Get Ready, Here They Come: As the Effective Date for FASB Statements Nos. 116 and 117 Approaches, Not-for-Profit Organizations Must Prepare for Significant Financial Reporting Changes
As the effective date for FASB Statements nos. 116 and 117 approaches, not-for-profit organizations must prepare for significant financial reporting changes. Not-for-profit organizations (NPOs) face implementing new accounting standards that will require major changes in financial reporting. Financial Accounting Standards Board Statement no. 117, Financial Statements of Not-for-Profit Organizations, addresses financial reporting by all NPOs. A companion statement, Statement no. 116, Accounting for Contributions Received and Contributions Made, includes accounting and reporting requirements of donor-imposed time and purpose restrictions. These statements are part of an ongoing FASB project addressing inconsistency in financial reporting among NPOs. Accounting standards evolved to meet NPOs' external and internal needs, resulting in different accounting and reporting practices for the various not-for-profit industry groups. Comparability of statements among NPOs from different industry groups is therefore difficult at best, requiring external financial statement users to learn different accounting conventions. Because of these varying accounting practices, the new FASB standards will not have the same effect on all NPOs. Colleges and universities likely will feel the largest impact, followed by voluntary health and welfare organizations. Hospitals and health care service providers will have the fewest changes to deal with. The effective date for the new accounting guidelines is years beginning after December 31, 1994 (December 15, 1995, for NPOs with less than $5 million in total assets and less than $1 million in annual expenses). Although early implementation is encouraged, most organizations are taking a "wait and see" attitude. Statement no. 117 establishes certain minimum requirements for financial statements but allow considerable flexibility and encourage experimentation. In the first quarter of 1995 the American Institute of CPAs accounting standards executive committee expects to issue an exposure draft of the audit and accounting guide Audits of Not-for-Profit Organizations. The guide will address Statements nos. 116 and 117 and provide additional guidance. In the meantime, there are several steps CPAs can take to help clients prepare for the changes required by the two standards. The purpose of this article is to describe ways auditors can help not-for-profit clients prepare for the significant changes that lie ahead. THE NEW REQUIREMENTS Statement no. 117, which is directed at reporting aggregate financial information for an entire entity, requires three basic financial statements: * A statement of financial position. * A statement of activities. * A statement of cash flows. A statement of cash flows is new for many organizations and the other two statements will be significantly different from the ones used currently. Traditional reporting by fund groups in the financial statements is replaced by three classes of net assets: permanently restricted, temporarily restricted and unrestricted. The first two classifications are based on the existence of certain donor-imposed contribution restrictions. The standard requires that entities report total assets, total liabilities and total net assets (both in total and by the three classes of net assets) in the statement of financial position. Changes in net assets (again in total and by the three classes) also must be reported in the statement of activities. Currently, most organizations report totals only by fund. The statement of cash flows will be similar to one currently required by FASB Statement no. 95, Statement of Cash Flows, but the classifications of cash flows are expanded to reflect certain long-term donor-restricted activity. The standard allows considerable flexibility in formatting financial statements; the FASB encourages organizations to experiment with financial statement formats. …