Thursday, April 23, 2015

FASB Proposes Major Changes in Nonprofit Accounting - Reprint from Accounting Today

FASB Proposes Major Changes in Nonprofit Accounting

Norwalk, Conn. (April 22, 2015)

By Michael Cohn
Reprint from Accounting Today

The Financial Accounting Standards Board has issued a proposed accounting standards update to improve the information provided in not-for-profit financial statements and notes to financial statements that could have major implications for nonprofit organizations.

FASB previewed some of the changes in March (see FASB Proposes Accounting Standards Changes for Nonprofits and Big Changes on the Way for Nonprofit Accounting).

“The proposed ASU contains recommended enhancements to the fundamental reporting model for not-for-profit organizations—a model that has existed for more than 20 years,” said FASB member Lawrence W. Smith in a statement. “We believe that these changes will refresh the model in ways that will make not-for-profit financial statements even more useful to donors, lenders, and other users.”

The document explains FASB’s proposed improvements to current net asset classification requirements and information presented in financial statements and notes to financial statements about a not-for-profit organization’s liquidity, financial performance, and cash flows. Specifically, the changes are intended to better reflect financial performance in the statement of activities by showing—in two measures of operating performance—available amounts that have been generated by or directed at carrying out the mission of a not-for-profit in the current period, both before and after any governing board actions affecting that availability.

The changes also would simplify the existing net asset classification scheme along with enhanced note disclosures. In addition, the proposed changes would enhance information in the notes to help financial statement users better assess a not-for-profit’s liquidity and how it is being managed. FASB also wants to make information about expenses more comparable and useful by requiring that all operating expenses be reported by both function and nature and investment return be reported net of related expenses.

The accounting standards update would also make the statement of cash flows more understandable by (a) presenting cash flows provided by operating activities using the direct method of reporting, rather than the indirect (reconciliation) method, and (b) classifying cash flows in ways that are more consistent with classifications in the statement of activities.

FASB originally undertook the project in 2011 based on input provided by its Not-for-Profit Advisory Committee (NAC) and other stakeholders. The NAC members said they believed that, while sound, the existing standards for financial statements of not-for-profit organizations could be updated and improved to provide better information to donors, creditors, and others.

The proposed ASU and a FASB in Focus overview are available at

The board is asking stakeholders to review and comment on the proposed ASU, Presentation of Financial Statements of Not-for-Profit Entities, by Aug. 20, 2015. On Tuesday, May 12, from 1:30 to 3:10 p.m. EDT, FASB plans to host an educational webinar that provides an in-depth look at the proposed ASU. In Focus: FASB’s Proposed Changes to the Not-for-Profit Financial Statement Model will look at specific amendments in the proposal and what feedback the board is seeking from stakeholders. Registration is now open for the event, which is worth up to two Continuing Professional Education credits to those who participate in the live broadcast.

“It’s been over 20 years since we had significant changes,” said Kim Fusco, chairperson of the Not-For-Profit Services Group at the Baltimore accounting firm Ellin & Tucker. “These changes coming down the road are pretty significant. It will take time for organizations to understand the changes and implement them properly. The end result will be financial statements that are more useful to the readers.”

Fusco believes it’s possible that FASB will issue a second exposure draft after receiving feedback on the initial exposure draft.

Carl Kampel, a member of FASB's Emerging Issues Task Force who is director in charge of professional services at Ellin & Tucker, commented, “FASB is going to try to do different things for some organizations to get the word out. They want feedback on the exposure draft.”

Monday, April 6, 2015

Filing Tax Returns, Even if Past Due

Perhaps you’ve wondered, am I a fool for filing my tax returns? Why not roll the dice and see if the IRS catches me? Our response is that you are most definitely not a fool for filing your returns, and there are many excellent reasons why everyone should file (and there are no good reasons not to). First, a preliminary point. There is no statute of limitations for nonfiling. Therefore, no matter how long ago the tax year, the IRS can come after someone if they did not file a tax return for that year. On the other hand, if someone does file a tax return the IRS has a limited period of time in which to challenge the return, generally three years from the filing or due date. So if you file a good faith tax return you will have peace of mind that, upon expiration of the statute of limitation, the return is final and no IRS audit of that return can occur and no additional assessment can be made.

 There are many bad consequences which can occur where someone does not file their tax return, and we’ll highlight the most severe. At the top is that the willful failure to file a return or pay tax is a criminal offense. Does that mean that every nonfiler who’s caught gets sent to prison? No. But that prospect is out there, and it’s greater where someone is willfully evading their responsibility to pay tax. Voluntary compliance by coming clean and filing past due tax returns and paying the tax due is always a factor benefitting the nonfiler in the eyes of the IRS.

If tax is owed, then penalties and interest continue to run until the outstanding liability is paid in full. Needless to say these will grow considerably over time; the penalties and interest on a liability that’s five years old will likely be significantly greater than a one year old liability. Ignoring the responsibility to file and pay will therefore result in additional expense. If the IRS catches on that someone has not filed a tax return, it may construct a substitute tax return based on information it’s received, such as W-2s and 1099s. In virtually all cases this will result in a higher tax being calculated than would occur if the individual prepared and filed a tax return. Among other things, the version constructed by the IRS will not include all applicable deductions or the cost basis for securities sales. And if the person does not pay the tax as so calculated by the IRS and a notice of deficiency gets issued, the person may become subject to wage garnishment, lien, or seizure of property.

In some cases a person might actually be entitled to a refund if a tardy tax return is filed. Tax withholding, typically from wages, may exceed the tax liability. However, remember the three-year time frame mentioned earlier for the IRS to challenge a filed tax return? That same three years also limits the IRS in issuing refunds. That is, the IRS cannot issue a refund for a tax return filed more than three years after the initial due date.

Even if someone cannot pay their tax liability in full, they should nevertheless file a return. The IRS has various programs in place, such as offer in compromise and installment agreements, for people without current means of paying their liability, but these programs are only available to people in compliance with their filing requirements. We’ve been encouraged by the IRS’s willingness to work with people in these circumstances, but the burden is on the delinquent taxpayer to take the first step. For these, and many other reasons, everyone should file their required tax returns, including returns from past years that are currently overdue. Your KOS professional is here to help and discuss this situation as it may apply.