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

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

All expenses are to be reported as decreases in unrestricted net assets. Expirations of donor-imposed restrictions are to be reported separately from revenues, expenses, gains, and loses, and shown as reclassifications that increase one class of net assets and decrease another. One of the more controversial conclusions reached by the FASB is that restrictions on long-lived assets expire as the assets are used up (i.e., are depreciated) unless the donor has otherwise restricted the asset.

These conclusions represent a departure from the current approach typically used in the healthcare industry. Specifically, contributions of property, plant, and equipment will no longer be treated as a direct addition to unrestricted fund balances, nor will the fulfillment of a specific purpose restriction trigger recognition of other operating revenue. Rather, revenue (i.e., restricted support) will be recognized when the contribution is received.

Another change for many organizations will be the presentation of functional expenses. The FASB requires that all expenses be reported by function and also encourages reporting by natural class. The Health Care Guide currently allows expenses to be reported either way. A natural class presentation could still be made on the face of the financial statements as long as the footnotes contained a functional breakdown. However, unlike the AICPA example contained in its Health Care Guide, the FASB believes that all costs, including depreciation and interest, should be fully assigned or allocated to specific programs or supporting activities.

For a variety of reasons, the FASB has allowed considerable flexibility in display, particularly in terms of the number of statements and the format used. Several different simplified healthcare examples based on formats developed by the FASB are presented in Exhibits 1 to 3. Captions in bold print are those required to be displayed.

The different FASB suggested activity statement formats have strengths and weaknesses. The statement format shown in Exhibit 1 facilitates multiyear reporting but, tends to obscure the "bottom line," which is traditionally thought of as the increase in unrestricted net assets ($2,220). The statement format shown in Exhibit 2 highlights the expiration of donor restrictions but contains many details that may make year-to-year comparisons more difficult. The statement format shown in Exhibit 3 is more in line with traditional healthcare reporting, but like Exhibits 1 and 2, displays some rather minor amounts. However, even though the FASB requires display of those subtotals in bold print, it specifically points out that the guidance need not be applied to immaterial items. With this in mind, other formats, such as those shown in Exhibits 4 and 5, may be more appropriate for hospitals with relatively minor amounts of contributions. As noted earlier, any not-for-profit business enterprises will find a format similar to Exhibit 5 to be the most informative.

Exhibit 4: Not-for-profit hospital statement of operations and
other changes in net assets year ended June 30, 19XX (in
thousands)
Unrestricted 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
Income from operations                                 2,220
Increase in restricted net assets                        380
Increase in net assets                                 2,600
Net assets at beginning of year                       82,440
Net assets at end of year                            $85,040