Accounting alphabet soup: can software keep up in moving from FASB and GAAP to IASB and IFRS?

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Nonprofits in the United States are required to manage and report financial activity according Generally Accepted Accounting Principals (GAAP). That they are not called Carved in Stone Accounting Principles (CISAP) is an acknowledgement that the organization of financial statements is as much art as science.

Many financial professionals prefer to exercise their creativity by following the rules with precision and elegance. Once a problem is solved, the solution is repeated as required and the underlying principles are seldom re-examined. "Why did the auditors cross the road?," asks one of the few jokes about the profession. "Because that's what they did last year" is the all too telling answer.

However, the rules of accounting are changing. The people who create, audit, and base management and funding decisions on financial reports will have to adapt to a new world order of accounting standards. Publicly traded companies in the United States regulated by the Securities and Exchange Commission (SEC) are on a path to converge GAAP with the International Financial Reporting Standards, or IFRS (pronounced eye-furs).

The original intent of this convergence was to create uniform standards to compare the financial results of companies across national boundaries. The global financial collapse of 2008 brought new concerns to the process. Providing a more transparent and accurate view of financial health, as well as a company's ability to manage risk, is becoming central to the emerging standards. Because nonprofits in the United States base financial reporting on standards for public companies, the nonprofit sector can expect its own set of new requirements. Knowing that these changes are coming and being able to adjust will be critical to the full range of nonprofit stakeholders.

"People are curious about U.S. GAAP v IFRS. Most of the world does not have nonprofits," said Frank L. Kurre, national managing partner, Not-For-Profit Industry Practice at Grant Thornton LLP, in New York. He continued, "We are going to see incremental changes. As the convergence starts, we'll start to see a ripple effect."

DEJA VU ALL OVER AGAIN

The codification of GAAP in the United States followed closely on the heels of the Wall Street collapse of 1929 when "profitable" companies found that they were unable to meet financial obligations. In 1939, the SEC encouraged the American Institute of Certified Public Accountants (AICPA) to create the Committee on Accounting Procedures (CAP) to deal with issues as they arose.

In 1959, the Accounting Principals Board replaced CAP and laid the groundwork for today's GAAP. APB was replaced in 1973 by the Financial Accounting Standards Board (FASB), an independent body operated by the 501(c)(3) Financial Accounting Foundation (FAF). The SEC defers to FASB in establishing GAAP for all kinds of organizations, including nonprofits.

According to Julie L. Floch, CPA, partner and director of Not-for-Profit Services at Eisner LLP in New York City, "It's not an 'if,' it's a 'when' we need international standards." Stuart J. Miller, CPA, executive in charge of nonprofit services with Crowe Horwath LLP in Chicago, sees convergence as the result of "the interconnectedness of the world and cross-border transactions. We're not on an island. As people make and donate money, it creates a requirement for consistency. Accounting is score keeping, and this allows one set of rules and investors can make decisions."

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FASB and GAAP apply only to the United States, while the International Accounting Standards Board (IASB) manages IFRS. More than 100 countries require or allow use of IFRS. FASB and IASB have been working to align GAAP and IFRS for several years to simplify the reporting process and improve the transparency of multinational companies with operations in the United States. The goal is to have the single set of reporting standards in place between 2014 and 2016.

Just how far reaching and disruptive the change will be and the type of preparation required is under debate. According to Floch, China, Great Britain, and New Zealand are all going to have different standards. "We don't know what's inevitable for us."

Grant Thornton's Knrre added, "It will be interesting to see if the IFRS has any innovations or other approaches that the U.S. might adopt. A lot of GAAP is specific to the U.S., and U.S. nonprofits are regulated in a different manner from in other countries."

FINANCIAL PICTURE OF DORIAN GRAY 

Over the long term, a nonprofit has to make as much money--or more--than it spends. That's the basis of good financial stewardship. Some agencies will choose, often unknowingly or innocently, and at other times deliberately, to distort their financials in an effort to look better. Reporting standards evolve over time to make it harder to hide problems. Enron's collapse brought one wave of change, and Wall Street's recent performance might bring a tsunami of new rules.

With the increased complexity of world markets, U.S. nonprofits might not have a clear picture of new standards for several years.

Nonprofit accountability has taken a back seat to controls on publicly traded for-profits. "We have different standards in the U.S. because charities aren't government agencies. In the rest of the world a lot of charities are NGOs (non-governmental organizations) or GOs (governmental organizations). Their accounting is so vastly different than ours. We have many more restrictions, from a tax status and from a donor restriction status," explained Floch.

According to Andrew Payne, product line manager for The Financial Edge at software vendor Blackbaud, "The history has been prevailing GAAP, there's pressing demand on the for-profit side, and the fact that the investment community is moving forward with buying equity in foreign entities without agreed upon financial standards has been a concern. These are the kinds of issues that will be addressed first. Protecting the investor is the primary focus; for good or for bad, U.S. nonprofits will have to wait."

BOTTOM LINE TRICKLE DOWN 

Nonprofit managers will have to get ready for financial reporting changes in three areas. The first change is watching and learning about the new standards and generally keeping it on the radar screen, particularly in concert with related changes to IRS Form 990.

Secondly, there is a need to engage staff with financial management responsibilities and strategically engage them in preparing for and implementing the whole range of changes during the next several years. And finally, managers need to be ready to simultaneously learn from and educate stakeholders, particularly boards and funders, who may be on a different part of the learning curve.

LEARNING TO INTERPRET

One of the biggest differences between current international standards and GAAP is that IFRS is principles-based while GAAP is rules-based. Dealing with many countries, IASB puts more emphasis on interpretation and disclosure than the FASB, which has a precise rule for almost every situation.

Steve Glauber, senior systems engineer at Serenic Software, thinks that "it'll be a little scary at first. But for individual not-for-profits, rules or principles won't be a big deal, but it will be for the auditors. The actual financials themselves will be a challenge for the auditors."

Blackbaud's Payne added, "We're moving in a less prescriptive way to a more theoretical view with respect to principals vs. rules, and it's unclear what the implications are. It could mean more risk in terms of conflicts of interpretation between a nonprofit and its auditor."

Jeannie Huckstep, CPA, CITP, president and founder of Springfield, Mo.-based Huckstep & Associates, LLC, joked that convergence is "the accountant's full employment act." In terms of preparation, she said, "We're just hearing little pieces in the accounting world. A lot of nonprofits haven't heard anything about it, but it's going to have a big impact. Things are going to be much more fuzzy, and it's going to require a lot more critical thinking. I see a lot of differences in accounting processes and procedures and judgment."

Accounting transactions will have to be readily verifiable directly from accounting software. Glauber warned that "auditors no longer want to audit around the system. They now want to audit through the system and make sure that every transaction is what it should be and all of the controls are in place. The right system makes the audit easier. Being able to have fund accounting out of the box--interfund transfers and a full statement of financial position in addition to reporting on revenue and expenses is critical."

Software publishers plan to be ready, so it will be important to have current versions, support agreements and to keep staff trained, he said.

Huckstep added, "Without the regulation that GAAP gave us, where we didn't have a lot of judgment, you knew what was a payable. But a payable only requires a commitment. You may have a commitment to buy a bus, but haven't taken delivery, and under the new standards timing is different and the payable could be booked much sooner. And for assets, you had something that you paid $200,000 for, and a residual value of $20,000 and so you have $180,000 that you're going to depreciate over its life. Under the new standard you have the choice to revalue each year, and that can impact on how you compare similar organizations counting things differently."

Huckstep continued, "The push for IFRS is from common reporting between countries, but we have questions about standards between organizations. It's not necessarily bad. It requires more judgments in how to account for things as well as in looking at reporting. If I look at one set of financial statements and see one organization revaluing every year and another every six months, these will be disclosed in the financial statements, and the reader will have to be aware of this."

POSITIONING ACCOUNTING STAFF

Huckstep predicted a significant impact on accounting staff. "Moving to a more principle-based approach will require big changes to audit standards, and this is going to further complicate the issues. I see big changes in how financial reporting staff in nonprofits operate--there will be less dependence on tick and tie people and more reliance on critical thinking skills," she said.

Glauber recommended, "If you can standardize things throughout the organization, do it now. People need to be reading and looking and not be afraid, because it's coming. It's not happening in a vacuum, being involved is critical. A lot of organizations don't realize how much the 990 is changing, let alone international standards."

According to Payne, an important preparation is "keeping a very close watch on the Conceptual Framework Project (CFP); FASB and IASB are moving in a very methodical way to creating financial reporting standards, which will help staff to propose quality standards."

Glauber recommended that organizations "tighten up controls, and manage costs and assets and understand the current value."

Payne cautioned that change is "coming in phases, and nonprofits are in phase G, when they get done with high-level issues, they'll move to nonprofit impact."

Huckstep's firm specializes on implementing Sage MIP software. She pointed out, "When we're doing a system implementation, the first thing we look at is the audit and try to build the system to provide the right information to the auditors. People have to look at their software and see that it's flexible enough to classify and report."

EDUCATING STAKEHOLDERS

Nonprofit board members from public companies actively involved in IFRS might be advocates for change, or they might be a hindrance. A lot will depend on how the organization deals with change. According to Huckstep, "A lot of organizations will do the minimum that they have to do, but there's a big opportunity to take a fresh look, to see if you've got the right people on the bus and they're in the right seats. The whole concept of education of the boards is critical--they're the policy makers. They may be involved with public companies, hut they don't necessarily understand nonprofits."

Miller added, "For statement preparers, rules give them the map from beginning to end. Principles require that you make some decisions. It creates more questions than answers. In theory, it's supposed to get simpler, but disclosures may have to get more robust for readers to understand intent."

Kurre cautioned that before worrying about IFRS, nonprofit boards should be preparing for changes to the federal Form 990. "It is important to look at a mockup of their 990 for FY'09 and look at the yes/no questions and then at their policies. If you're answering no, you're not violating the law, but will have to explain why not. You have to demonstrate adequate fiscal transparency. You have to legitimately click the box 'yes.' They'll have to disclose double or triple what they've had to in the past, and they may have to change policies. First class travel is a question, as is reporting embezzlement."

Miller predicted that, "Boards and constituents will drive this. Complicated organizations with international work will adopt earlier. Local organizations won't need to be bleeding edge. People will watch the first couple of organizations go through this, and peer pressure will drive this for a while. Board members will get it first because they're associated with public companies."

Nonprofits have already adopted some Sarbanes-Oxley Act (SOX) standards because boards were asking questions about controls. You'll see internal audits, rotating audit partners after a set number of years, whistle blower polices--some of which are asked in the new 990. Internal controls are very important, but there's also a balancing act of how much to do in the back office that takes away from mission, he said.

BEST GUESSES

Serenic's Glauber sees the first changes with international charities: "Fundraising is global. We're not just getting donations from the U.S. A lot of African governments are partnering with U.S. donors and giving money for aid in rural areas. That money has to roll up through the local currency. For example, getting a contribution in euros, and then distributing it in Zimbabwean schillings and paying a Ugandan consultant in Ugandan schillings. The advantage is to have local systems and being able to roll up reporting to the consolidated reporting."

Glauber doesn't see the impact just with U.S. charities working internationally, noting the international monies that went to United Ways after Hurricane Katrina, and "under IFRS reporting would have been different."

Miller pointed out, "Software is an unknown because we don't know just how big the changes are. The big question is when to recognize public support/contributions. Most packages are robust enough and the companies behind them will make the changes accordingly."

Kurre summarized with the assurance that "the underlying business will have to be managed the same. The chart of accounts will still follow the fund accounting standards. The substance of the transaction is the most important thing, and you have to understand what's happening."

Miller offered: "Financial standards are how to keep score, and organizations will still have to talk about how they changed people's lives--and accounting can't capture that."

Said Marc Yanchura, vice president and chief financial officer of The John D. and Catherine T. MacArthur Foundation, "This is going to be a big change. We have been tracking this issue, talking to our auditors about it, and thinking about how best to prepare for implementation when the new standards come out. But that's something that will happen in the future."

According to Floch, FASB will be a presence for quite some time. "If FASB goes away, who sets standards for private companies and nonprofits? If we don't have FASB, we don't have (FAS) 116 and 117. A public company can adopt international standards now, a nonprofit can't because they don't exist."

Miller likewise sees changes after the current financial turmoil is overcome. "The economic crisis is more important. Multimillion-dollar donors are impacted. Donations are going to be problematic. A lot of nonprofits are carrying a debt burden and their investments have lost 30 or 40 percent. I think we're going to see some shakeouts and consolidation."

According to Payne: "It's my belief that the stronger GAAP--the one providing the better reflection of the financial health of an organization--will win out. In countries where they have similar financial transactions, we'll likely see the U.S. model prevail. Convergence will likely move toward the U.S. model."

GETTING STARTED COMPARING ACCOUNTING SOFTWARE

AccuFund Inc.

AccuFund Accounting Suite--Standard

Single-user: $2,995; three-user: $6,495; add $895 for each additional user; AccuFund Accounting Suite--Professional

Single-user: $6,595; three-user: $8,995; add $1,195 for each additional user;

Additional modules range from $1,000 to $1,600. 781-433-0233 www.accufund.com

Agilon

Agilon Business Financials

Starts at $27,000 for 1--4 users

Starts at $42,000 for 5--10 users

319-739-0773

www.myagilon.com

Blackbaud

The Financial Edge, version 7.7

Starts at $2,100 for single-user

800-443-9441

Fundware (formally from Kintera)

Starts at $1,295 for single-user

858-795-3000

www.blackbaud.com

Cougar Mountain Software (CMS)

CMS Professional 2009 Fund

Single-user $2,247; Multi-user $4,647

CMS Professional 2009 FUND Suite

Single-user $4,887; Multi-user $7,407

CMS Professional 2009 FUND Revenue Center

Single-user $2,487; Multi-user $2,787

800-388-3038

www.cougarmtn.com

Donor2/Campus Management Corp.

Donor2 Accounting

Starts at $2,655 per user

800-548-6708

www.donor2.com

Executive Data Systems

Nonprofit Starter Kit

Single-user: $400; unlimited: $600; Fund Accounting Software Series

Single-user: $1,000; unlimited: $1,500

800-548-6708

www.execdata.com

Fund E-Z Development Corp.

Fund E-Z Fund Accounting

Starts at $695 for base system; add approximately $500 per additional user.

877-696-0900

www.fundez.com

Intuit Inc.

Quickbooks Premier for Nonprofits

Single-user $399; Two users $749.95; Three users $1,099.95

Quickbooks Enterprise Solutions for Nonprofits

Five users $3,000

866-676-9668

www.quickbooks.com

Microsoft Corporation

Microsoft Dynamics

Estimated cost from $2,000 to $6,000, per concurrent user.

701-281-6500

www.microsoft.com

Open Systems Inc.

TRAVERSE for Not-For-Profit

Approximately $1,000 per application and approximately $400 for each additional user

800-328-2276

www.osas.com

Sage Software

Sage MIP Fund Accounting

Starts at $2,995 for single-user

800-811-0961

www.sagemip.com

Sage Software (small business)

Peachtree Premium for Nonprofits

Single user $599.99

Five users $1,299.99

800-228-0068

www.peachtree.com

Serenic Corporation

Serenic Navigator

Starts at $3,000 per user for basic Business Essentials suite to $6,000 per user for Advanced Management suite.

877-737-3642

www.serenic.com