SFAS no. 117 brings uniformity to financial statement formats - Statement of Financial Accounting Standards

Healthcare Financial Management, June, 1995 by David T. Meeting, Randall W. Luecke, Melissa Rogers

Statement of Financial Accounting Standards (SFAS) No. 117 was issued to establish consistency in financial reporting among not-for-profit organizations, which are subject to various American Institute of Certified Public Accountants (AICPA) audit guides. In addition, SFAS No. 117 was designed to close the gap between the statements of not-for-profit and for-profit organizations. The provisions of SFAS No. 117 are intended to override AICPA audit guides and statements of position when the two conflict.

The goal of many changes required by SFAS No. 117, Financial Statements of Not-for-Profit Organizations, is to present information that focuses on an organization as a whole, rather than various parts. SFAS No. 117 likely will affect other not-for-profit organizations more than it will hospitals, as many hospitals already have incorporated into their statements many of the provisions contained in SFAS No. 117. However, there remain some provisions of SFAS No. 117 that few hospitals have put in place.

In general, SFAS No. 117 requires financial statements of not-for-profit organizations to include a statement of position (formerly a balance sheet), a statement of activities (formerly a statement of revenue and expenses and a statement of changes in fund balances), and a statement of cash flows, with a complete set of footnotes. This requirement applies only to statements prepared for external users. SFAS No. 117 gives further guidance about the reporting and classification of assets, liabilities, revenue, and expenses.

The statement of position

SFAS No. 117 requires assets and liabilities to be aggregated into homogeneous groups primarily based upon current/non-current classifications. Furthermore, to provide financial statement users with information about the liquidity of an organization, assets should be sequenced according to their nearness to cash, and liabilities according to their nearness to maturity. Also, information regarding restrictions on the use of assets should be provided.

The most significant change required by SFAS No. 117 in this area is a requirement that net assets be divided into three groups: unrestricted, temporarily restricted, and permanently restricted. Unrestricted net assets are used at management's discretion; temporarily restricted net assets are used for a specific purpose indicated by the donor and thus are generally awaiting the passage of time or the occurrence of an event that will signal their conversion to unrestricted net assets. Permanently restricted net assets are donated to provide investment income, and the principal can never be used. SFAS No. 117 requires that information regarding the amounts of all three classes of net assets be displayed on the face of statements, or in the footnotes that further subdivide temporarily restricted net assets into amounts restricted for support of particular operating activities, for a specified term of investment, for use in a future specified period, or for acquisition of capital assets.

SFAS No. 117 allows considerable latitude in how the required information is presented. Most requirements can be met by providing information in footnotes, which does not preclude aggregating or subtotaling amounts in a wide range of formats. Finally, the provisions of SFAS No. 117 are not required to be applied to immaterial items.

Exhibit 1: Current format of Sample Hospital A balance sheet.
December 31, 1994.(*)

A statement of activities must show changes in all classes of net assets in this single document. In this sense, the statement represents a combination of a statement of revenue and expenses and a statement of changes in fund balances, which historically have been presented as two separate statements.

Another change for most healthcare organizations will be that transfers between funds be shown as two separate line items. Additions to temporarily restricted net assets, whose condition is met to qualify as unrestricted in the same period, may be recorded as direct additions to unrestricted net assets, provided this accounting policy is detailed in the footnotes to the financial statements.

Certain other changes must be made to revenue and expenses. All revenue and expense items are to be reported gross, with no netting allowed except for investment income and expense. Gains or losses from peripheral or incidental transactions, such as a disposal on an old piece of equipment at the end of the equipment's economic life, can be shown as a net gain or loss (rather than as a gross revenue from the sale of the equipment and an expense for the book value of the equipment). This change is likely to affect the presentation of nonoperating gains and losses for some providers. All expenses must be classified on a functional basis, whether on the face of the statements or in the footnotes. This classification requires the allocation of depreciation and interest, which historically have not been allocated to service lines for financial reporting purposes.

Exhibit 3 shows a statement of revenue and expenses for Sample Hospital A using the pre-implementation format. Exhibit 4 illustrates the significant change in format that will occur upon implementation of SFAS No. 117. This format shows the change in net assets for the entity as a whole most clearly; however, this example is only one allowable format option - other formats also would be acceptable under SFAS No. 117. For example, an organization may choose to make a four-column presentation, with one column for each of the classes of net assets and a total (see SFAS No. 117, paragraph 159, format B). The advantage of this method is that it more clearly illustrates transfers among funds. Furthermore, two statements could be completed, one that details changes in unrestricted net assets (as did the former statement of revenue and expenses) and the other that shows changes in total net assets (as did the former statement of changes in fund balances). The only amounts required to be shown on the face of the statement are the changes in each category of net assets, as well as the change in total net assets. SFAS No. 117 allows the statement to be formatted in various ways, for example, by segregating operating and nonoperating amounts, or by inserting other subtotals.