FAS 116 and 117: the implementation process - Financial Accounting Standards Board's new Financial Accounting Standards for non-profit entities and contributions

Healthcare Financial Management, Oct, 1993 by John T. Bigalke

The Financial Accounting Standards Board finalized and issued two new statements in June 1993: "Financial Statements of Not-for-Profit Organizations" (FAS 117) and "Accounting for Contributions Received and Contributions Made" (FAS 116). The statements will become effective for fiscal years beginning after December 15, 1994. Until a revised audit guide is issued, however, several factors will need to be carefully considered when implementing the two standards.

Accounting standards are dynamic in nature. Whether it be through the issuance of new financial accounting standards by the Financial Accounting Standards Board (FASB), guidance in the form of FASB Technical Bulletins, or other less formal guidance, the process of accounting and reporting is constantly evolving.

Where needed, audit guides, such as the Healthcare Audit Guide, of the American Institute of Certified Public Accountants are updated to reflect these changes annually. However, when the changes are as sweeping as those resulting from the new "Financial Statements of Not-for-Profit Organizations" (FAS 117) and "Accounting for Contributions Received and Contributions Made" (FAS 116), particularly with the amount of interpretation available within these standards, extra care in implementation is mandated.

|FAS 117 and FAS 116, issued in June 1993, are substantially the same as those exposed in October 1992. The content of the two statements is not the subject of this article (for a detailed analysis, see "FASB proposes changes in not-for-profit reporting," William R. Titera, CPA, Healthcare Financial Management, April, 1993, pp. 39-49).~

FAS 117 and FAS 116 are effective for fiscal years beginning after December 15, 1994. A great deal of flexibility is provided within the standards. As a result, various committees of the AICPA will be working on revising their guidance to assist practitioners in implementing these new standards. In some cases, interim guidance may be provided by these various committees.

Before AICPA issues final revised guidance in the form of an audit guide, it must first review the current guide to identify sections that are effected and require changes. Once identified, there must be a consensus not only within the respective committee members, but with the oversight groups such as the Accounting Standards Executive Committee (AcSEC) and FASB, that the changes being made are, in fact, "conforming" changes, not development of new accounting. Revisions must be developed for the sections identified.

Once revised, the changed sections must be submitted to the appropriate regulatory authorities, AcSEC, and FASB. If no new accounting is identified, the revised guide can be issued. However, if new accounting is developed, a statement of position may be required. The process of issuance of a statement of position is substantially more time-consuming than updating the guide for conforming changes.

FAS 117 modifies several elements of the basic financial reporting mechanisms of not-for-profit entities, especially the statement of activities. The format for this statement will require careful and studied consideration. This issue is further complicated by the lack of consistency in financial reporting across the healthcare industry caused by the complex hierarchy of authoritative accounting and reporting guidelines. As highlighted in the July issue of Healthcare Financial Management ("The need for consistency in healthcare reporting," Terry Duis, FHFMA, CPA, pp. 40-44), this subject of consistency is far from resolved. The committee studying this issue must identify the constituency affected and provide for some type of road map for facilities and practitioners in determining which guidance is appropriate. Further, because of the diversity within industries, multiple examples may be required to provide sufficient direction. Also complicating the revision of reporting mechanisms by FAS 117 will be incorporation of the effects of FAS 116, specifically, the issues of pledges and donated property.

In addition to these factors, a number of other issues must be addressed:

* For the first time, it is required that "not-for-profit" hospitals address and report functional allocation of expenses.

* The latitude previously available regarding the aggregation or disaggregation of financial statements will be eliminated.

* The interpretational need for a classified balance sheet has been broadened under FAS 117.

* The continued validity of operating versus non-operating distinctions may need to be considered.

* Accounting for related party relationships is under study.

* The current format for the statement of cash flows will also need to be readdressed when implementing these standards.

A variety of other accounting standards and changes have occurred since the original guide was issued. These standards will undoubtedly be reviewed and incorporated in to whatever revised audit guide is developed.

The most appropriate advice during the development process is to be careful. Early adoption of FAS 117 and FAS 116 is encouraged, but early adoption should be approached with the full awareness that specific implementing guidance will be forthcoming from industry committees. It would be unfortunate to incur the time and effort necessary to implement FAS 117 and FAS 116, only to have additional guidance provided shortly thereafter.