NFPs excluded from FASB’s proposed definition of a public business entity

FASB would not consider not-for-profits (NFPs) and employee benefit plans public business entities for purposes of future standard setting, according to a new proposal the board exposed for public comment Wednesday.

FASB is defining a public business entity to prevent confusion over which entities can apply the alternatives within GAAP being developed for private companies by the Private Company Council (PCC). The board described the proposal in an issue of FASB in Focus released Wednesday, and consideration of NFPs in particular would change if the proposal is approved.

Multiple definitions of the terms “nonpublic entity” and “public entity” exist within FASB’s Accounting Standards Codification (ASC). The proposal, Definition of a Public Business Entity: An Amendment to the Master Glossary, would provide a single definition of a public business entity for use in future standard setting. The proposal would not affect existing financial reporting requirements.

Although NFPs generally have received the same alternatives as private companies within GAAP, distinctions between NFPs for alternatives within GAAP have typically been made on the basis of whether an NFP has public debt securities, including conduit debt.

The proposal would eliminate a public vs. nonpublic distinction between NFPs in future standard setting. FASB instead would consider various factors on a standard-by-standard basis to determine whether all, none, or only some NFPs will be eligible for alternatives within GAAP for private companies. These factors would include user needs and NFP resources.

What is considered a public business entity?

An organization would be considered a public business entity if it meets any of the following criteria:

• It files or furnishes—or is required to file or furnish—financial statements with the SEC. This includes other entities whose financial statements or financial information are required to be or are included in a filing.
• It is required to file or furnish financial statements with a regulatory agency by the Securities Exchange Act of 1934, as amended, or rules or regulations promulgated under the Act.
• It is required to file or furnish financial statements with a regulatory agency in preparation for the sale of securities or for the purposes of issuing securities.
• It has (or is a conduit bond obligor for) unrestricted securities that are traded or can be traded on an exchange or an over-the-counter market.
• Its securities are unrestricted, and it is required to provide U.S. GAAP financial statements to be made publicly available on a periodic basis because of a legal or regulatory requirement.

NFPs and employee benefit plans within the scope of ASC Topics 960–965 on plan accounting are specifically excluded from the definition of a public business entity under the proposal. This would represent a shift in how FASB considers NFPs.Comments can be made on FASB’s website and are sought by Sept. 20.

The proposal could eliminate confusion in one sense because it strives to develop and enforce one consistent definition of a public business entity. The FASB Accounting Standards Codification’s glossary currently contains three definitions of “public entity,” five definitions of “nonpublic entity,” and two definitions of “publicly traded company,” two members of the AICPA Not-for-Profit Organizations Expert Panel said in a joint email responding to a JofA request for comments on the ED’s effect on NFPs.

But the proposal could create difficulty for NFPs with conduit debt, according to Jennifer Hoffman, CPA, a partner in the Northeast Higher Education and Not-for-Profit Practice of Grant Thornton LLP, and Frank Jakosz, CPA, director of Not-for-Profit & Social Enterprise Services for Frost, Ruttenberg & Rothblatt PC.

If the proposal is approved, NFPs with conduit debt would follow public company guidance for previously issued standards and private company guidance for standards created after the new definition takes effect.

“The ED instructs NFPs to continue to apply previously issued and effective standards under the ‘old’ definition of ‘public,’ and for future standards NFPs will use the proposed ‘new’ definition,” Hoffman and Jakosz said. “Therefore, once the new definition is effective, an NFP with conduit debt could be in a challenging position.”

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.