by Rob Fleming, Director of the Not-for-Profit industry group

Clark Nuber & Co, CPAs, Bellevue, WA 98009 206-454-4919

The Financial Accounting Standards Board, the rule making organization for generally accepted accounting principles, has issued two standards affecting the nonprofit sector. These standards will have the most significant impact on nonprofits in more than 20 years.

The two standards are Financial Accounting Standard No. 116, dealing with contributions made and received, and Financial Accounting Standard No. 117, dealing with financial statement format. Compliance with both standards is required for years ending December 31, 1995 and beyond, with an optional one year delay for small organizations which are those with annual expenditures under $1,000,000 and total assets less than $5,000,000.

The impact of FAS 116 and 117 is so extensive that all levels of operations at a nonprofit will be affected - not just the accounting office. For example, development officers will need to know the exact terms of contributions in order to correctly record them under the new standards, legal assistance may be needed to determine the proper treatment for endowment fund gains and losses, and computer assistance may be required to accommodate the new reporting requirements.

The following is an overview of the two new standards.

FAS 117 on Financial Statement Display

* A set of financial statements should include a balance sheet, statement of activity, statement of cash flows and, for voluntary health and welfare organizations, a statement of functional expenses. Note that the statement of cash flows has not previously been required for many nonprofit organizations.

* Financial statements should focus on the entity as a whole, rather than reporting on separate fund groups. Reporting totals for all fund groups has been done by some nonprofits but many have not done so in the past.

* Contributions and net assets (previously called fund balance) must now be separated into three categories based solely on donor imposed restrictions. The three categories are "unrestricted", "temporarily restricted" and "permanently restricted".

* Expenses are to be reported (1) by functional categories (programs, management and general, and fundraising) rather than by natural categories and (2) in the unrestricted column or category even though the source of the funds may have been restricted. This method of reporting has only previously been followed by hospitals and will be a significant change for many nonprofits.

* All capital gains and losses on investments and other assets will be reported in the unrestricted category, unless there are explicit donor restrictions, or state law, which require the reporting of gains or losses in a restricted category. This may require substantial research by many nonprofits as to how gains and losses on endowment funds have been accounted for in the past.

FAS 116 on Contributions Made and Received

* This standard covers accounting by for profit as well as nonprofit entities and for contributions made as well as received.

* Contributions are defined as being an unconditional, nonreciprocal transfer of assets. This means that a contribution with a donor imposed condition, such as a matching requirement, should not be recognized until the condition has been met and, secondly, the donor should not be receiving anything of value back for a contribution to exist; otherwise, the contribution is either just part contribution and part fee for service or possibly not a contribution at all.

* Contributions will be recorded not just when cash is received, but also when pledges are made. This means donees must record pledges receivable and contribution income prior to receiving the cash. This will be a change in practice for many nonprofits who previously only recorded pledged amounts when the cash was received.

* Contributions will be recorded immediately as income even though the contribution may have had donor restrictions that have not been met. This requirement has been particularly controversial as most nonprofits record donor restricted contributions, that is contributions that are restricted for a specific operating purpose or future period, as "deferred revenue" on the balance sheet until the restriction of the gift has been met. The FASB concluded that restricted contributions only limit the use of the funds but do not result in liabilities. Therefore, the amounts should be recognized as income currently even though the related expenditure that satisfies the restriction may not be made until a future period.

* Noncash contributions, such as buildings and equipment, and contributed services, such as the time of volunteers, should be recorded, but the criteria for recognition, particularly contributed services, is much more restrictive. Noncash contributions that do not meet the criteria cannot be recorded. Basically, a volunteer's time can only be recorded if the time is spent building an asset for the nonprofit or the volunteer possesses a professional skill such as an attorney or CPA, and the nonprofit would have paid for the service had the service not been donated.

If you are located in Washington state and would like a detailed list of the provisions of both standards and a guide to their implementation, please call Sue Lewis at (206) 454-4919.

Copies of the statements are available from the FASB Order Department, 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06586-5116. (203) 847-0700.