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

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

Also, HFMA objected to the provision that allows an organization to record as an expense the "quoted market price" of goods or services obtained (such as food for an event or the services of an auditor), even if less is paid. HFMA said that allowing the value of contributed goods and services to be "grossed up," is subject to varying interpretation and misleading reporting. HFMA said only the amount paid should be recognized as an expense by the purchaser.

Pledges

While the statement avoids the term "pledge," using instead the term "unconditional promises to give with payment due in future periods," the statement falls short of requiring that collectibility of these amounts must be legally enforceable. The FASB explains that legal enforceability varies according to local legislative and regulatory provisions, but HFMA again advocated restrictive criteria to provide clear guidelines about amounts that should be reported and to avoid burdensome reporting requirements.

HFMA urged deletion of the proposed provision that the amount of a pledge be the "present value of estimated future cash flows using a discount rate commensurate with the risks involved." HFMA said that present value accounting should be addressed in a broader context before applying the concept to the circumstance of a pledge with payment due in future years. HFMA criticized the requirement that some contributed funds be reported as interest revenue or gains simply because they are paid in accord with an earlier promise to give. Such a result would be confusing to donors and other financial statement readers.

Functional vs. natural classification of expenses

One of the key provisions of the proposal that applies only to not-for-profit organizations requires reporting expenses by functional classifications while also encouraging use of natural classifications. HFMA objected to this special reporting requirement and said that if functional reporting is to be required for any type of entity, it should be required by all. Existing line of business reporting requirements may provide a basis for establishing a consistent basis for this type reporting. The FASB proposed definition of functions is much less detailed than the functions enumerated in the audit guide and, as a practical matter, most healthcare entitles will only be required to report patient service, management, and general services.

There is some linkage between this FASB call for functional reporting and an objective for general-purpose financial statements to provide information about the "service efforts" of an organization. HFMA reiterated its past advocacy position that financial reporting standards should address the financial results of operations, that the same service effort reporting requirements should apply to all entities, that each industry should identify the most appropriate service effort information to disclose, that simplistic output measurements may be more misleading than informative, and that the cost of such reporting must be balanced against its benefit.