestricted net assets. The intent is to allow financial statement users (e.g., creditors, donors, CPAs) to better determine an organization’s liquidity and liquidity risks. Currently “unrestricted net assets” does little to inform the reader regarding liquidity of those assets. Potential new classifications include expendable and unexpendable net assets.
- Statement of cash flows
Many financial statement readers don’t understand how the statement of cash flows relates to the statement of activities. FASB will consider revising the format of the statement of activities to directly link cash flow to operations.
- Financial statement disclosures
FASB is also looking to streamline financial statement disclosures to improve their relevance and understandability. Since many footnotes relate directly to the financial statements, changes above will require new footnote disclosures.
Background
Although nonprofit accounting standards have been in place for about 20 years, it wasn’t until October 2009 that FASB established the NAC as a direct resource. The committee met several times over the last two years to discuss and recommend changes to the way nonprofit organizations report their annual financial information.
“The net asset classification standards have been around for almost 20 years. It was anticipated when the standards were set that improvements would evolve voluntarily, but that has not happened. Now FASB is taking a proactive approach and will establish new standards,” says Larry Adams, a nonprofit and government principal with LarsonAllen and a member of FASB’s NAC resource group.
What’s next?
FASB will issue a proposed standard and ask for feedback. According to Adams, standard setting projects like this usually become effective a year or two down the road. In the meantime, FASB will work with different associations to evaluate how potential changes will impact their member organizations.
“Changes would require auditors, management, board, and creditors to look at financial reporting in a new way,” Adams says.
Additional information
Larry Adams, Nonprofit and Government Principal
ladams@larsonallen.com or 612-397-3052
View our nonprofit and government principals.