Actions by the FASB and FAF to Reshape Financial Reporting for Both Not-for-Profits and Private Entities
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Actions by the FASB and FAF to Reshape Financial Reporting for Both Not-for-Profits and Private Entities

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The Financial Accounting Standards Board (FASB) continues its work specific to not-for-profits. Back in November 2011, FASB announced two agenda projects—a standards-setting project and a research ...

The Financial Accounting Standards Board (FASB) continues its work specific to not-for-profits. Back in November 2011, FASB announced two agenda projects—a standards-setting project and a research project (Not-for-Profit Financial Reporting; Other Financial Communications)—both intended to improve financial reporting of not-for-profit entities.
The standards-setting project explores existing standards for financial statement presentation by
not-for-profit entities in an effort to find ways to improve net asset classification requirements, as well as enhance the information provided in financial statements and footnotes regarding liquidity, financial performance and cash flows.

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Actions by the FASB and FAF to Reshape Financial Reporting for Both Not-for-Profits and Private Entities Actions by the FASB and FAF to Reshape Financial Reporting for Both Not-for-Profits and Private Entities Document Transcript

  • July 2012MHMMessenger TM M AY E R H O F F M A N M C C A N N P. C . – A N I N D E P E N D E N T C PA F I R M A publication of the Professional Standards Group Actions by the FASB and FAF to Reshape Financial Reporting for Both Not-for-Profits and Private Entities An Update on Not-for-Profit Financial Reporting The Financial Accounting Standards Board (FASB) • Examine classification within financial statements, continues its work specific to not-for-profits. Back particularly those related to restrictions imposed in November 2011, FASB announced two agenda by donors, such as whether to include restrictions projects—a standards-setting project and a research imposed by statute, contract, or others. project (Not-for-Profit Financial Reporting; Other Financial Communications)—both intended to improve • Revisit a definition of what should be included in financial reporting of not-for-profit entities. operating income, expenses, gains and losses, as well as an operating performance financial metric. The standards-setting project explores existing standards for financial statement presentation by • Avoid making changes impacting recognition and not-for-profit entities in an effort to find ways to measurement of contributions or of other revenues improve net asset classification requirements, as and expenses. well as enhance the information provided in financial statements and footnotes regarding liquidity, financial The disclosure framework component of the financial performance and cash flows. reporting project is interesting in that the FASB will consider adding a reporting entity decision process To further clarify the scope and intent of its project, in on assessing what disclosures to make in instances early June FASB said it aims to: where there are flexible disclosure requirements set by the FASB. This new thought process would allow • Improve and build on the existing financial reporting entities to scale the disclosures to what is most relevant model but not to completely overhaul or create an to the individual entity and could make the financial entirely new financial reporting model. statements more user-friendly. This project will also require the FASB’s decision process to address three • Explore presentation and disclosure in financial areas: statements and footnotes, including NFP-specific disclosures that may not be focused only on 1. eneral information about the reporting entity G liquidity, financial performance, and cash flows. 2. inancial statement line items F 3. ther events and conditions that affect future O cash flows roots run deep® TM (Continued on Page 2) our © 2 0 1 2 M A Y E R H O F F M A N M C C A N N P . C . 877-887-1090 • www.mhm-pc.com • All rights reserved.
  • MHMMessenger(Continued from Page 1)Answers to the above questions would then drive Backgroundwhether the FASB should consider disclosurerequirements for a particular project. These questions Unlike public companies, most private companiesalso provide examples of the types of disclosures that aren’t legally obligated to follow GAAP. Nevertheless,deliver information that would be incrementally useful many private companies prepare audited, GAAP-to users of financial statements. The overall goal is to compliant financial statements to satisfy lenders,improve the effectiveness of the footnote disclosures, investors, regulatory bodies and other stakeholders.not necessarily to reduce the volume of the footnotes. But preparing GAAP financial statements for privateHowever, a reduction in the volume of the footnotes companies often results in added complexity andcould also occur since the project should result in expense.footnotes with a sharper focus on information that isimportant to the entity. Last year, a blue-ribbon panel sponsored by the FAF, the American Institute of Certified Public AccountantsA consensus document for this proposal is expected in (AICPA) and the National Association of State Boardsthe summer of 2012, with a comment period following. of Accountancy recommended that the FAF establish an autonomous board with standard-setting power toThe FASB is also working on a research project address the needs of private companies. The boardto study other means of communication used by would focus on making exceptions and modificationsnot-for-profits to tell their story, and to inform donors, to U.S. GAAP rather than creating a new set ofusers, creditors and stakeholders. This process will standards.entail a request for information among the not-for-profitcommunity and the FASB will evaluate the responses Concerned that establishing an independent boardand assess next steps. would lead to a “two-GAAP system,” the FAF in October 2011 voted against the panel’s recommendation.Private Company Financial Reporting Instead, the FAF proposed establishment of a Private Company Standards Improvement Council (PCSIC)The movement toward developing accounting that would identify appropriate exceptions andstandards that better meet the needs of private modifications to GAAP for private companies, subjectcompanies has taken a step further. On May 23, to ratification by FASB.2012, after considering numerous public comments,the Financial Accounting Foundation (FAF) — parent Critics, including the AICPA, argued that the proposalorganization to the Financial Accounting Standards didn’t go far enough to remove the PCSIC from FASBBoard (FASB) — approved the creation of the Private control. The AICPA noted that the FAF’s proposalCompany Council (PCC). The PCC will identify and “falls substantially short of what is necessary to makevote on exceptions and modifications to U.S. Generally GAAP relevant for private companies by not includingAccepted Accounting Principles (GAAP) that respond establishment of a separate authoritative board.”to the needs of private companies and their financialstatement users. Although it is unclear at this timeexactly how, the coming changes in private-entityfinancial reporting may impact not-for-profits as well. (Continued on Page 3) © 2 0 1 2 M A Y E R H O F F M A N M C C A N N P . C . 877-887-1090 • www.mhm-pc.com • All rights reserved.
  • MHMMessenger(Continued from Page 2)The FAF’s Current Plan The FAF’s Process for Setting Standards for Private CompaniesThe FAF’s new plan generally follows its October 2011proposal, with several changes designed to address According to the FAF, the PCC and FASB will jointlycommenters’ concerns. In addition to shortening the establish criteria for determining when exceptionsbody’s name from “PCSIC” to “PCC,” the plan makes or modifications to GAAP are warranted for privateseveral changes designed to temper FASB’s control companies. The PCC will use the criteria to determineand influence over the PCC. For example, the PCC which elements of GAAP to consider for exceptionschair will not, as originally proposed, be a FASB or modifications. These determinations will be mademember. More significant, the PCC’s decisions will by a vote of two-thirds of all sitting PCC members,be subject to “endorsement” by FASB, rather than in consultation with FASB and with input from“ratification” as originally proposed. stakeholders. Proposals endorsed by a simple majority of FASB members will be exposed for public comment.Like ratification, endorsement is based on a simplemajority vote of FASB members. But the endorsement At the end of the comment period, the PCC willprocess, by requiring FASB to explain its decisions, re-examine the proposals and submit them to FASB,addresses the concern of some commentators that which will make a final endorsement decision, likelyratification would give FASB too much power by within 60 days. Any FASB-endorsed proposal willallowing it to “veto” or “table” PCC proposals. If the be incorporated into GAAP. For any non-endorsedFASB does not endorse a PCC recommendation, then proposals, as noted above, FASB will provide thethe FASB chair will be required to provide the PCC with PCC with a written explanation and suggestions forwritten notice of that fact and outline changes in the potential adjustments that might allow the proposal toproposal that could result in the FASB’s endorsement. be approved in the future.According to the FAF, the PCC will: After a three-year period, the FAF will assess the effectiveness of the PCC to determine whether it has • Consist of nine to twelve members, appointed by fulfilled its mission and whether further changes to the the FAF, including “a variety of users, preparers standards-setting process for private companies are and practitioners with substantial experience needed. working with private companies.” In addition, FASB aims to develop a prototype of a • Members will serve three-year terms, after which decision-making framework to guide the PCC. As part they may be reappointed for additional two-year of its standards-setting project, FASB is re-examining terms. the definition of a non-public entity so it may determine which companies will be included in the scope of • Hold at least five meetings each year and be the private company decision-making framework. overseen by a newly created Private Company The current thinking is that for-profit entities with Review Committee consisting of FAF trustees. conduit debt obligations that are traded in a public (Continued on Page 4) © 2 0 1 2 M A Y E R H O F F M A N M C C A N N P . C . 877-887-1090 • www.mhm-pc.com • All rights reserved.
  • MHMMessenger(Continued from Page 3)market would not be considered private companies; For more informationhowever, this assessment has not yet been made fornot-for-profit entities. If you have any specific questions, comments or concerns, please share them with Michelle SpriggsWhat Does This All Mean? of MHM’s Professional Standards Group or your MHM service professional. You can reach MichelleFor both not-for-profit organizations and private by email at mspriggs@cbiztofias.com and phone atcompanies, significant changes in financial reporting 774-206-8336.are on their way. It would be wise to monitor theactivities of the PCC and the FASB’s standards-settingproject because their actions will greatly impact howcompanies and organizations prepare their financialstatements. The FASB recently held a webinar onthese topics, and other FASB projects. The archivedversion of this presentation can be found via thefollowing link: FASB June 28 Webinar The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation. Please contact your MHM service provider to further discuss the impact on your financial statements. © 2 0 1 2 M A Y E R H O F F M A N M C C A N N P . C . 877-887-1090 • www.mhm-pc.com • All rights reserved.