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.

1. July 2012
MHMMessenger
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
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2. MHMMessenger
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Answers to the above questions would then drive Background
whether the FASB should consider disclosure
requirements for a particular project. These questions Unlike public companies, most private companies
also 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 private
However, a reduction in the volume of the footnotes companies often results in added complexity and
could also occur since the project should result in expense.
footnotes with a sharper focus on information that is
important to the entity. Last year, a blue-ribbon panel sponsored by the FAF,
the American Institute of Certified Public Accountants
A consensus document for this proposal is expected in (AICPA) and the National Association of State Boards
the summer of 2012, with a comment period following. of Accountancy recommended that the FAF establish
an autonomous board with standard-setting power to
The FASB is also working on a research project address the needs of private companies. The board
to study other means of communication used by would focus on making exceptions and modifications
not-for-profits to tell their story, and to inform donors, to U.S. GAAP rather than creating a new set of
users, creditors and stakeholders. This process will standards.
entail a request for information among the not-for-profit
community and the FASB will evaluate the responses Concerned that establishing an independent board
and 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 and
standards that better meet the needs of private modifications to GAAP for private companies, subject
companies 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 proposal
organization to the Financial Accounting Standards didn’t go far enough to remove the PCSIC from FASB
Board (FASB) — approved the creation of the Private control. The AICPA noted that the FAF’s proposal
Company Council (PCC). The PCC will identify and “falls substantially short of what is necessary to make
vote on exceptions and modifications to U.S. Generally GAAP relevant for private companies by not including
Accepted Accounting Principles (GAAP) that respond establishment of a separate authoritative board.”
to the needs of private companies and their financial
statement users. Although it is unclear at this time
exactly how, the coming changes in private-entity
financial reporting may impact not-for-profits as well.
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The FAF’s Current Plan The FAF’s Process for Setting Standards for
Private Companies
The FAF’s new plan generally follows its October 2011
proposal, with several changes designed to address According to the FAF, the PCC and FASB will jointly
commenters’ concerns. In addition to shortening the establish criteria for determining when exceptions
body’s name from “PCSIC” to “PCC,” the plan makes or modifications to GAAP are warranted for private
several changes designed to temper FASB’s control companies. The PCC will use the criteria to determine
and influence over the PCC. For example, the PCC which elements of GAAP to consider for exceptions
chair will not, as originally proposed, be a FASB or modifications. These determinations will be made
member. 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 simple
majority vote of FASB members. But the endorsement At the end of the comment period, the PCC will
process, 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, likely
ratification would give FASB too much power by within 60 days. Any FASB-endorsed proposal will
allowing it to “veto” or “table” PCC proposals. If the be incorporated into GAAP. For any non-endorsed
FASB does not endorse a PCC recommendation, then proposals, as noted above, FASB will provide the
the FASB chair will be required to provide the PCC with PCC with a written explanation and suggestions for
written notice of that fact and outline changes in the potential adjustments that might allow the proposal to
proposal 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
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4. MHMMessenger
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market would not be considered private companies; For more information
however, this assessment has not yet been made for
not-for-profit entities. If you have any specific questions, comments or
concerns, please share them with Michelle Spriggs
What Does This All Mean? of MHM’s Professional Standards Group or your
MHM service professional. You can reach Michelle
For both not-for-profit organizations and private by email at mspriggs@cbiztofias.com and phone at
companies, significant changes in financial reporting 774-206-8336.
are on their way. It would be wise to monitor the
activities of the PCC and the FASB’s standards-setting
project because their actions will greatly impact how
companies and organizations prepare their financial
statements. The FASB recently held a webinar on
these topics, and other FASB projects. The archived
version of this presentation can be found via the
following 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.
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