Magazine article The CPA Journal

Commentary on FASB's Proposed Changes to Nonprofit Financial Statements: Overhaul Falls Short on Usefulness and Practicality

Magazine article The CPA Journal

Commentary on FASB's Proposed Changes to Nonprofit Financial Statements: Overhaul Falls Short on Usefulness and Practicality

Article excerpt

Edäor's note: On April 22, 2015, FASB issued an exposure dr aß of a proposed Accounting Standards Update (ASU), Notfor-Profit Entities (Topic 958) and Health Care Entities (Topic 954), Presentation of Financial Statements of Not-for-Profit Entities. Shortly thereafier, the NYSSCPA formed a task force consisting of 15 members of the Financial Accounting Standards and Not-for-Profit Organizations Committees to comment on the proposed ASU. The Society's comment letter, dated August 20, 2015, is available at http://www. nysscpa. org/advocacy/ comment-letters. This article presents the author's personal viewpoints on the proposal and does not represent the position of the Society.

FASB's proposed ASU on financial reporting for nonprofits is intended to address the current net asset classification requirements and improve the reported information about a nonprofit's liquidity, financial performance, and cash flows.

"While the proposed ASU's basic theory is reasonable, its application, as presented in the proposed revisions to the Accounting Standards Codification (ASC), results in a financial statement presentation that is difficult to understand and overly? complex. The difficulty in applying the specific provisions to existing nonprofit financial statements has caused FASB staff to issue three sets of frequently asked questions to clarify the proposal's intent.

Classifying Net Assets

The proposed ASU seeks to improve disclosures of liquidity and reduce complexity by 1) combining permanently restricted and temporarily? restricted net assets into "net assets with donor restrictions" on the face of the financial statements and 2) requiring disclosure of the individual restrictions in the accompanying notes. This reflects a concent that permanently? restricted net assets may? be overstated (which understates liquidity) because recent changes in the law have blurred the differences between permanent and temporary restrictions.

Today?'s nonprofits have greater access to endowment funds than in the past but not all net assets currently classified as permanently restricted are available in the year following the issuance of the financial statements (i.e., near term). The New York Prudent Management of Institutional Funds Act (NYPMIFA) requires nonprofits to request authorization to spend funds below? the original dollar value of a restricted gift provided before September 17,2010. If donors do not object to such expenditures or fail to respond within the specified time frame, the nonprofit is limited to spending a "prudent" amount. NYPMIFA creates a rebuttable presumption of imprudence if, in any year, a nonprofit appropriates more than 7% of the fund's average fair value over the prior five years after considering eight specific factors. Nonprofits must overcome that rebuttable presumption to appropriate amounts greater than those deemed prudent.

The proposed net assets with donor restrictions w?ould have two components:

* Net assets that can be released from restrictions, due either to compliance with donor-imposed stipulations or the passage of time (currently called "temporarily? restricted net assets"), and prudent expenditures of funds formerly classified as permanently restricted

* Net assets unavailable either in perpetuity or in the near term because such expenditures w?ould be deemed imprudent.

The proposed changes do not differentiate between the two components on the face of the financial statements and do not require adequate disclosure (e.g., of the dates when restrictions are expected to be satisfied) in the financial statement notes. Whereas the first component describes assets that are often available in the near term (a measure of liquidity), the second describes assets not generally available until after the near term, such as donorrestricted endowment funds.

NYPMIFA permits the prudent appropriations of endow?ment funds. Expenditures in excess of prudent appropriations may result in "underwater" donor-restricted endowment funds. …

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