The FASB Just Released Brand New Not-for-Profit Accounting Standards

On August 18th, 2016, the Financial Accounting Standards Board (FASB) released important changes to accounting standards — changes that apply specifically to not-for-profit organizations. According to Accounting Today, the update chiefly concerned net asset classification, and it apparently “simplifies and improves” the manner in which a not-for-profit organization organizes such classification.

The Nonprofit Update

The update’s biggest changes are related to net asset classification. The term net asset classification simply refers to reporting of an organization’s assets minus its liabilities.

FASB Chair Russell G. Golden has said that the changes are partially in response to concerns voiced about the clumsiness of previous rules. “While the current not-for-profit financial reporting model held up well for more than 20 years, stakeholders expressed concerns about the complexity, insufficient transparency, and limited usefulness of certain aspects of the model,” Golden said.

The Accounting Standards Update, also known as an ASU, aims to improve communication between organizations and their stakeholders, as well as to enhance disclosures, according to Golden. As an added bonus, he said, the update should reduce “certain costs and complexities in preparing their financial statements.”

The Credit Losses Update

The theme from the FASB of seeking to improve communication and enhance organizations’ disclosures is not novel. Back in June, the Board passed an Accounting Standards Update concerning the private sector and its credit losses. The update aimed to improve communication between financial institutions and their investors by requiring active and accurate bookkeeping. In the Board’s view, institutions need to provide their investors with relevant information in a timely manner in order to avoid irresponsible lending. The Board suggests that investors can take steps to solve potential issues if they are given the proper information.

The Board’s Mission

A brief tour of the Financial Accounting Standard Board’s website can provide interesting insight into its goals. Established in 1973, the Board considers itself “the independent, private-sector, not-for-profit organization based in Norwalk, Connecticut, that establishes financial accounting and reporting standards” for any organization that follows the Generally Accepted Accounting Principles (GAAP). The FASB is recognized by the U.S. federal government as the standard setter, as well as other state governments and independent boards. What, then, does it consider its purpose?

According to its website, the FASB intends to “promote financial reporting that provides useful information to investors” and other users of financial reporting. This mission suggests that the Accounting Standards Updates during the summer of 2016 are not unique aberrations; rather, they are part of a broader ambition to increase transparency.

The Broader Ambition

On September 8th, in fact, according to Business Wire, the FASB issued proposed changes to hedging activity guidance. Chairman Russell Golden stated that stakeholders had shared concerns that, as it currently stands, “hedge accounting requirements do not faithfully portray” an institution’s risk management activities. Of course, hedge investment is notorious for its fundamental riskiness, and its riskiness is the reason it is so profitable.

Are all these standards changes good or bad? In one view, the FASB is improving upon capitalism by responding to stakeholders’ legitimate concerns about transparency. In another view, the Board is crossing a line by wielding governmental force instead of letting institutions individually determine their accounting methods. Regardless, it appears the FASB will continue to roll out Accounting Standards Updates, and whether bystanders like it or not, bigger changes may be on the way.

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