I was pleased to see the article in the July JofA ("Not-for-Profit Financial Reporting Headed for a Change," page 42) about FASB considering changes in the model for not-for-profit accounting and reporting. However, I am concerned that the approach of having only two categories, unrestricted and restricted, in the financial statements would be a step in the wrong direction, making it more difficult for readers to understand the situation. Revision to the present not-for-profit model is essential but needs much more discussion and debate, particularly by users of not-for-profits' financial statements.
I am a retired CPA who had 25 years in the audit division of a major CPA firm and then 20 years with my small firm, which specialized in audits of not-for-profits. I have served and presently serve as board member, treasurer, and member of finance and investment committees for not-for-profits. It is my considered opinion that the understanding of the operations and financial status of not-for-profits by board members, staff, and donors is much less than in the old days when the reporting was by funds with specific purposes—operating, restricted, property, and endowment—rather than by legalistic restrictions. I believe FASB should seriously consider returning to the fund accounting model. If it is felt that restriction categories must be reported, that could be detailed in the net asset section of the balance sheet.
One of my earliest memories is a grade school teacher telling us that you cannot add apples and oranges and get a meaningful result. I see our present model as just that. When the endowment comprises all three restriction categories, nobody can figure what it is without reading all the notes. Unfortunately, few do. I believe it is important to have the basic statements provide as much information as possible. FASB needs to ask what information readers need and see that the financial statements provide it. I believe what is needed are the following:
1. The results of ongoing operations, without inclusion of nonoperating items like market value change in investments, bequests, legal settlements, gains on property sales, and gift annuity transactions. While these are frequent, they should be shown in a nonoperating separate section, so readers can evaluate regular operations. It should be very clear what the earnings on endowment were and what additional draw was taken.
2. Transactions in temporarily restricted net assets, with clear distinction between amounts currently expendable, and endowment appreciation, likely a permanent growing amount.
3. Transactions in the endowment funds, both donor restricted and board designated, in one place, with clear separation of income from market value change.
4. Transactions in fixed assets, clearly showing if they are included in the operating fund, and if so, how much is left in the operating fund for regular operations. Often that is negative. People need to see that property purchased from operations depletes money available for operations.
5. A major capital campaign needs reporting in a separate column so people can see it easily.
In summary, if FASB will consider and ask readers what they need to know and do their best to make required reporting tell it, not-for-profit reporting will be much improved.
—Stanley F. Dole, CPA
Grand Rapids, Mich.
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