Saturday, August 26, 2006


Classic Nonprofit Resources: FASB 116 & 117*
by Pam Ashlund

Disclaimer: this is a "from the trenches" opinion piece written by a nonprofit finance director who lived through the transition from pre to post FASB Statements 116 & 117. Please click the "summary" and "status" links to read the full text of the statements and consult your independent auditor for final interpretation.

Both Statements were effective December 15, 1994 for nonprofits with over $1 million in annual expenses and over $5 million in total assets.

Statement No. 116
Accounting for Contributions Received and Contributions Made (Issue Date 6/93)
[Summary] [Status]

The statement radically changed (and standardized) the way nonprofits reflect income. Generally, the statement requires that contributions are recognized in the period received. Why radical? Pre-116, nonprofits received multi-year funding and reflected only the portion for the current fiscal year. The remainder was held in a balance sheet account known as "deferred revenue". This prevented the appearance of a large bubble of "profit" in the fist year. Statement 116 had one unfortunate effect, it made financial statements very hard for boards and the public to understand, creating artificial profits and losses which, without notation, could be misleading. You have to decide for yourself whether the advantage (standardization) outweigh the disadvantages (hard to interpret financials); however, there is no choice, Statement 116 is required to be in conformance with GAAP.

Statement No. 117
Financial Statements of Not-for-Profit Organizations (Issue Date 6/93)
[Summary] [Status]

Nowhere near as controversial as 116, Statement 117, this Statement requires nonprofits to provide a statement of financial position, a statement of activities, and a statement of cash flows. The statement also requires that the amounts for each of three classes of net assets-permanently restricted, temporarily restricted, and unrestricted-be displayed in a statement of financial position and that the amounts of change in each of those classes of net assets be displayed in a statement of activities.

When this Statement was published all nonprofit accounting software had to be re-written to allow for a three column presentation. It also forced out some critical information. An organization that had previously showed high net assets, now might now call attention to a true loss in current unrestricted activity offset by permanently restricted funds. This statement made financials significantly more transparent and easy to understand by boards and the public.

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