Some Best Practices in Financial Statement Presentation and Disclosure
by Cecil "Pat" Patterson, CPA
Background of Economic Developments
Various economic conditions will have an impact on an entities business and ultimately its financial statements. These conditions include:
• Interest rates
• Consumer confidence
• Expansions and contractions
• Labor markets
The U. S. economy was recovering in 2015 and 2016. Particular indicators showed this recovery. Indicators like the Dow Jones Industrial Average, the S & P 500 reached record highs in 2016. A key measure of market expectations of near-term volatility is the Chicago Board Options Exchange Volatility Index (VIX) is thought by many to be a key measure of fear in the market. At the end of 2015 and into 2016 the VIX showed an overall decline. Prices ranged from 31.40 to 11.43 in that period which shows some uncertainty; however, the downward trend indicates that investors believe the economy and market are improving. Some key economic indicators also show a recent trend:
• Gross Domestic Product (GDP)
• Federal Fund Rate
Per the Bureau of Economic Analysis, GDP rose at a rate of 1.2 percent during 2016. Unemployment rates varied between 5.6 percent and 4.7 percent from July 2015 to July 2016. This was another indicator of improvement. The Federal Reserve System’s Board of governors decreased the fed funds rate more than 5.0 percentage points from 5.25 to less than 0.25 percent till august 2015. They caused it to rise to 0.5 percent in January 2016.
These indicators all pointed to a recovering economy. The recovering economy has an impact on entities and their financial statements.
To properly discuss some “best practices in presentation and disclosure” one should probably divide the discussion into (1) Not-for-Profit Entities and (2) U. S. GAAP Financial Statements
The best resource for a discussion of not-for-profit entities is found in the AICPA’s publication of Not-for-Profit Entities – Best Practices in Presentation and Disclosure.
FASB Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of financial Statements of Not-for-Profit Entities (August 2016) changes the reporting model for NFPs. The ASU is effective for fiscal years beginning after December 15, 2017 with early adoption permitted.
Net Assets of NFPs are currently divided into three classes. This will be replaced with two classes called, “net assets with donor restrictions”, and “net assets without donor restrictions”. The total net assets will also be required. On the statement of activities, the NFP will be required to present the change in each of the two net asset classes and the currently required change in total net assets.
The provision of relevant information about the nature and amounts of donor restrictions on net assets has also been retained. This includes how the restrictions affect the use of resources as well. Other types of information and disclosures will be needed:
• Amounts and purposes of governing board designations, appropriations, and like actions resulting in self-imposed limits on the use of resources without donor-imposed restrictions as of the end of the period.
• Disclosures on composition of net assets with donor restrictions at the end of the period and how the restrictions affect the use of resources.
• Qualitative information that communicates how an NFP manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date
• Quantitative information, either on the face of the balance sheet or in the notes, and additional qualitative information in the notes as necessary, that communicates the availability of an NFP’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date.
• Availability of a financial asset may be affected by (1) its nature, (2) external limits imposed by donors, grantors, laws, and contracts with others, and (3) internal limits imposed by governing board decisions.
• Amounts of expenses by both their natural classification and their functional classification. That analysis of expenses is to be provided in one location, which could be on the face of the statement of activities, as a separate statement, or in notes to financial statements.
• Method(s) used to allocate costs among program and support functions.
• Underwater endowment funds, which include required disclosures of (1) an NFP’s policy, and any actions taken during the period, concerning appropriation from underwater endowment funds, (2) the aggregate fair value of such funds, (3) the aggregate of the original gift amounts (or level required by donor or law) to be maintained, and (4) the aggregate amount by which funds are underwater (deficiencies), which are to be classified as part of net assets with donor restrictions.
• Report investment return net of external and direct internal investment expenses and no longer require disclosure of those netted expenses.
• Use, in the absence of explicit donor stipulations, the placed-in-service approach for reporting expirations of restrictions on gifts of cash or other assets to be used to acquire or construct a long-lived asset and reclassify any amounts from net assets with donor restrictions to net assets without donor restrictions for such long-lived assets that have been placed in service as of the beginning of the period of adoption (thus eliminating the current option to release the donor-imposed restriction over the estimated useful life of the acquired asset).
U. S. GAAP Financial Statements
Next, we move on to a discussion of U. S. GAAP Financial Statements – Best Practices. The best source of this information is U.S. GAAP Financial Statements—Best Practices in Presentation and Disclosure. This is available from the AICPA.
The first point to make is that accounting and reporting practices not included in the FASB’s Accounting Standards Codification are not authoritative. Also, remember that FASB Concept Statements are also non authoritative. We would need a book to cover all “Best Practices”. For that reason, it is best to simply list some of the sources of the nonauthoritative accounting guidance. They include:
• Practices that are widely recognized and prevalent, either generally or in an industry.
• FASB Concepts Statements
• AICPA Issues Papers
• International Financial Reporting Standards (IFRSs) of the International Accounting Standards Board (IASB)
• Pronouncements of professional associations or regulatory agencies
• Technical Questions and Answers included in AICPA publications
• Accounting textbooks, handbooks, and articles
In order to stay current on the current and best practices in financial statement presentation and disclosure, one must follow the FASB and AICPA publications and stay tuned to www.FASB.org and www.AICPA.org.