FASB’s Not-for-Profit Advisory Committee (NAC) discussed recommendations on net asset classes, liquidity information and a possible requirement for management’s discussion and analysis (MD&A) when it met on Sept. 8–9. The NAC heard feedback from three working groups that formed recommendations for FASB to add to its standard-setting agenda. FASB has not yet considered the recommendations.


The NAC created the working groups earlier this year (see prior JofA coverage, “FASB Not-for-Profit Panel’s Subgroups to Study Possible Improvements"). The NAC charged the subgroups with studying ways for FASB and others to improve financial reporting for nonprofit entities and to develop recommendations and alternatives for the full committee to consider.


The committee agreed that nonprofits share some attributes of nonpublic companies, but the prevailing opinion is that they are more similar to public entities because of the public accountability created via donations and tax exemptions. For these reasons, the committee said it would be inappropriate to consider nonprofits in the same light as most private companies.


The committee also staked out differences between the boards of directors of nonprofits vs. other entities. Generally, boards are considered part and parcel with management, but the committee noted that board members or trustees of nonprofits have a special role in ensuring public accountability. They are generally not involved in directly running the nonprofits and should be considered as users of financial statements.


The NAC recommended several possible long-term projects for FASB’s standard-setting agenda to make financial reporting more useful for users of financial statements of nonprofit entities.


Possible agenda items include:


1. Net asset classes. The committee recommended revisiting current net asset classes in current nonprofit financial statements. There was agreement that many users of financial statements have found certain categories to be confusing over the years. Credit analysts use these classes to determine liquidity. There was concern that GAAP presentation does not provide useful information to make conclusions on liquidity, which can be an indicator of potential bankruptcy. The committee recommended looking at how liquidity is conveyed in the financial statements.


2. Form of financial statements. The committee recommended looking at the form and format of financial statements for better disaggregation about reporting financial performance and cohesion across the statements. The panel noted a desire for a better disaggregation of operating vs. nonoperating aspects of financial performance within the statements of activity and statements of cash flow, and doing it in a way that is conceptually grounded.


3. MD&A. The committee stated a strong consensus in favor of requiring or encouraging MD&A for nonprofits. The committee said this is important for “telling the story” of a nonprofit. The NAC noted that many nonprofits are starting to include MD&A in financial statements, but the committee also expressed a need to re-examine footnote requirements and avoid what some referred to as “disclosure overload.”


The NAC’s next meeting will be determined when FASB finalizes its schedule for 2012.


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