Six key developments for not-for-profit CPAs

The missions not-for-profits (NFPs) follow do not make them immune to the business difficulties faced in other sectors.

Complexity, regulation, globalization, and economic trends all are creating challenges for NFPs, their leaders, and the CPAs who work with them. New accounting standards for NFPs are under development, and NFPs face new demands for transparency as the economy and donors recover from the financial crisis.

Here are six developments discussed Thursday at the AICPA Not-for-Profit Industry Conference in Washington:

FASB proposal coming. A FASB proposal designed to improve financial reporting for NFPs is expected to be released as an exposure draft in the fall, said Jeffrey Mechanick, CPA, CGMA, the assistant director for nonpublic entities at FASB.

One highlight of the proposal is expected to be a reclassification of net assets. Under current U.S. GAAP, net assets are divided into three categories—unrestricted, temporarily restricted, and permanently restricted.

The proposal is expected to divide assets into two classes—without donor restrictions and with donor restrictions—with some new disclosures required.

Policies on gifts, ethics needed. Various situations in which donors are suing NFPs highlight the need for strong, consistent policies and agreements on gifts and ethics, said Lou Mezzina, national industry director for higher education and other NFPs at KPMG.

“Keep good records,” Mezzina said. “Follow consistent gift acceptance policies. Craft solid gift agreements. Follow good communication policies inside the organization and with the donor. And, finally, include an ethics clause in all agreements.”

Young donors want information. NFPs are finding that younger donors often want measurable information on how organizations are spending their resources.

“Generation Y is more likely to demand accountability and transparency,” Mezzina said.

Quarterly earnings calls experiment. In the name of transparency, some NFPs have been experimenting with quarterly earnings calls to give interested parties information on their performance.

GuideStar USA—an NFP that aggregates and provides information about NFPs as a service to donors and the public—is among them. GuideStar jokingly labels the calls an “anti-hypocrisy mechanism,” because his organization often calls for transparency in the sector, said Jacob Harold, GuideStar’s president and CEO.

GuideStar has received great feedback about the calls, he said, but the organization also has been cautioned not to let the attention to quarterly results contribute to short-termism.

“We are definitely not saying that the cycles of social change are that short,” Harold said.

Middle class a concern. Surveys have shown that the wealthy have fared well in the recovery from the financial crisis, but the middle class has struggled to bounce back.

Mezzina said this is causing difficulties for NFPs because while they may be having success recruiting wealthy donors, smaller donations may be more difficult to secure than before the financial crisis. For example, $25 donations by people of modest income to sponsor friends who are doing walks or runs to benefit a cause may be more difficult to procure now, Mezzina said.

“Those numbers are dramatically impacted by the shrinking middle class,” Mezzina said. “… It’s that middle class that we’re concerned about.”

“Starvation cycle.” In some cases, NFPs are struggling to accomplish their missions because the donating public has been convinced that overhead ratios and fundraising ratios measure performance, Harold said.

He said this is leading to an NFP “starvation cycle.”

Although those ratios are valuable data points, they don’t provide critical information about the people and communities the NFPs are trying to serve, Harold said. But ever conscious of those ratios, NFPs are failing to fund core operations and failing to invest in people and measurement systems, Harold said.

“We have to allow NFPs to invest in themselves,” he said.

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