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Nonprofits Should Disclose Risks of Big Donor Withdrawals Over Emerging Events, Panel Signals

Denise Lugo  Editor, Accounting and Compliance Alert

· 5 minute read

Denise Lugo  Editor, Accounting and Compliance Alert

· 5 minute read

Not-for-profit organizations should make sure they are providing good disclosures around the risk of big donors withdrawing contributions over “events going on around the world,” a FASB panel recently signalled.

Ratings analysts have been studying whether there are material risks that could have an impact on an entity’s operations, some on the board’s Not-for-Profit Advisory Committee (NAC) said. This includes “headline risks” that could bring litigation.

“Much like auditors use materiality for their audit statements, as a user analytically we’re looking at materiality of these headline risks impacting the operations of entities,” Robert Dobbins, managing director at S&P Global Ratings, said. “And so specifically around donations, if there is a concentration there I think we would encourage some disclosure around the concentration just like if there was concentration on investments, concentrated exposure to inflating employee costs , any level of the organization which there is a concentration risk associated with a certain headline risk – litigation,” he said. “I think that’s where we would be looking for information for disclosure around those things and not just historical reporting but a forward-looking view around that.”

S&P Global Ratings maintains 102 bond ratings in the US not-for-profit sector, according to the agency’s website. Nonprofit entities that are rated include: cultural institutions (32%); membership and service organizations (30%); research-related (18%); foundations (12%, the majority of which are private foundations and a few that are operating); and college or university foundations (8%).

Generally, donors look at ratings to determine which not-for-profit to contribute to.

The NAC was established in October 2009 to advise the FASB from the perspective of the not-for-profit sector on a timely basis in connection with the development of US GAAP. The panel is composed of 18 senior-level members who are financial statement users, preparers, auditors at various organizations and companies.

The topic was raised during March 26, 2024, discussions about recent trends, events, and concerns that pose financial reporting implications for nonprofits. No decisions were made.

Nonprofits, including universities, are seeing either withdrawals of contributions or contributions receivables from big donors due to current events, the discussions also revealed. No specific event was highlighted. Some sector accountants, however, are questioning “at what point do you need to take pledges of your books?”

There is accounting guidance already in place on “how to account for those reversals of pledges, pledges receivable, contributions – the derecognition of those things,” Brian McAllister, Professor of Accounting at the University of Colorado, explained.

McAllister pointed to the types of issues that entities could consider in relation to the withdrawal of a contribution. “Does that have an impact on a valuation allowance?” he said. “And so for a preparer, for an auditor, for instance, does that go into that consideration for valuation of that realizable value?”

 

This article originally appeared in the April 8, 2024, edition of Accounting & Compliance Alert, available on Checkpoint.

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