A proposal by the Financial Accounting Standards Board (FASB) that would radically alter the way non profit organizations present their financial information raises more problems than it solves, according to the NYSSCPA. In a comment letter published in August, the Society said the board’s plan was needlessly complex, falling far short of its goal to provide greater clarity, and was even more far-reaching than the board suggested. 

The proposal, outlined in the exposure draft, “Proposed Accounting Standards Update–Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities,” was released by the FASB in April. The board has presented the effort as an update meant to addresses current issues within not-for-profit accounting, or as board member Lawrence W. Smith said in a statement, a “refresh” that would make “not-for-profit financial statements even more useful to donors, lenders, and other users.”

However, according to David M. Rottkamp, a past chair of the Society’s Not-for-Profit Organizations Committee and one of the comment letter’s authors, when taken as a whole, the changes are less a tuneup than a complete overhaul of how organizations will present their financial information. 

“It’s a lot more extensive than just an update to the standard,” he said, adding that, if implemented, the changes would require a significant amount of education for CPAs who work in the not-for-profit sector, as well as for not-for-profits themselves. 

One indication of how sweeping the proposed changes are is the sheer number of CPA experts the Society assembled for its response. The NYSSCPA’s comment letter was drafted by a 15-person task force that included members of both its Financial Accounting Standards Committee and Not-for-Profit Organizations Committee, each of whom has extensive experience in technical analysis, nonprofit organization accounting, or both, Rottkamp added. 

While the task force found fault with several aspects of the draft, its chief overall objection was that the proposal was simply “too complex to function.” 

“We spent a lot of time discussing the proposal—and came up with a lot of interpretations of what it meant,” Rottkamp said. “To have a room full of people as experienced as the people on the task force not be able to agree on what the exposure said, means it’s not clear.”

One of the more significant revisions in the exposure draft is to how assets will be measured and reported. Under the current model, the use and purpose of assets are conveyed by reporting them in one of three classes: unrestricted, temporarily restricted or permanently restricted. The proposed standard, however, would collapse these three classes into two: net assets with donor restrictions and net assets without donor restrictions. Changes in net assets without donor restrictions would be further divided between those that arose from external factors (gains and losses, expenses, support, etc.) and those that came from internal actions (appropriations, internal transfers, etc.). 

The FASB said the change would address misunderstandings about how restrictions or limits on assets imposed by donors, laws, contracts and governing boards affect an entity’s liquidity, net asset class, performance and terminology, particularly as they pertain to unrestricted net assets. 

But while the Society agreed that nonprofit organizations should discuss asset liquidity in the financial statement, it said that the proposed presentation only muddies the water by getting rid of nuances that are necessary to adequately assess a nonprofit’s access to resources. “Those restricted net assets not readily available should be clearly identified on the face of the financial statements,” the Society wrote.  

Robert A. Dyson, a member of the Society’s Financial Accounting Standards Committee and chair of the task force that drafted the letter, said that by removing the distinction between temporarily and permanently restricted assets, “the board is implying that all of these assets are available.” However, he said, organizations often have endowments that are explicitly unavailable and bound by strong case law and regulation. For example, he explained that while a nonprofit might technically have generous assets, it could get into legal trouble if it tried to use them for certain necessary administrative functions, such as paying rent or salaries. 

The FASB proposal also calls for a major about-face in cash flow reporting, namely, by requiring organizations to switch from using the indirect method of reporting (adjusting changes in net assets to reconcile that amount to net operating cash flow) to the direct method (reporting the sum of gross cash receipts and gross cash payments from operating activities). These same cash flows would then be divided into operating cash flows, financing cash flows and investing cash flows. 

The Society, however, felt that what does and does not count as operating income won’t always be so clear, and to pretend otherwise is to “create false differentiation” between the two, resulting in an overly complex presentation that hinders the goal of comparability. For instance, many not-for-profit organizations generally consider investment income that is available for exempt activities to be operating revenue. The FASB, however, feels that it should be classified as investment revenue, since that investment is not part of the organization’s mission.  

“The people who set up these foundations put money aside for the specific purpose of funding operations,” Dyson said. “How do you say that’s not operating? The change adds to complexity, causes confusion and makes a foundation appear poorer than it really is. We couldn’t see any benefit in it, frankly.” 

Moreover, the Society expressed confusion as to why the proposed standard would change cash flow reporting from the indirect to the direct method. Rottkamp said there was no clear reason why the FASB would suggest this. 

“That’s not required anywhere across other industries or other organizations,” he said. “In our opinion, this makes our statements less comparable to others.” 

The comment period for the exposure draft closed on Aug. 20. Read the Society’s letter in its entirety online.

cgaetano@nysscpa.org