NEWS RELEASE 10/03/11
FASB Not-for-Profit Advisory Committee Recommends Improvements to Financial
ReportingNorwalk, CT, October 3, 2011—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:
Not-for-Profit Advisory Committee has provided the FASB with focused input about
specific areas of improvement for not-for-profit financial reporting, and we
commend its members for their thoughtful approach to the issues,” stated FASB
Chairman Leslie F. Seidman.
- 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
- Improving the statements of activities and cash flows to more clearly
communicate financial performance
- Creating a framework for not-for-profit directors and managers to provide
commentary and analysis about the organization’s financial health and
operations, somewhat similar to the “Management Discussion and Analysis”
provided by publicly traded companies in their annual reports, to help them
bring context to their financial story
- Streamlining, where possible, existing not-for-profit-specific disclosure
requirements to improve their relevance and clarity.
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
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
“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.
strongly that adding this section to financial reports is important in helping
not-for-profit organizations in fulfilling the public accountability that is so
central to the sector,” said Mechanick. “They did caution, however, that it
should be scalable for smaller not-for-profit organizations.”
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. 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.
More information about
the Not-for-Profit Advisory Committee is available at www.fasb.org.
the Financial Accounting Standards Board
Since 1973, the
Financial Accounting Standards Board has been the designated organization in the
private sector for establishing standards of financial accounting and reporting.
Those standards govern the preparation of financial reports and are officially
recognized as authoritative by the Securities and Exchange Commission and the
American Institute of Certified Public Accountants. Such standards are essential
to the efficient functioning of the economy because investors, creditors,
auditors, and others rely on credible, transparent, and comparable financial
information. For more information about the FASB, visit our website at www.fasb.org.