Accounting Guidance for Not-for-Profit Entities Is Changing
The Financial Accounting Standards Board (FASB) has recently clarified certain guidance relating to not-for-profit (NFP) entities. Specifically, it has issued Accounting Standards Update (ASU) No. 2012-05, Statement of Cash Flows (Topic 230), Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows, and ASU No. 2013-06, Not-for-Profit Entities (Topic 958), Services Received from Personnel of an Affiliate. The latter ASU was issued on April 19, 2013. Separately, the American Institute of Certified Public Accountants (AICPA) in March 2013 issued new guidance in the form of an updated Audit & Accounting Guide (AAG), Not-for-Profit Entities.
Background—Who Makes Which Rules?
The FASB establishes accounting rules in the United States (commonly known as generally accepted accounting principles, or “U.S. GAAP”) for all companies whether public or private, for-profit or not-for-profit. Companies that are public also have to follow the rules of the U.S. Securities and Exchange Commission (SEC). With the issuance of the FASB Accounting Standards Codification in 2009, any accounting guidance issued by the AICPA is no longer authoritative, although entities and their auditors typically consider AICPA guidance when a particular situation or “facts and circumstances” doesn’t quite fit the FASB rules.
What Exactly Is Changing?
Cash Flow Presentation Change
The FASB, in ASU 2012-05, clarified the way in which an NFP entity presents certain items in its cash flow statement. Specifically, if a donor makes a contribution of a financial asset (e.g., a debt or equity instrument) that will be converted to cash “nearly immediately,” the proceeds are to be reflected as an operating cash inflow in the cash flow statement. However, if the donor restricted the use of the contributed resource to a long-term purpose (e.g., the acquisition or construction of a long-lived asset), then those cash receipts are to be classified as a financing activity.
The guidance in this FASB release is effective for fiscal years, and interim periods within those years, beginning after June 15, 2013. Certain transitional rules must be followed. The FASB’s purpose in issuing this standard is to eliminate the diversity in practice that has arisen over the years for such transactions, which can occur quite frequently in certain types of NFP entities.
Change in Accounting for Services Received
In ASU 2013-06, the FASB requires a recipient NFP entity to recognize all personnel services received from all affiliates (both for profit and not-for-profit) that directly benefit the recipient NFP entity and for which the affiliate does not charge the recipient NFP entity. These services are to be measured at the cost for the personnel providing those services recognized by the affiliate, unless cost would not be representative of the value of the service received. In those circumstances, the entity would be permitted to make an election to measure the service at fair value. NFP entities could make this election for each service they receive. The guidance in ASU 2013-06 is effective, on a prospective basis, for fiscal years, and interim periods within those years, beginning after June 15, 2014. The FASB is permitting early adoption and provides for certain transition reporting.
Updated Audit & Accounting Guide
The AICPA periodically updates its AAGs for references to recent FASB changes. Such updates might be considered helpful but “cosmetic.” In its updated AAG, Not-for-Profit Entities, however, several revised or new topics were discussed, including:
Reporting relationships of NFP entities with other not-for-profit and for-profit corporations, limited liability partnerships, general partnerships and financially interrelated entities.
Below-market rate loans and bargain purchases.
Reporting and measuring noncash gifts, including gifts-in-kind.
Contributions of fundraising materials, informational materials, advertising, or media time or space.
This updated AAG has also been revised to reflect the AICPA’s clarity project—a project discussed in my prior blog article, “GAAS Rules Are Being ‘Tweaked’ for Calendar Year 2012 Audits.”
When preparing this updated AAG, the AICPA’s Financial Reporting Executive Committee (FinREC) identified several accounting issues it considered appropriate to be addressed by the FASB and submitted these issues to the FASB’s interpretive group, the Emerging Issues Task Force (EITF) for consideration. The two above-described FASB ASUs resulted from this AICPA effort. Those issues that the EITF did not believe warranted FASB attention were included, as appropriate, in the updated AAG but the guidance is non-authoritative—like all accounting guidance in AAGs.
Other NFP-Related FASB Initiatives
As of May 1, 2013, the FASB has two other “active” projects on its agenda relating to NFP entities. The first one is a standard-setting project titled, “Not-for-profit Financial Reporting: Financial Statements.” This project is designed to focus on improving:
Net asset classification requirements.
Information provided in financial statements and notes about liquidity, financial performance, and cash flows.
The second FASB project is a research project titled, “Not-for-Profit Financial Reporting: Other Financial Communications.” The FASB plans to study other means of communication that NFP entities currently use in telling their financial story. Specifically, the project is scheduled to:
Review best practices followed by NFP entities in their financial communications with donors, creditors, and other stakeholders, and how such communications enhance the stakeholders’ understanding about the financial health and performance of the organization.
Determine whether the FASB, through standard-setting or other efforts, can contribute to promoting such communications.
While the FASB terms the above two projects as “active,” they have been on the FASB agenda since 2011 without much activity. That said, the FASB plans to issue an Exposure Draft for the standard-setting project above in the fourth quarter of 2013. It has no planned date for anything from the research project.
Over the past year, in various blog articles, I have discussed the effort by the FASB and its international counterpart, the International Accounting Standards Board (IASB) that issues International Financial Reporting Standards (IFRS), to converge their accounting principles. The two boards have been successful on topics like revenue recognition wherein a final converged standard is expected by June 30, 2013. Similarly, the two boards plan to issue a converged revised exposure draft on the accounting topic of leases by June 30. They are still struggling to achieve converged standards on the topics of financial instruments, including derivatives and insurance, with some believing that such topics will never be converged.
However, not on the radar at all is the accounting for NFP entities. In fact, guidance in the IASB literature as it relates to NFP entities is essentially non-existent. Specifically, as stated in the preface to IASB’s standards, “IFRSs are designed to apply to the general purpose financial statements and other financial reporting of profit-oriented entities.... Although IFRSs are not designed to apply to not-for-profit activities in the private sector, public sector or government, entities with such activities may find them appropriate.”
In short, while progress has been made on converging certain standards applicable to for-profit entities, true convergence of all accounting principles such that the FASB could “go-away” is not even plausible at this time.
About the Author
Ron Pippin is an experienced CPA based in Wheaton, IL. His 40 plus year career includes being an audit partner in Arthur Andersen, a member of Andersen’s Professional Standards Group (“national office”) in Chicago, the Director of Financial Reporting for a Fortune 50 company and most recently, the editorial director of CCH’s Accounting Research Manager. Currently, Ron does independent writing and analysis together with accounting consultation on a variety of topics.