Article by Larry Smith & Ken Euwema | Featured on Journal of Accountancy
As a part of the response to the call for increased transparency and accountability among not-for-profit entities (NFPs), FASB has taken on a project to improve the existing NFP financial reporting model. The goal is to improve the usefulness of NFP financial statements by providing better information about an NFP’s liquidity, financial performance, and cash flows to the primary users of financial statements, governing boards, donors, grantors, creditors, and other stakeholders of NFPs.
The fundamental reporting model for NFPs has existed for over 20 years. During that time, NFP organizations have developed different methods of reporting their operating results in a way that conveys the connection between financial choices and mission execution because existing GAAP does not prescribe a specific way of reporting operating performance. Additionally, changes in endowment laws together with the existing framework for reporting restricted and unrestricted net assets, and the lack of required information about the liquidity of an organization, have contributed to the confusion in determining whether an NFP is in sound or poor financial condition.
On April 22, FASB issued an exposure draft, Proposed Accounting Standards Update (ASU), Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities. In reaction to feedback from NFP constituents, primarily FASB’s Not-for-Profit Advisory Committee (NAC), FASB is proposing fundamental changes to both the presentation and disclosures in financial statements of not-for-profit organizations. This article explains the basic requirements of the proposal and the reasons for the proposed changes, and it describes the planned activities of the board and its staff to assess whether stakeholders believe the benefits of the proposal through improved financial reporting of NFPs justify the costs to implement it.