Trends & Developments - February 2013 - FASB Project to Define Nonpublic Not-for-Profit
FASB has recently experienced a whirlwind of changes, as re-codification, international standards, and increased complexities in organizations have made accounting much more interesting. These complexities have placed into question whether certain definitions that standard setters have relied on or implied are outdated, and perhaps to the reader the definition of “interesting” is included. Nevertheless, the FASB Chairman, Leslie F. Seidman, announced a project in March 2012 to define one topic of contention: the nonpublic entity. The objective is to develop a stronger and clearer definition of a nonpublic entity – with an additional focus on what constitutes a nonpublic not-for-profit entity – with which to help clarify the scope of the Private Company Decision-Making Framework project.
The Private Company Decision-Making Framework is a project aimed to develop criteria from which to decide whether and when to adjust reporting standards applying to private companies, which include not-for-profit entities. The project expects a major outcome could be a fundamentally different basis for preparing financial statements between private and public companies, which would provide more meaningful financial statement presentations and disclosures all within the confines of GAAP. However, the project will not be fully effective without a modern definition of who it will affect. As mentioned above, the chairman further instituted a project to re-examine the definition of a nonpublic entity. The line between private and public companies is increasingly becoming clouded, especially with the complexity of various financing arrangements. The hope is this project can help focus, for standard-setting purposes, which companies will fall within the Framework’s scope.
During its September 2012 meeting, FASB’s Not-for-Profit Advisory Committee (NAC) addressed the issue as it concerns Not-for-Profit (NFP) Organizations. The major topic of concern was whether defining distinctions between private/public would be helpful, and perhaps other distinctions among NFPs would be more appropriate. Below is a summary of observations that the committee believes will help clarify the issue, excerpted from the “Highlights of the FASB’s Not-for-Profit Advisory Committee Meeting on September 6 and 7, 2012:”
- “Substantially all NFPs have some degree of public accountability by virtue of their tax-exempt privileges (Federal and State income taxes, property taxes, tax-exempt debt, etc.) and the favored charitable deduction treatment for their donors. Thus, under that notion the number of NFPs that might be eligible for a private entity accommodation for a particular accounting or disclosure requirement could be too limited.
- Distinguishing among NFPs based solely on whether or not they are issuers of debt (or are obligors for conduit debt) might not be appropriate and may create an ineffective bright-line, based on the broad spectrum of debt characteristics. Some members added that the publicly-traded aspect of debt should be emphasized, rather than whether it is conduit debt or tax exempt.
- The FASB should consider factors such as user needs and resources, on a standard-by-standard basis, when determining whether all or only certain NFPs will be eligible to apply accounting and reporting differences under U.S. GAAP. The Board should also consider evaluating whether a particular accounting or reporting difference that is permitted to be applied by a private company should be extended to an NFP.
- For comparability of key metrics and indicators, many users of NFPs’ financial statements prefer consistency in recognition and measurement accounting requirements among NFPs, but may be more flexible in accepting financial reporting differences for disclosures and deferred effective dates for cost/benefit purposes.”
Below are links to find more information on the progress of these FASB projects:
Project Update – Definition of a Nonpublic Entity
Project Update – Private Company Decision-Making Framework
News Release 03/07/12 – FASB Chairman Adds an Agenda Project on Defining “Nonpublic Entities”
Trends & Developments - February 2013 Issue