The Emerging Issues Task Force, abbreviated as the EITF, was formed in the year 1984. The EITF works to assist the FASB (Financial Accounting Standards Board) to improve financial reporting by providing timely identification, identification, discussion and resolution of issues in accounting which are within the FASB framework known as the Accounting Standards Codification. The framework represents the source of authoritative standards of accounting in general and reporting and is to be applied to nongovernmental entities. They are issued side by side to those of the SEC (Securities Exchange Commission) Beresford, 1998()
The EITF promulgates the guidance of implementation of financial and reporting procedures within the FASB framework in order to reduce the diversity in practice on a basis that is timely. The EITF was also created to minimize the need of the FASB to spend crucial effort and time to address narrow issues of implementation, application as well as other emerging issues that can be effectively analyzed within the existing generally accepted accounting principles (GAAP) May, Paul, & Uhl, 2009()
The taskforce also helps to create awareness on emerging issues in the accounting world before they come widespread and thus helps to reduce the diversity of practices. When a consensus is reached by the EITF about a particular emerging issue, it is taken up with the FASB as an outright indication that there is no action by the board that is required. If the EITF is unable to reach a consensus, then the FASB needs to take some action.
Since its creation, the EITF has helped to resolve 517 issues and it serves an extremely valuable purpose in its response to diverse opinions on accounting issues in a manner that is less authoritative and timelier. Moreover, since the meetings of the EITF are open to the members of the public, there is transparency in the discussion and no favoritism of any kind.
Current emerging issue
The current emerging issue chosen is issue no. 12-A which it titled "Not-for-Profit Entities: Classification of the Sale of Donated Securities in the Statement of Cash Flows," Emerging Issues Task Force, 2012.
The issue here is how not-for-profits should classify in the cash flow statement the cash that is received for the sale of donated items which are directed upon receipt for sale and for which the not-for-profit has the inherent ability to avoid a significant risk of investment and rewards through converting it immediately to cash.
With the exception of certain securities which are accounted for as trading securities, any cash received from the sale of equity and debt securities donated by other entities should be classified as cash flow from investing activities. There is also another view that the cash flows from the sale of securities that are donated should only be regarded as income from operating activities if the securities are held only for a short period of time as is the policy of the not-for-profit.
The cash flow statement of not-for-profits allows them to enter cash received for the sale of securities that are donated as either investing or operating activities Financial Accounting Standards Board, 2012.
This is the disparity in the accounting procedure of not-for-profits that this issue targets to streamline. The EITF reached a consensus-for-exposure that such cash receipts of not-for-profits that result from the sale of securities that are donated should be classified as operating cash flows. This is to be the case unless the donor specifically stated the use of the donated security to be long-term use such as construction. In this case, such receipts of cash would be termed as financing cash flows.
How a company's accounting and financial reporting is likely to be impacted by the work being done by the EITF on this issue
From the consensus reached by the EITF, a not-for-profit company would not classify cash received from the sale of securities that are donated as cash donations in the cash flow statement. They would be classified as cash receipts from operating activities. Therefore the cash received would fall under cash receipts from cash flows. This is done so to streamline the financial and reporting activities of not-for-profits.
This emerging issue is not likely to bring any issues in the reporting of cash flow statements by not-for-profits since it just alters the classification of receipts of cash from the sale of securities that are donated. For those organizations that were classifying such receipts as operating income, there is no change. However, for those that were classifying these as cash flow from investing activities, they will need to change their accounting policy to fit this new recommendation by the EITF.
Response to the EITF recommendation
The EITF recommendation is a valid recommendation on the basis that it attempts to eliminate the diversity in accounting practices that comes from the classification of the cash receipts from the sale of securities that are donated. The not-for-profits will need to align their financial and reporting procedures to be in line with this new recommendation by the EITF.
The scope of the proposed recommendation by the EITF is befitting of the situation facing the not-for-profits. However, an important question that is raised by this recommendation is that of which other assets that are donated other than securities should be included in this particular criterion for accounting for the cash receipts as operating incomes. Other assets such as cars and non-marketable securities including artwork should also be included in this criterion since they can be sold to get immediate cash for other activities.
Cash receipts for not-for-profits resulting from the sale of securities that are donated which when received by the not-for-profit are directed for immediate sale either by the policy of the not-for-profit or direction of the donor and those securities for which the not-for-profit would like to avoid incurring significant risks of investment by converting them into cash must be classified as operating cash flows. This is because they are receipts that are generated from revenues in the organization. The only exception to this should be if the donor restricts the use of the security that is donated to a long-term purpose.
One major short fall is that the EITF recommendation on the issue makes an assumption that the organization will not have any market risk that is significant when it liquidates the donated security. Therefore, this recommendation fails to acknowledge that in the dynamic business world, there is bound to be significant market risk arising from an orderly liquidation and thus the cash flow would need to be recognized as cash receipt from investing activity. Additionally, in the situation where the donor restricts the use of the donated security for a long-term purpose, then it requires the cash receipt to be described as a financing cash inflow.
The update of the financial statements of not-for-profits to reflect these amendments would not affect an analysis of these financial statements. This is because as a result of these recommendations being done to streamline the financial accounting and reporting procedures for all not-for-profits, it will result in easier analysis since the diversity will be eliminated.
The proposed amendments should indeed be applied in a prospective manner but there should be an allowance that is set aside for its application retrospectively to all previous periods which are presented upon the date of adoption. There is not much time requirement for the adoption of this recommendation. It should be effected immediately when the proposed amendments are passed.
Evaluation of the difference in accounting treatment between GAAP and IFRS in the current emerging issue
The IFRS was designed specifically to apply financial statements that are made for general purposes and for other financial reporting of all entities that are profit-oriented. The principles stated in the IFRSs are not applicable for the activities of not-for-profit organizations. However, these not-for-profits can find them to be appropriate and applicable. IAS 7 which outlines the statement of cash flow presents a definition of the definitions of the various classifications of cash flows. It defines operating cash flows as those that come from the principal revenue-generating activities of the business entity. Sales of equity and debt instruments are referred to as investing activities. The IAS 7 does not state in an explicit manner whether cash receipts from such donated securities should be listed as cash inflow from investing activities.
In regards to the GAAP, there is a huge diversity in the practice that is run under the GAAP. Therefore, this amendment would eliminate this diversity in practice and unify the practice to bring about uniformity in the practice being applied.
Role of the EITF should the accounting professional adopt a global set of accounting standards
The EITF has somewhat a changing role in the accounting society. The EITF strives to assume responsibility over accounting standards in an exclusive fashion. The EITF acts independently on the emerging accounting issues by simply passing a consensus agreement. The FASB members do not provide any input on the EITF consensus and…