FASB: Not-for-Profit Advisory Committee focuses on improvements to financial reporting
03 October 2011
The FASB released recommended changes in accounting rules suggested by the Not-for-Profit Advisory Committee, an advisory group to the FASB. The changes would enable not-for-profit organisations to report and explain their finances to donors and other interested parties better.
Key recommendations advanced by the FASB’s Not-for Profit Advisory Committee (NAC) include:
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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 notes;
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Improving the statements of activities and cash flows to communicate financial performance more clearly;
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Creating a framework for not-for-profit directors and managers to provide commentary and analysis about the organisation’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;
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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 autumn.
The recommendation to revisit how net assets are classified in a not-for-profit’s financial statements is intended to help 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 organisation’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.
Press release
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