FASB proposes changes in not-for-profit reporting - Financial Accounting Standards Board - includes related article

Healthcare Financial Management, April, 1993 by William R. Titera

ACCOUNTING

In 1986, the FASB added to its agenda a project to establish standards to resolve certain inconsistent accounting and reporting practices of not-for-profit organizations. With the FASB's encouragement, the American Institute of Certified Public Accountants (AICPA) studied the issue and submitted a report. In 1989, the FASB created a task force to deal with not-for-profit reporting matters. In August 1989, the FASB issued an invitation to comment, on Financial Reporting by Not-for-Profit Organizations: Form and Content of Financial Statements, that included the AICPA report and requested comments on issues raised by that report.

In October 1990, the FASB issued an exposure draft of a proposed statement, Accounting for Contributions Received and Contributions Made and Capitalization of Works of Art, Historical Treasures, and Similar Assets. More than 1,000 respondents provided written comments on that exposure draft. Many suggested that since the projects on accounting for contributions and on financial statement display are interrelated, it would be more productive if they were combined or more closely coordinated. Near the end of 1992, the FASB issued an exposure draft on display and reissued a modified exposure draft on contributions. The comment period ended on Feb. 19, 1993, and public hearings were held on Feb. 25 and 26, 1993.

Once the FASB has evaluated the comments, it is expected to issue final statements, probably by the summer. The new standards would apply to annual financial statements issued for fiscal years beginning after Dec. 15, 1994.

General framework

Currently, financial reporting practices among not-for-profit entities are inconsistent due to the differences among the four separate AICPA Audit Guides (including Audits of Providers of Health Care Services |Health Care Guide~) that govern these reporting practices. To add to the confusion, the scope of some of the guides overlaps. For example, certain types of healthcare providers, such as drug abuse centers funded largely by public support, appear to fall within the scope of both the Audits of Voluntary Health and Welfare Organizations Guide and the Health Care Guide. Similarly, in addition to being governed by the Health Care Guide, hospital-related foundations may fall within the purview of the Audits of Certain Nonprofit Organizations Guide, and university hospitals may fall under the Audits of Colleges and University Guide.

The FASB's new standards are intended to resolve these inconsistencies. Further, the FASB has concluded that the standards should be no more stringent than those governing other business enterprises.

A not-for-profit organization is defined by the FASB as one that possesses the following characteristics: (a) contributions of significant amounts of resources from resource providers who do not expect commensurate or proportionate pecuniary return, (b) operating purposes other than to provide goods or services at a profit, and (c) absence of ownership interests like those of business enterprises. While the FASB has acknowledged that not-for-profit organizations have these attributes in varying degrees, a criticism of the proposals has been that most not-for-profit hospitals are more like business enterprises than typical eleemosynary organizations and may not possess two of the three characteristics.

It is unclear how the FASB intends for this definition to be applied. However, it seems reasonable that not-for-profit organizations should not adopt guidance that would result in a less informative presentation. For example, because of the importance of an operating indicator, most tax-exempt hospitals should continue to present a statement of operations, separate from other changes in equity. As discussed elsewhere in this article, the FASB has allowed affected organizations considerable flexibility.

Exhibit 1: Not-for-profit hospital statement of activities year
ended June 30, 19XX (in thousands)
Changes in unrestricted net assets:
Revenues and gains:
Net patient service revenue                      $92,650
Investment income                                  3,600
Contributions                                      1,200
Other                                                950
Total unrestricted revenues and gains             98,400
Net assets released from restrictions              1,400
Total unrestricted revenues, gains, and
other support                                     99,800
Expenses:
Patient care                                      87,180
Management and general                            10,400
Total expenses                                    97,580
Increase in unrestricted net assets                2,220
Changes in temporarily restricted net assets:
Contributions                                      1,250

Investment income                                    200
Net assets released from restrictions             (1,400)
Increase in temporarily restricted net assets         50
Changes in permanently restricted net assets:
Contributions                                        280
Investment income on endowment                        50
Increase in permanently restricted net assets        330
Increase in net assets                             2,600
Net assets at beginning of year                   82,440
Net assets at end of year                        $85,040