Following through on recommendations from the Not-for-Profit Advisory Committee, the Financial Accounting Standards Board (FASB) recently announced two additions to its slate of ongoing projects. With these two new projects, the FASB has committed to improving the existing standards for not-for-profit organization’s financial statements.

The Not-for-Profit Advisory Committee was established in October 2009 to provide the FASB with insight into the not-for-profit sector. As a result of the committee’s work over the past two years, they have recommended that the FASB take steps to improve and enhance not-for-profit financial reporting, which has remained largely untouched for the last 20 years.

The FASB has agreed to move forward on two projects.  The first is a standard-setting project which aims to clarify rules around net asset classification and footnote disclosures.  The second project is a research project which focuses on streamlining and standardizing methods of communications about not-for-profits’ financial results.

The standard setting project will address the need to maintain the current net asset classification system, which currently characterizes assets as either unrestricted, temporarily restricted, or permanently restricted. As some users of financial statements are confused by the labels currently used to describe net assets, relabeling or redefining classifications may alleviate some of the confusion. The project will  also address financial statement disclosures as they relate to an organization’s liquidity and will also attempt to define an operating measure for not-for-profit organizations. When originally issued, Statement No. 117 purposely maintained significant flexibility in the use of an operating measure, as long as the measure used was clearly defined and disclosed in the financial statements. Organizations also had the option of not adopting an operating measure. However, the original flexibility of this rule has resulted in widespread disparity, making it nearly impossible to compare similar organizations.

This project will also address the relationship between the statements of activities and cash flows, as information on the statement of activities often does not fully convey the true liquidity of the organization when presented on the statement of cash flows.  For example, endowment income that is used in operations typically includes total return, yet unrealized gains are backed out of operating cash flows.  These types of disparities add to the lack of clarity when assessing the true liquidity of the organization.

In addition to setting asset-classification standards, the FASB will also be completing a research project to explore options regarding a commentary and analysis disclosure framework. Since many not-for-profit organizations already prepare annual reports to convey information about their mission and financial results, some have suggested that the new proposed disclosure framework should mirror the Management’s Discussion & Analysis (MD&A) section typically found in the annual reports of public companies.  They argue that without a consistent, universal framework, there is a wide disparity in the content of the annual reports issued by not-for-profit organizations.  The research project will also address the specific disclosures currently required in basic financial statements and examine the possibility of moving some of the disclosures to the commentary and analysis section.

The FASB plans to release more information about the projects in the coming weeks. While the FASB adoption of the Committee’s recommendation is just one step in a multi-step process to update not-for-profit financial reporting, organizations are encouraged to provide their feedback and comments throughout the process to enhance the overall usefulness of these projects. Interested parties can visit www.fasb.org to learn more or click here for additional insight into the Not-for-Profit Advisory Committee.