SFAS 117: financial statements of not-for-profits

National Public Accountant, The, June, 1996 by Brian M. Reynolds

The primary purpose of financial statements is to provide relevant information to meet the common interest of donors, members, creditors and others who provide resources to not-for-profit organizations. More specifically, the purpose of financial statements and accompanying notes are to provide the financial statement readers with the following information:

* dollar amounts and nature of organization's assets, liabilities and net assets;

* effects of transactions and other circumstances that changed the net assets;

* inflows and outflows of economic resources for the period;

* how an organization obtains and spends its resources and other factors affecting its liquidity; and

* service efforts of the organization.

External financial statement readers have a common interest in assessing the performance of not-for-profit organizations. Therefore, FASB enacted SFAS No. 117 to ensure that not-for-profit organizations' external financial statements would provide the necessary information needed by the readers.

SFAS No. 117 has several new requirements for not-for-profit organizations. First, not-for-profit organizations must issue financial statements that include a statement of financial position, a statement of activities, a statement of cash flows and accompanying notes to the financial statements. This statement amends SFAS No. 95, Statement of Cash Flows, to extend its provisions to not-for-profit organizations and to expand its description of cash flows from financing activities to include certain donor-restricted cash that must be used for long-term purposes. Furthermore, this statement requires that net assets (members equity) be classified into three categories based on the existence or absence of any donor-imposed restrictions: permanently restricted, temporarily restricted and unrestricted net assets. These terms are defined as follows:

* permanently restricted net assets: the part of the net asset of a not-for-profit organization resulting from contributions and other inflows of assets whose use by the organization is limited by donor-imposed stipulations that neither expire by passage of time nor can be fulfilled or otherwise removed by action of the organization.

* temporarily restricted net assets: the part of the net asset of a not-for-profit organization resulting from contributions and other inflows of assets whose use by the organization is limited by donor-imposed stipulations that either expire by passage of time or can be fulfilled or otherwise removed by action of the organization.

* unrestricted net assets: the part of the net asset of a not-for-profit organization resulting from contributions and other inflows of assets whose use by the organization are not restricted by the donor; or anything not classified as permanently or temporarily restricted net assets.

Also, not-for-profit organizations must classify their revenues, expenses, gains and losses based on existence or absence of these donor-imposed restrictions. According to SFAS No. 117, a governing board of directors may designate to set aside an amount of its unrestricted net assets to an endowment fund; this endowment fund must be classified as an unrestricted net asset. Those responsible for preparing financial statements for a not-for-profit organization should remember the following about SFAS No. 117:

* These new requirements focus on the presentation of the external financial statements;

* All internally designated endowments are always classified as unrestricted net assets;

* The effective date is for annual financial statements issued for fiscal years beginning after December 15, 1994, except for organizations with less than $5 million in total assets and less than $1 million in annual expenses. For these organizations, the Statement is effective for fiscal years beginning after December 15, 1995. Early application is encouraged.

To order a copy of SFAS No. 117, write to: Order Department, Financial Accounting Standards Board, 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06856-5116.

The product order code number for SFAS No. 117 is S117.