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New FASB Not-for-Profit Accounting Rules Just the First Step

Aug 22nd 2016
Managing Editor Thomson Reuters Checkpoint
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Accounting Standards Update No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, issued by the Financial Accounting Standards Board (FASB) on Aug. 18, is only the first phase of a larger project to improve financial reporting by not-for-profit entities.

In this first phase, the FASB focused on streamlining the presentation of net assets and making it more useful to stakeholders while reducing the costs of preparation.

The distinction between temporarily restricted net assets and permanently restricted net assets is disappearing because it did not provide meaningful enough information to the users of the financial statements and was complex in practice.

The FASB also added disclosures to provide financial statement users more clarity around a not-for-profit’s liquidity and liquidity risk, as well as its use of liquid resources to meet cash needs.

On the expense side, not-for-profits will now have to report expenses both by nature and by function. In addition, not-for-profits that present their statement of cash flows using the direct method will no longer have to provide a reconciliation with the amounts presented under the indirect method.

These changes are more limited than what the 2015 proposed Accounting Standards Update was suggesting. Yet, not-for-profit entities will have to take a hard look at their systems to allow for a new presentation of net assets and expenses in their financial statements.

While this is an important step toward improving financial reporting by not-for-profits, this is only a beginning. Some of the most hotly-debated issues will be part of the second phase of the FASB project.

The measure of operating performance is one of them and will most likely be debated in conjunction with another of the FASB’s projects geared toward the reporting of financial performance by for-profit entities.

Related articles:

FASB Updates Accounting Rules for Not-for-Profits
FASB Proposes Major Changes to Not-for-Profit Reporting Rules

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By Muhammad Sardjono Hadidjaja
Sep 2nd 2016 03:30 EDT

The accounting rules shall apply to all organizations either profit oriented or no profit oriented with a motto
“Quaere Verum”—that is, “seek the truth”. Hoping FASB’s projects do not geared an improvement the current financial reporting – Balance sheet, income statement.
The reason for stopping that is shown at the following.
I am sure that FASB did not care to the statement of Professor of Accounting George J. Staubus written in his book in the year of 1977 as follows:
”The failure of the sum to represent a measure of the value of the whole firm (additivity failure) is a limitation of the accounting that we do not know how to overcome.” 1)
FASB as one of professional accountants’ organization and others did not care to this statement and its reality till today? Why it has happened?
I my opinion, accountants just applying the accounting practices without deep thinking. Almost accountants do not care to the motto “Quaere Verum”—that is, “seek the truth”. Or maybe someone (Professor of Accounting Yuji Ijiri) has tried to get the truth in accounting, but unfortunately he has not reached the truth yet.
In the mathematic there is assumption of the addition process that:”The sum of two numbers is a unique numbers” and ”If equal number be added to equal number the sums are equal number” 2) For example: 5 plus 3 its sum is 8 . In the Mathematic, the operation of addition needs the uniquiness of property 3) as Keedy said”the essential property of operation is the uniquiness” 4).
Balance Sheet presents in the measurement assets side the sum of many types of assets for example: Cash, Inventory, Building, Land and so on. As we understand that for Cash item its property of valuation is face value, for Inventory we know many types of valuation methods i.e. LIFO, FIFO and so on, for Building item its property valuation is acquisition or historical cost minus accumulated depreciation.
Balance Sheet only accumulates the total value of money based on the respective property of each item of assets and liabilities cannot be proofed its mathematical truth.
So, from the scientific approach the professional Accountants provide something that are said is very important in supporting the Financial Market and Economy with the Balance Sheet but in fact it is scientifically illogical.
And now how about the Income Statement with its Earnings? During this time, we assume the earnings and earnings per share is the best indicator of to measure the performance of an entity but we did not realize that this is only a delusion. Please thinking in deep the statement of Accounting Professor William A. Paton in his monograph and Littleton in An Introduction to Corporate Accounting Standards in the year of 1940 said:”I have not read the entire monograph, or any substantial part of it, for 35 years or … the monograph has faults…the major faults is our failure to call attention to what is perhaps the most important measurement in a corporation’s financial history the earning rate…’Earning power’ was mentioned, I believe, at one point, but the subject was not pursued I might add that lack of meaningful earning rate determination is a glaring weakness of present day accounting practice”5). Beside that Ahmed Belkoui said:”The reliance of accounting income on the historical cost principle makes comparability difficult, given the different acceptable methods of computing ‘cost’ (for example, the different acceptable methods of allocation) deemed arbitrary and incorrigible”6). Beside that Professor Revsine said that: income is an artifact 7).
It means professional accountants provide financial Reports that stakeholders depend on them but in the reality the financial report cannot proof their mathematically truth and income is an artifact and delusion.
Accountants have to realize this additivity failure of Balance Sheet and Income Statement that cannot be proofed their mathematical truth. In facing this condition, professional accountants have to get a solution that can proof its mathematical truth in line with the motto “Quaere Verum”—that is, “seek the truth”.

1) George J. Staubus, Making Accounting Decision. Scholar Book Company, Houston, Texas, 1977, page 169
2) Harry Waldo Kuhn and James Hanry Weaver, Elementary College Algebra, The McMillan Co., New York, 1935, page 2
3) Ibid page 3
4) Mervin L. Keedy, Number System: A Modern Introduction, Addison Wesley Publishing Company, Inc., Reading, Massachussets, U.S.A., 1965, page 19
5) William A, Paton, Statement by William A. Paton,”The Accounting Review”, vol. LV, no. 4, October, 1980, p 629-630
6) Ahmed Belkoui, Accounting Theory, Harcourt Brace Janovich, Inc., New York, 1981, page 143.
7) Revsine, Lawrence “Predictive Ability Prices, and Operating Flows, ”The Accounting Review, Vol XLVIII, No. 3, July, 1971, page 480-489

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