Linsmeier Explains Benefits of Proposed Changes to Not-for-Profit Accounting

Linsmeier Explains Benefits of Proposed Changes to Not-for-Profit Accounting (June 18, 2015)

Accounting & Compliance Alert--Complete Edition (WG&L)

Summary: There’s general support among not-for-profit organizations for an update of their 22-year-old financial reporting requirements. But not all of them back all the changes that have been proposed, particularly those that will create differences between the accounting by not-for-profit groups and for-profit businesses. Some FASB members who approved the proposal believe the changes, particularly those to cash flow reporting, could lower not-for-profit organizations costs of preparing their financial statements.

Some attendees at the AICPA’s Not-for-Profit Conference in National Harbor, Maryland, wondered why the FASB did not give more weight to the dissenting views in the Proposed Accounting Standards Update (ASU) No. 2015-230,Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities, published in April.

But board member FASB member Thomas Linsmeier defended the accounting board’s decision to move forward with a proposal.

“First of all, we got an exposure draft here, it’s not a final standard,” Linsmeier said in response to some questions during the June 15, 2015, discussion.

FASB Chairman Russell Golden and Vice Chairman James Kroeker dissented from the proposal.

“We’ve made a lot of progress based on a call by the not-for-profit community to put proposals forward to better tell the business story,” Linsmeier said. “Since we got some ideas, let’s get some feedback.”

Golden and Kroeker agreed with the need to improve financial reporting for not-for-profit organizations and with many of the proposed changes, but they disagreed on the parts of the proposal that would create differences between the accounting by not-for-profit groups and for-profit companies.

“An important objective of the board is to eliminate, rather than create, accounting and reporting differences that are not justified by differences in underlying facts and circumstances,” they said in the dissent.

However, Linsmeier emphasized that the FASB undertook the project in 2011 based on input from its Not-for-Profit Advisory Committee (NAC) and others. The panel said the financial statements of non-profits could be improved to provide better information about the groups’ expenses and investments.

“Some of us said, let’s go forward before we stop and think for public business entities,” Linsmeier said. The accounting board plans to follow its standard course of using the comments and other feedback to revise the proposal before producing a final amendment to U.S. GAAP. At a later stage, it may also consider the feedback’s suitability for for-profit companies.

The proposal offers the most significant change to not-for-profit reporting in more than two decades. The FASB’s guidance on accounting by not-for-profit groups was established in 1993 with SFAS No. 116, Accounting for Contributions Received and Contributions Made, (FASB ASC 958), and SFAS No. 117, Financial Statements of Not-for-Profit Organizations.

Proposed ASU No. 2015-230 calls for changes to the requirements for classifying assets, a new cash flow statement, and more financial statement footnotes that lend insight into a not-for-profit organization’s access to short-term cash, financial performance, and overhead and expenses.

The proposal’s deadline for comment letters is August 20.

Golden and Kroeker didn’t agree with the concept of a new measure of operating performance for not-for-profit groups when the FASB has a research project to address a similar issue for for-profit businesses.

They also disagreed with the changes proposed in the statements of cash flows. The proposal calls for presenting cash flow using the direct method of reporting instead of the indirect method. The direct method calls for the separate reporting of cash receipts and payments tied to operating activities. The indirect method starts with net income, adjusts for all noncash transactions, and then makes a second adjustment for cash-based transactions.

“The changes introduced by the proposed update would establish fundamental differences in the approach to cash flow reporting for NFPs when compared with reporting for business enterprises,” the dissent reads.

The direct cash method could give “a lot of insight as to where things are coming and going,” said Linsmeier, who is a director on the governing boards of some not-for-profit organizations. “Indirect methods are a lot of things I don’t care about in some respect.”

Linsmeier also felt that the direct method of reporting cash flow may be less costly for not-for-profits than the indirect method.

“That’s why the board, the five of us, voted to go ahead with the proposal,” he said. “But we will step back and think about this all together before finalizing something for either set of communities