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By Denise Lugo
Not-for-profit organizations will get accounting clarifications that provide consistency for how to report grants from the federal government, foundations, and other contributors.
The Financial Accounting Standards Board voted May 2 to finalize pending rules to reduce reporting differences among nonprofits for how to account for research and development contributions.
“This is an area where there’s been a lot of diversity in practice,” FASB member Christine Botosan said during the discussions. “Diversity didn’t always result in the accounting intention of the board when the guidance was originally written. The changes will also take cost out of the system for preparers, auditors and users.”
All not-for-profits, from international nongovernmental organizations (NGOs) to local community charities, will find the rules relevant if they file financial reports. For example, the rules are applicable to universities as some institutions receive billions of dollars in federal R&D funding.
The guidance will be especially meaningful to funders and credit ratings agencies because it will allow them to make better comparisons among donees, accountants told Bloomberg Tax.
“It will allow them to hopefully compare apples to apples a little easier,” Lee Klumpp assurance director in BDO International Ltd.’s U.S. nonprofit and education practice in Washington, said.
“It’s not going to fix all the problems that are out there, but hopefully the clarity that’s provided for the nonprofit organization will help more organizations have consistent application of the accounting standard around contributions,” he said.
Even local facilities such as the library may receive a department of education grant, accountants said. “The local community recreation center may have a grant to work with high risk youth,” Klumpp said. “The local organization deals with mentally and physically handicapped adults definitely receives federal and state funds,” he said.
Currently, nonprofits vary in how they report funds from federal or foundation grants or contracts because some view them as donated contributions and others as revenues gained in exchange for services.
“There was a mindset that the government doesn’t give contributions, where contributions were thought of as donations,” Cathy Clarke, chief assurance officer, Clifton Larson Allen LLP, Minneapolis, Mn., told Bloomberg Tax.
“The definition of a contribution in a standard is a nonreciprocal transaction with an organization acting not in an ownership capacity,” Clarke said. “And so these government grants which the profession had treated as an exchange type transaction needed to be revisited.”
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