As the haze of the Spring semester has sufficiently dissipated, I’ve had a little time to ponder the content of my Not For Profit Accounting class. Transparency is the watchword of the era, and I think NFP accounting standards are not as helpful as they would be. As a result I have a few, mostly radical suggestions for the Financial Accounting Standards Board and the regulation of NFP accounting:
- Allow fund accounting for NFP entities. Yes, you heard me right, but don’t make it mandatory. Make it an election if the organization meets certain requirements. For instance, take a small church congregation. At the beginning of the year the minister distributes pledge cards. The members of the congregation complete the cards and in my experience do make the contributions as pledged. Some don’t but this is easily handled within the framework of the modified accrual basis of accounting. Wouldn’t the use of fund accounting be more meaningful in this context than the current accounting? Additionally, the reconciliation of actual results to the budget municipalities must do in their Annual Comprehensive Financial Report would be of great interest to many stakeholders of a NFP organization. Wouldn’t it be great to have a management discussion and analysis section of the annual report just like municipalities do? How about the statistical section municipalities are required to report? I know I would find all of this information interesting.
- Allow the use of the old classification of net assets. The current classification on the statement of financial position divides net assets into donor restricted net assets and net assets without donor restriction. I liked the previous disclosure that split net assets into unrestricted, temporarily restricted and permanently restricted net assets. Additionally, I like the idea of including assets restricted by board of directors or trustees in restricted net assets, with the appropriate disclosures of course. Finally, net assets with a purpose designated by management should be allowed on the face of the statement of financial position. Yes, this would be a little more complicated but I believe it is much more meaningful than the current schema. The current disclosures hide the intent of management and the board somewhere deep in the footnotes. Why not be “upfront” about intentions? Wouldn’t stakeholders be interested in that as well?
- Use activity based costing and management. Yes, I know this is difficult as well. However, Gary Cokins, the guru of activity based costing has developed a rapid prototyping model for ABC that even smaller organizations can use. Why would an NFP organization want to put itself through such a strenuous introspective exercise? Well, there are a lot of reasons including forming a basis for enterprise performance management. Also, think about what happens when your organization is applying for a grant. Donors are loath to fund overhead. Since ABC traces costs rather than allocating them, your organization would be on a much firmer footing and have a more convincing argument when applying for a grant.
Yes, these suggestions could complicate the lives of many NFP managers and accountants, but they also would make your organization’s finances much more transparent to stakeholders. Your organization would become more competitive finding the allusive donation dollar.