7 Jun

The accounting profession has done a huge disservice to the nonprofit world.

One need look no further than the accounting rule that used to go by the name of FASB 116*.  If you have ever tried to read and understand financial reports for a nonprofit organization that has received multi-year awards, you know what I mean.

FASB 116 forces accountants to ignore the longstanding “matching principle” in which revenue and related expenses are matched by showing them in the same time period.   Instead, with FASB 116, if you receive a multi-year grant, pledge, or other award, and if the award meets certain accounting requirements, all of the revenue must be shown in the first year even though expenses related to that award continue to be incurred in subsequent years.

This creates the bizarre set of circumstances in which, during the first year of the multi-year award, the organization shows what appears to be a huge windfall in its budget and financial reports, while in subsequent years losses are shown from continuing expenses even though the organization received the funds to pay them!

For an example of how this all works, see my previous blog called, “The Single Biggest Problem With Nonprofit Accounting Rules.”  (See )

For a real-life example of how this rule ensnared the Clinton Foundation, see my blog, “Bill Clinton Feels Your Pain.” (See )

Without going too far into the accounting details, it is helpful to understand for comparison purposes how multi-year awards used to be treated prior to FASB 116.

Prior to 1993, when FASB 116 was passed (effective for fiscal years beginning after December 15, 1994), future years’ funds from multi-year awards were simply shown on the balance sheet as a liability.  Each subsequent year the liability was reversed, thereby showing the revenue that should be matched against that year’s expenses.

This pre-FASB 116 treatment was easy to account for.  It was easy to explain.  It made it easy for nonprofit organizations to develop their budgets.  It made it easy for readers of financial reports (e.g., board members, funders, management, etc.) to read and understand their numbers.

Because of this rule, accountants, like me, have spent the last 20 years explaining the consequences of this rule to our nonprofit clients and to the readers of their financial reports.  Over the years we have had to develop a variety of workarounds to help our clients with this accounting fact of life when preparing their budgets and when presenting and explaining their financial reports.

The management teams and boards of nonprofits all across America treat this accounting rule with disdain, and derisively ridicule the accounting profession which foists rules like this upon them.  Why, our clients want to know, must they show a deficit for programs in the second and subsequent years of an award when they were awarded the funds to cover the costs?  Logically, it makes no sense either to the lay person or to the accounting professionals.  How much time is wasted every year by organizations as they try to figure out how to portray and reflect these so-called “carry-over” funds, a phrase we hear often, in their budgets and financial reports?  While there are various techniques we use with our clients to help them through this, most organizations view the accounting rules, and the profession that promulgates them, as something they are forced to put up with, something that hinders their ability to properly manage their organizations.

Organizations put up with this accounting rule because they have to.  If a nonprofit is audited by a certified public accountant and wants to receive a “clean” unqualified audit opinion, the organization must follow this rule, among all other generally accepted accounting principles.  As a result, accountants and their rules are often viewed as a necessary evil.  (I exempt my firm, Your Part-Time Controller, from this since our clients appreciate our advice about how to understand and deal with the problems created by this rule.)

The FASB states on its website that its mission is to:

“…establish and improve standards of financial accounting and reporting that foster financial reporting by nongovernmental entities that provides decision-useful information to investors and other users of financial reports.”

FASB 116’s required treatment of multi-year awards does not provide decision-useful information to anyone.

We, the accounting profession, have created this problem.  Fortunately, there is a simple solution.

FASB, repeal this provision of FASB 116.

Comments welcome.

Eric Fraint, President and Founder
Your Part-Time Controller, LLC
The NONPROFIT accounting specialists
Washington, DC – New York, NY – Philadelphia, PA

*As of 2009, the FASB’s (Financial Accounting Standards Board, a group of people based in Norwalk, CT) numbering system was replaced by the ASC (Accounting Standards Codification) numbering system.  Those of us who have been working in the accounting field for long still refer to the subject of this blog as FASB 116.  Also note that FASB 116 deals with a variety of topics related to nonprofit accounting.  This blog is concerned with just one aspect of this rule, that which deals with the treatment of multi-year awards.

11 Responses to “REPEAL FASB 116!”

  1. thomas Scurto-davis June 8, 2015 at 5:48 PM #

    Eric, perhaps it is time for the CPAs who participate primarily in nonprofit accounting to create their own self regulating organization ala FASB.

    Since the accounting profession is self-regulated, what would prevent the nation’s nonprofit focused CPAs from branching off and creating a set of NPASC just for the treatment of nonprofit organization’s financials?
    Glad to see you are still relentlessly beating this drum,


    • Eric Fraint June 15, 2015 at 5:53 PM #

      Hello Thomas, thank you for your post. I am not anti FASB. They have an important function to perform. Someone has to make the rules, so it might as well be a dedicated group of professionals, which they are.


  2. Rose Marine June 10, 2015 at 12:55 PM #

    I completely agree it should be repealed and go back to the old way of reporting multi-year grants. It adheres to the fundamental matching principle.
    How does one go about getting a FASB rule repealed?


    • Eric Fraint June 15, 2015 at 6:06 PM #

      I would suppose the way to influence the FASB is by letting them know of your concerns. For example, they are currently collecting feedback to an exposure draft which I believe does not address the problem identified in my blog.


  3. Debra Ward June 14, 2015 at 7:51 PM #

    Hi Eric,
    I totally agree and found this accounting rule to be ridiculous after working in the commercial work. Accounting principles are based on the matching concept which is what we all learn throughout our studies and then we go into the Not for Profit world where this principle doesn’t apply anymore. It would probably be fine if you were running a cash business which isn’t the case.
    Therefore, I say get rid of FASB 116 as it goes against the grain and causes confusion for everyone, especially Board Members.


  4. Raul Larios June 15, 2015 at 12:05 PM #

    I will also add to the chorus on this worthwhile call-to-action for the repeal of the treatment of multi-year awards under FASB 116. But as Rose Marine asked, how does one go about getting a FASB rule repealed?


    • Eric Fraint June 15, 2015 at 6:12 PM #

      Thank you Raul for your reply. I just posted a reply to Rose Marine suggesting the way to influence the FASB is by writing to them of your concerns. By the way, I see that you are an active blogger on nonprofit topics. I just signed up to “Follow” your blog.


  5. Marieanne D'Antonio-Hunt June 23, 2015 at 12:32 PM #

    What was the rationale behind passing FASB 116 in the first place? Currently a student, so obviously not a CPA yet, but this seems counterintuitive to me.


  6. Donna Dudley August 24, 2015 at 8:18 PM #

    Hear, Hear! Totally agree. And yet FASB’s proposed changes to NFP financial reporting that just concluded its comment period, purport to reduce complexity of said statements. Without addressing 116. LIke you, many years spent explaining, and re-explaining to organizations, their boards, and donors, how the mismatch of revenue to expense is manifest in their reports and that looking at one year in isolation cannot provide any meaningful information.


  7. Carol Wilson September 4, 2015 at 8:55 AM #

    My accounting career was just starting when FASB 116 was issued, so I never worked under the prior more intuitive and logical system. It’s good to know I am not alone in struggling with this presentation. I have even seen grants restricted for future periods presented as deferred revenue in audited financials and wondered where the auditors found support for that position. Maybe they were simply rebelling!


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