Not-for-Profit Financial Reporting Model: No MD&A Requirement


By Jason King

In January, the Financial Accounting Standards Board (FASB) voted to cancel a research project that focused on making a Management Discussion & Analysis (MD&A) section required supplemental information of financial statements for not-for-profit organizations.  This research project had begun in late 2011 as a key recommendation of the first meeting of the FASB’s Not-for-Profit Advisory Committee, which perceived a need for not-for-profit organizations to be more transparent about their financial results and liquidity, and tell their story.

Currently, many larger not-for-profits already prepare an MD&A, but the content and quality varies across these organizations. Further, public higher education institutions, and other organizations required to report under the standards of the Governmental Accounting Standards Board, are required to prepare an MD&A.  Therefore, cancellation of the project cements another difference in financial reporting between independent and public colleges and universities.  The Securities and Exchange Commission requires MD&As for public companies.

Ultimately, the benefits of additional information need to be weighed against the costs, and an MD&A would have placed a significant additional cost on many not-for-profits that, unlike governmental organizations and public companies, are not required to widely distribute their financial statements outside their organization.  While not-for-profits routinely share their financial statements with donors, lenders and other stakeholders, these stakeholders are typically in a position where they can obtain additional information as necessary directly from the not-for-profit.  Therefore, the cost of preparing an MD&A would outweigh the benefits for many organizations.  Individual FASB Board members cited the following as reasons for cancellation of the project:  1) availability of resources, 2) prioritization of more pressing standard-setting needs, 3) view that voluntary compliance would be more appropriate, and 4) concern the project was beyond the scope of basic financial statement reporting.

However, the Board will continue to focus on a related project, Financial Statements of Not-for-Profit Entities, which could significantly alter the reporting model for not-for-profit financial statements, with the intent of providing more useful information to stakeholders within the financial statements themselves.  An exposure draft for this standard is expected in the second half of 2014.

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 This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.


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