[Editor’s note: The following article was prepared by Wachovia Trust Nonprofit and Philanthropic Services.]
In recent years, the financials of nonprofit organizations and other corporations have come under increased scrutiny.
So it’s important for nonprofit CFOs and finance-committee members to be aware of any changes made or proposed to the generally accepted accounting principles (GAAP) promulgated by the Financial Accounting Standards Board (FASB).
To help, here are some recent FASB actions affecting nonprofits.
UPMIFA and endowment reporting addressed
In November 2007, FASB began a short-term project related to the Uniform Prudent Management of Institutional Funds Act of 2006 (UPMIFA).
As part of that project, in late February, FASB released proposed FASB Staff Position (FSP) FAS 117-a, Endowments of Not-for-Profit Organizations: Net Asset Classification of Funds Subject to an Enacted Version of the Uniform Prudent Management of Institutional Funds Act, and Enhanced Disclosures.
This position would provide guidance on classifying the net assets (equity) associated with donor-restricted endowment funds held by organizations that are subject to an enacted version of UPMIFA.
It would also require additional disclosures about endowments (both donor-restricted and board-designated) for all organizations, including those not yet subject to UPMIFA.
Classifying donor-restricted endowment funds: Organizations subject to UPMIFA would have to classify all or a portion of a donor-restricted endowment fund of perpetual duration (as distinguished from term endowments) as permanently restricted net assets.
The amount classified as permanently restricted would be the amount of the fund (1) that must be retained permanently in accordance with explicit donor instructions, or (2) that, in the absence of such instructions, the organization’s governing board determines must be retained permanently under relevant law.
Temporary Restrictions: UPMIFA provides that “unless stated otherwise in the gift instrument, the assets in an endowment fund are donor-restricted assets until appropriated for expenditure by the institution.”
In determining whether this provision imposes a temporary (time) restriction on the portion of a donor-restricted endowment fund that otherwise would be classified as unrestricted net assets, an organization would apply the guidance in EITIF Topic No. D-49, “Classifying Net Appreciation on Investments of a Donor-Restricted Endowment Fund.
Disclosures: Organizations would have to disclose information to enable financial statement users to understand the net asset classification, net asset composition, changes in net asset composition, spending policies, and related investment policies pertaining to their endowment funds (both donor-restricted and board-designated).
On the statement of financial position (balance sheet), the composition of an endowment would have to be presented by net asset class, in total and by type of endowment fund. Donor-restricted endowment funds would be shown separately from funds designated by the organization.
The organization would also have to indicate the cumulative amount of investment return, if any, contained in the permanently restricted net asset class because of the organization’s interpretation of relevant, beyond the amount required by any explicit donor stipulations.
The proposed changes are tentative and do not change current accounting. FSP 117-a would generally be effective for fiscal years ending after June 15, 2008.
FIN 48 Delayed for Nonpublic Entities
Also in February, FASB postponed the implementation of FIN 48, Accounting for Uncertainty in Income Taxes; an Interpretation of FASB Statement No. 109 for certain nonpublic enterprises, including nonprofit organizations not already implementing FIN 48.
For these entities, FIN 48 now applies to annual financial statements for fiscal years beginning after December 15, 2007. It had applied for fiscal years beginning after December 15, 2006.
FASB defines a nonpublic enterprise as “An enterprise other than one (a) whose debt or equity securities are traded in a public market, including those traded on a stock exchange or in the over-the-counter market (including securities quoted only locally or regionally), or (b) whose financial statements are filed with a regulatory agency in preparation for the sale of any securities.”
So, for example, a university with publicly traded conduit debt would not qualify for the deferral.
FIN 48 is intended to increase the relevancy and comparability of financial reporting by requiring companies and organizations to identify, analyze, and measure their tax positions. FASB Statement No. 109 (Accounting for Income Taxes) sets financial accounting and reporting standards for the effects of income taxes.
For nonprofit organizations, FIN 48 requires an organization to record a tax liability when substantial uncertainties exist as to whether certain income is exempt from income tax.
An example might be income the IRS could recharacterize as taxable unrelated business income. Under FIN 48, the organization must identify anything that affects the amount of federal, state, and local income taxes it may have to pay.
The effect of a tax position can be reflected in financial statements only if there is a greater than 50% chance the position will be upheld upon audit by the taxing authorities.
The amount to be recorded in the statements is the largest amount of the tax benefit from a position that would more likely than not be realized upon ultimate settlement (which includes any related appeals or litigation).
When there is a difference between the tax benefit taken on a return and the benefit recognized in the financial statements, the difference is considered an “unrecognized tax benefit.” FIN 48 requires certain footnote disclosures, including a table reconciling total unrecognized tax benefits at the beginning and end of the reporting period.
FASB Statement No. 157
In November 2007, FASB decided to defer the effective date of FASB Statement No. 157, Fair Value Measurements, for most nonfinancial assets and nonfinancial liabilities, other than those that are recognized or disclosed at fair value on a recurring basis (at least an annually).
For items subject to the deferral, Statement No. 157 is effective for fiscal years beginning after November 15, 2008.
Note that the deferral does not apply to real estate and other nonfinancial assets if they are carried at fair value in a nonprofit’s endowment or other investment portfolio.
The deferral does include these assets if they are used in the organization’s operations and, thus, carried at cost (if acquired by purchase) or fair value at the date of donation (if acquired by gift).
In addition to the effective date deferral, FASB has issued a proposed Staff Position, Measuring Liabilities under FASB Statement No. 157, that clarifies the principles in Statement No. 157 on the fair value measurement of liabilities.
The proposed FSP, if approved, would add the following guidance:
A quoted price for the identical liability* (unadjusted) in an active market (Level 1 input) is the best evidence of fair value for that liability.” Entities that purchase the reporting entity’s obligations as assets incorporate the nonperformance risk of the liabilities, as well as other factors, in determining the prices they are willing to pay for the assets.
The quoted price for the identical liability in an active market would be used as the fair value measurement for both (a) the obligor of the liability and (b) the asset holder.
In the absence of a quoted price for the identical liability in an active market, the reporting entity may measure the fair value of its liability at the amount that it would receive as proceeds if it were to issue that liability at the measurement date. A reporting entity would evaluate fair value inputs and prioritize observable inputs over unobservable inputs in determining whether it should use the amount that it would receive as proceeds if it were to issue that liability at the measurement date.
The amount that would be paid to transfer a liability at the measurement date would be the amount that market participants with the same level of nonperformance risk (including credit risk) would require to assume that liability or to issue an identical liability. Consequently, because the reporting entity and market participants have the same level of nonperformance risk, the amount that the reporting entity would receive as proceeds if it were to issue that liability at the measurement date provides an equivalent of the amount market participants would demand to assume the reporting entity’s liability (that is, fair value).
These clarifications would not apply until the period in which the final FSP is issued or, if later, the period in which Statement 157 is first applied.
For more information on how Wachovia Nonprofit and Philanthropic Services can help you work through these new developments and assess their impact on your organization, please contact your Wachovia Philanthropic Consultant.
* A reporting entity’s debt instrument or other form of obligation might be exchanged in the market as an asset; that is, the instrument represents the right to receive cash flows (or other resources) from the reporting entity.
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