This paper examines the Emerging Issues Task Force (EITF) and its function within the Financial Accounting Standards Board (FASB) framework. It analyzes EITF Issue No. 12-A, which addresses how not-for-profit entities should classify cash receipts from the sale of donated securities in their statements of cash flows. The paper evaluates the EITF's consensus-for-exposure that such receipts should be classified as operating cash flows, assesses the recommendation's implications for nonprofit financial reporting, and compares the treatment under U.S. GAAP with International Financial Reporting Standards (IFRS). It also considers the EITF's evolving role in a potential global accounting standards environment.
The Emerging Issues Task Force (EITF) was formed in 1984. The EITF works to assist the Financial Accounting Standards Board (FASB) in improving financial reporting by providing timely identification, discussion, and resolution of accounting issues that fall within the FASB framework known as the Accounting Standards Codification. This framework represents the authoritative source of accounting and reporting standards and is applied to nongovernmental entities. These standards are issued alongside those of the Securities and Exchange Commission (SEC) (Beresford, 1998).
The EITF promulgates implementation guidance for financial and reporting procedures within the FASB framework in order to reduce diversity in practice on a timely basis. The EITF was also created to minimize the need for the FASB to spend significant effort and time addressing narrow issues of implementation and application, as well as other emerging issues that can be effectively resolved within existing generally accepted accounting principles (GAAP) (May, Paul, & Uhl, 2009).
The task force also helps create awareness of emerging issues in the accounting world before they become widespread, thereby reducing diversity in practice. When the EITF reaches a consensus on a particular emerging issue, it is communicated to the FASB as a clear indication that no further board action is required. If the EITF is unable to reach a consensus, then the FASB must take action.
Since its creation, the EITF has helped resolve 517 issues and serves an extremely valuable purpose by responding to diverse opinions on accounting issues in a manner that is less burdensome and more timely than full standard-setting. Moreover, because EITF meetings are open to the public, discussions are transparent and free from favoritism of any kind.
The current emerging issue examined here is Issue No. 12-A, 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 concerns how not-for-profit entities should classify, in their cash flow statements, cash received from the sale of donated items that are directed upon receipt for immediate sale and for which the organization has the inherent ability to avoid significant investment risk by converting them immediately to cash.
With the exception of certain securities accounted for as trading securities, one view holds that cash received from the sale of donated equity and debt securities should be classified as cash flows from investing activities. Another view holds that cash flows from the sale of donated securities should be classified as operating activities only if the securities are held for a short period of time, consistent with the not-for-profit's policy.
The cash flow statement of not-for-profits currently permits organizations to enter cash received from the sale of donated securities as either investing or operating activities (Financial Accounting Standards Board, 2012). This disparity in accounting practice among not-for-profits is what Issue No. 12-A seeks to resolve. The EITF reached a consensus-for-exposure that such cash receipts should be classified as operating cash flows. The exception is when a donor specifically restricts the donated security for a long-term purpose, such as funding construction, in which case the cash receipt would be classified as a financing cash inflow.
Under the EITF consensus, a not-for-profit organization would no longer classify cash received from the sale of donated securities as a cash donation in the cash flow statement. Instead, such receipts would be classified under operating activities. This change is intended to streamline financial accounting and reporting for not-for-profit entities.
This emerging issue is unlikely to cause significant disruption to cash flow reporting for most not-for-profits, since it simply realigns the classification of cash receipts from the sale of donated securities. For organizations that were already classifying such receipts as operating income, no change is required. However, organizations that had been classifying these receipts as cash flows from investing activities will need to revise their accounting policy to conform to the EITF's new recommendation.
"Merits, limitations, and scope of the recommendation"
"Comparing U.S. GAAP and IFRS on donated asset cash flows"
"EITF's potential function if global standards are adopted"
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