Changes to Non-profit Organization Audit Rules Proposed
The Not-for-Profit Advisory Committee, an advisory group to the Financial Accounting Standards Board (FASB), has recommended changes in accounting rules that would enable not-for-profit organizations to better report and explain their finances to donors and other interested parties.
Key recommendations advanced by the FASB’s Not-for Profit Advisory Committee (NAC) include revisiting current net asset classifications, and how they may be relabeled or redefined, in conjunction with improving how liquidity is portrayed in a not-for-profit’s statement of financial position and related notes.
Improving the statements of activities and cash flows to more clearly communicate financial performance is also part of the proposed changes.
The recommendations will be submitted to the FASB chairman in a formal agenda request by the FASB staff. The FASB is expected to discuss the request at a public Board meeting later this fall.
Established in October 2009, the NAC is a standing resource group of the FASB. It was created to provide the FASB with input from the nonprofit sector on existing accounting guidance, current and proposed technical agenda projects, and longer-term issues affecting those organizations.
The recommendations are based on member discussions at meetings held in September 2010 and February 2011, as well as subsequent work done by three committee subgroups. Those subgroups, consisting of preparers, auditors, and users of nonprofit financial statements, were charged with assessing the effectiveness of the current nonprofit financial reporting model, which dates from the mid-1990s.
“While NAC members largely agree that the basic financial reporting model for not-for-profit organizations is sound, they also believe updates can be made to improve the overall value of a not-for-profit’s financial reporting package for users,” said Jeffrey Mechanick, NAC chairman and FASB assistant director of nonpublic entities.
“Some of those proposed improvements have clear linkages with projects already on FASB’s agenda, while others would potentially involve entirely new projects.”
One recommendation that received unanimous support, he added, was the creation of commentary and analysis framework for managers and directors of not-for-profit organizations to use to tell their financial story more effectively.
Hand in hand with this NAC recommendation is that of increasing the understandability of financial reports by streamlining certain disclosure requirements specific to not-for-profit organizations. This might include identifying current disclosure requirements that might be better suited for the proposed commentary and analysis section, and is consistent with the FASB’s goal of reducing complexity in financial reporting in general and with some of the aims of the FASB’s current disclosure framework project in particular.
The recommendation to revisit how net assets are classified in a not-for-profit’s financial statements is intended to help to clarify terms that commonly cause confusion, including the definition of an “unrestricted” net asset.
According to the SEC, this is a critical area for not-for-profits, since net asset classes are used by many credit analysts and other users to determine an organization’s liquidity and liquidity risks. The issue of liquidity risk is also being addressed by the FASB in its project on accounting for financial instruments.
Finally, the recommendation to improve how information is aggregated and classified within the statement of activities, and to create better cohesiveness between the financial statements, covers ground being considered by the FASB and IASB in their joint project on financial statement presentation for business enterprises. NAC members agreed that more clearly segregating and defining “operating” versus “nonoperating” activities, for example, would result in greater comparability in financial reporting of not-for-profits.
In addition to the recommendations described above, the NAC identified potential ways to create greater awareness among not-for-profit organizations on ways to improve their financial reporting that are currently permitted by U.S. GAAP.