FASB Not-for-Profit Advisory Committee Recommended Improvements to Financial Reporting
Category: Articles
During October 2011, the Financial Accounting Standards Board (FASB) Not for-Profit Advisory Committee recommended improvements to financial reporting that would enable not-for-profit organizations to better report and explain their finances to donors and other interested parties. While they will almost certainly represent an increase in complexity, the changes recommended by the Committee are generally positive and should foster transparency through additional disclosures.
The most interesting recommendation includes creating a framework for not-for-profit directors and managers to provide commentary and analysis about the organization's financial health and operations somewhat similar to the "Management Discussion and Analysis" (MD&A) provided by publicly traded companies in their annual reports.
The MD&A disclosure is intended to add context to entity's financial statements and thereby enhance usefulness to donors, creditors, and other financial statement users. Tentatively, MD&A would have four sections: introduction and overview, financial health, operations, & liquidity.
The introduction and overview section will add context about the entity as a whole which will give users an understanding of the entity's mission, the legal and economic environment in which it operates, its governance structure, and its relationship with other entities that are critical to carrying out its mission. The financial health section will provide information regarding the extent, nature, and availability of the entity's resources and its capacity to carry out its mission, as well as its liabilities and risks that place demands on those resources and may jeopardize the entity's ability to sustain its mission. The operations section should provide a clear and concise description of the entity's notion of operating inflows and outflows, and discussion and analysis of entity's operating results for the period. Finally, the liquidity section will discuss how the entity measures and monitors its liquidity and liquidity risks and how those risks were managed during the reporting period.
One item of interest regarding the MD&A section is that it will be considered required supplementary information. As a result, this section is considered part of the general purpose financial statements, and is subject to review by auditors of the entity's financial statements.
We will keep you posted, as this recommendation progresses through the standard setting process. In addition, we will touch on the other proposed changes in a later edition of the Source.
Mr. Negari, is a supervisor in the audit practice of Rubino & McGeehin. Mr. Negari can be contacted for additional information at dnegari@rubino.com or by telephone at 301-564-3636.