Addressing the financial reporting needs of not-for-profit entities is proving to be more complicated than those of private companies due to the diversity among not-for-profits as well as the nuances within that sector, discussions by the Financial Accounting Standards Board’s not-for-profit advisory committee (NAC) revealed Sept. 7. There are a variety of different types of not-for-profits and therefore addressing such entities monolithically for standard setting purposes would not adequately tackle the issues within that space, NAC members indicated to FASB board members.

With regard to GAAP, not-for-profits fall between public and private companies, with some more closely aligned to public entities—especially those with a broader base of donors and other users and some (that have a very limited user base) that are more closely aligned to private companies, NAC members said.

Many Don't do GAAP. “Many not-for-profits are in the micro end of the spectrum, there are lots and lots of not-for-profits that don’t do GAAP financial statements, even those that do meet the thresholds for filing with state charities regulators typically because they have certain amounts of donation levels, many of the states actually don’t require GAAP per se but they do require audited financial statements,” said NAC Assistant Director Jeffrey Mechanick.
“That said, for many of those organizations there are others users—watch dog agencies, accreditation bodies, national organizations with affiliates such as United Way, lenders and so forth that do require GAAP financial statements,” he said.

FASB should also be careful with looking for any bright line differences in making distinctions among not-for-organizations, even conduit debt because of all the different sorts of structures and possible arrangements involved with conduit debt, Mechanick said summarizing the NAC's viewpoint on the topic.

Another nuance for not-for-profits is that public accountability and absence of owners gives NFP’s Board of Directors or Trustees a different role than that held by the director of a business entity, the discussions revealed. Typically, the Board of Trustees or Directors of not-for-profits are some of the primary users of not-for-profit financial statements, which differs from the way the FASB’s conceptual framework views boards of directors.

In comparison, for private entities, as a first step, FASB accountants were able to identify six factors that would differentiate them from public companies, which in turn informed the development of a decision making framework for private company accounting guidance.
“It sounds like trying to do the same for not-for-profits is not quite so straight forward,” FASB member Daryl Buck pointed out during the NAC discussion.
“In a perfect world you’d come up with five or six clearly defining differential factors such as we did with private companies but it sounds like the diversity that we have among not-for-profit entities doesn't really lend itself to such a clean cut," he said.

 Clarifying Not-for-Profits. NAC member Michael Tarnoff suggested that one of the places where it’s possible to “get a little closer to one of those clean lines" is in conduit financing. “Conduit financing can be further segmented into stuff that’s publicly traded and stuff that’s privately placed or a direct purchase with the bank where the bank buys the whole issue," said Tarnoff, who is also executive vp and CFO of Jewish Federation of Metropolitan Chicago.  "And I think when the non profit institution issues the kind of debt that’s publicly traded then it probably needs to be treated as a public company, so I think that’s one place where there might be a clear line,” he said.
Another NAC member, Stephen Golding, vp of finance and treasurer at the University of Pennsylvania, in addition pointed to the publicly traded debt outside the conduit debt vehicle, which has lured non-profits and which could also be considered by the board.

“Increasingly many nonprofits have gone to the taxable debt market, so the focus should be publicly traded debt, not just that related to conduit,” said Golding.  Golding also pointed to the diversity of revenue sources among non profits that would need to be taken into account. “The term “self selection” came up in terms of developing a profile of the not-for-profits in determining the degree of ‘publicness’ based on how many different types of users you’re dealing with,” he said. For example: entities that have federal funding, in healthcare, in education, among others, would have different donors, he said.

Among other factors NAC members highlighted included the importance of taking into consideration the resources (or lack thereof) of nonprofits and the timing and transition of them. In addition, some felt the FASB’s current disclosure framework project could help with some clarifications among nonprofits. Others pointed out that consistency--in relation to recognition and measurement as a result of the diversity among nonprofits--is important. “It’s very diverse,” said Bill Titera, Partner at Ernst & Young LLP. “You can have the reporting entity that has some entities within it that are much more like a public type entity and some that are much more like a private type entity,” said Titera.
Titera stated that there should be great consistency as it relates to recognition and measurement but flexibility as it relates to display, disclosure and transition guidance.

“Certainly I wouldn’t want to have one answer at one lower level and then I do a combination and struggle with the question: 'well now how do I recognize something differently at a higher level', that would give a bad outcome I think,” he said.

By dlugo@bna.com (Denise Lugo)