The Financial Accounting Standards Board (FASB) has not-for-profit financial reporting on its horizon. The board is expected to propose new guidance on non-profit financial reporting standards in the second half of 2013.

“It’s exciting because the FASB is actively working to make the financial statements more understandable for the user and more comparable across the varying types of not-for-profit organizations, which will allow these organizations to better tell their story to donors.” says Liz Dollar, a partner in the Not-For-Profit and Government group at Moss Adams LLP.

Smart Business spoke with Dollar about how these changes originated and what they could mean for the not-for-profit world.

What is the FASB’s Not-For-Profit Advisory Committee?

This 17-member committee was established in 2009 to act as a standing resource for the FASB. The various users and preparers of not-for-profit financial statements now have a formal process to give input that guides the FASB on the impact of the current standards, and provides feedback on proposed updates. The committee also can assist in outreach activities to the sector.

How is the committee filling a need in the not-for-profit world?

The most impactful financial reporting standards for not-for-profits were statements on Financial Accounting Standards 116 and 117, but these standards were written almost two decades ago in the mid-90s. The committee has focused on determining whether these standards still make sense in the current financial environment. The committee also considers overall financial trends such as the convergence of international and U.S. standards as well as increased emphasis on reporting and transparency of financial information.

What has the committee recommended to FASB?

The committee and its three subcommittees, Reporting Financial Performance, Liquidity and Financial Health, and Telling a Story, recommended:

  • Focusing transparency on operating and non-operating activities in the statement of activities.

  • Suggestions for improving the cash flow statement, better linking it to the operating measures.

  • Reducing the net asset classes from three to two — unrestricted and restricted — in an effort to make financial statements easier to prepare and use, while adding some subcategories into the new net asset classes. Streamlining and improving the footnote disclosures, which have gotten long and can be unclear to many users.

  • Requiring some sort of management discussion and analysis in the financial statement that tells a story of what happened during the year. This could enhance the understanding of donors about the financial health and performance of the organization.

What is the FASB doing with these recommendations?

The FASB is currently working on a project entitled Not-for-Profit Financial Reporting: Financial Statements, which is focused on net asset classifications and the information provided in the footnotes about liquidity, financial performance and cash flow. An exposure draft is expected in the second half of 2013. After the comment period, changes likely would be implemented around 2015.

The FASB also added a research project looking at other financial communications, which could include requiring a management discussion and analysis in the financial statements.

Why should not-for-profit organizations be excited about these potential changes?

Not-for-profit organizations often need an audited financial statement because of a donor, statutory or lender requirement. However, they will tell you that most people don’t look at or understand these financial statements. When using a document to tell a story and solicit funds, the 990-tax form is often a more useful tool and something that is comparable among all not-for-profit organizations. The hope is that with the current project the FASB changes will simplify the financial statements, making them in turn more user friendly and useful to the reader.

What does this mean for business owners?

Not-for-profit financial statements typically are very different from for-profit financial statements. So, someone from a public company who serves on a not-for-profit board or who is a potential donor could have trouble reading the statement. With potential changes to the net asset classifications, focus on liquidity and streamlined disclosures, the not-for-profit financial statements should more clearly reflect an organization’s financial position and be more usable to those with a for-profit background.

Liz Dollar is a partner, Not-For-Profit and Government group, at Moss Adams LLP. Reach her at (415) 677-8247 or elizabeth.dollar@mossadams.com.

 

Upcoming live webcast: Register now for “Legislation with Social Purpose: Examining Regulations on International Activities and Social Purpose Corporations in the Context of Today’s Economy.” The webcast will be held from 10 to 11 a.m. PST Tuesday, March 12.

 

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Published in National

If your business leases equipment, vehicles, office space or other facilities, the proposed lease accounting standards could have a significant impact on your company’s financial statements.

Over the past two years, the business and financial communities have been awaiting finalization of the proposed lease standards that will transform balance sheets. The proposed changes, originally outlined in an exposure draft issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) in August 2010, have been delayed due to the large number of comments and questions received during the comment period. Some companies may have been hoping that the scope of standards would be lessened before they were finalized.

However, that doesn’t appear to be happening. In July 2011, the boards agreed to re-expose the revised standards to businesses and financial statement users. While the revised exposure draft isn’t expected until later in 2012, the boards have released some tentative decisions reached in their June 2012 meetings that shed light on how the standards may ultimately look.

“The boards haven’t changed their initial position that long-term leases represent an obligation that should be reported on a business’s balance sheet,” says Mark Lund, assurance services partner for Weaver. “The tentative decisions reached in their last meetings helped clarify some questions raised during the first round of responses from the public. Additionally, the boards appear to have addressed the issue of the acceleration of expenses for lessees in certain circumstances, which was criticized in the initial draft. Beyond that, I don’t see any reduction in scope or administrative relief in the updates.”

Smart Business spoke with Lund about the tentative decisions on the proposed standards and what they mean for businesses.

What are the major components of the proposed lease standards?

The proposed lease standards are a joint effort to help create convergence between U.S. and international accounting standards for leases and to address perceived weaknesses regarding current financial statement presentations of leasing arrangements. Under existing U.S. standards, leases are either classified as capital leases or operating leases. Businesses are not required to include operating lease commitments as liabilities on their balance sheets.

Under the proposed standards, lease commitments — existing and new — are to be recorded on a company’s balance sheet as liabilities with an offsetting asset called a ‘right-of-use asset.’ The lease obligation will be divided between current liability and non-current liability, similar to a note payable, and the existing capital lease presentation. The boards expect to issue a revised draft in the third quarter of 2012 and then take additional comments. The final standard likely will be issued in 2013.

How has the acceleration of expenses over the lease term been tentatively addressed?

In the first draft, capitalization of leased assets and liabilities accelerated the recognition of expenses earlier in the lease term. Companies were required to amortize the asset over the lease term, while the lease obligation was amortized using the effective interest method. That method results in more interest expense being recognized earlier in the lease term. Based on concerns, the boards have tentatively decided leases of property, such as buildings and real estate, can be accounted for using a straight-line approach, meaning the expense recognition will be recorded evenly over the lease term.

However, if your lease term represents the major part of the asset’s economic life, or if the lease payment obligation amount is the equivalent of essentially buying the asset, you won’t  be able to utilize the straight-line expense approach. All other leases of assets other than property will continue to be accounted for as outlined in the original exposure draft, including:

  • A business will initially recognize a right-of-use asset and the related liability for its lease obligation measured at the present value of the lease payments.

  • The right-of-use asset will be amortized, similar to depreciation, on a systematic basis that represents the use or consumption of the asset.

  • The amortization expense of the asset and the interest expense related to the liability are shown separately on the income statement.

What are some other key provisions?

The FASB further identified leases that are within the scope of the new standard to include long-term leases of land. Leases of 12 months or less, including the option periods, however, are excluded from the new standard. Proposed financial statement disclosures are lengthy and will add time to comply.

How will the changes impact businesses?

There will be an immediate gross-up of the balance sheet, adding right-to-use assets and related current and noncurrent liabilities to financial statements. The amounts could be significant, depending on lease activity. Bankers, sureties and other users often analyze companies’ liquidity and performance using financial ratios.

Current ratio, debt-to-equity ratio, and other leverage and coverage ratios will be affected with the addition of these new lease liabilities and related interest expenses. Covenant agreements will have to be revised for companies to remain in compliance.

How can employers prepare for the changes?

Prepare a pro-forma of your company’s balance sheet and income statement reflecting the new standard. Then, sit down with the users of your financial statement and discuss how the new standards will impact your company’s financial statements and ratios. This proactive approach will help bankers and creditors plan ahead on what to expect and how to maintain covenant compliance once the standards are finalized.

Mark Lund is an assurance services partner for Weaver. Reach him at (713) 297-6907 or mark.lund@weaverllp.com.

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Published in Houston