pronouncement

Statement of Financial AccountingConcepts No. 4

Objectives of Financial Reporting by NonbusinessOrganizations

Financial Accounting Standards Board

ORIGINALPRONOUNCEMENTS

AS AMENDED

Copyright 2008 by Financial Accounting Standards Board. All rights reserved.No part of this publication may be reproduced, stored in a retrieval system, ortransmitted, in any form or by any means, electronic, mechanical, photocopying,recording, or otherwise, without the prior written permission of the FinancialAccounting Standards Board.

Statement of Financial Accounting Concepts No. 4Objectives of Financial Reporting byNonbusiness Organizations

STATUS

Issued: December 1980Affects: No other pronouncementsAffected by: No other pronouncements

HIGHLIGHTS

[Best understood in context of full Statement] This Statement establishes the objectives of general purpose external financial reporting by nonbusiness

organizations.

Based on its review of those objectives and the objectives set forth in FASB Concepts Statement No. 1,Objectives of Financial Reporting by Business Enterprises, the Board has concluded that it is not neces-sary to develop an independent conceptual framework for any particular category of entities.

The two sets of objectives will serve as the foundation of an integrated conceptual framework for finan-cial accounting and reporting that, when completed, will have relevance to all entities while providingappropriate consideration of any different reporting objectives and concepts that may apply to only cer-tain types of entities.

Pending resolution of the appropriate structure for setting financial accounting and reporting standardsfor state and local governmental units, the Board has deferred a final decision on whether the objectivesin this Statement should apply to general purpose external financial reporting of those units. On the basisof its study to date, the Board is aware of no persuasive evidence that the objectives in this Statement areinappropriate for that type of financial reporting by state and local governmental units.

Based on its study, the Board believes that the objectives of general purpose external financial reportingfor government-sponsored entities (for example, hospitals, universities, or utilities) engaged in activitiesthat are not unique to government should be similar to those of business enterprises or other nonbusinessorganizations engaged in similar activities.

This Statement focuses on organizations that have predominantly nonbusiness characteristics that heavilyinfluence the operations of the organization.

The major distinguishing characteristics of nonbusiness organizations include: (a) receipts of significantamounts of resources from resource providers who do not expect to receive either repayment or eco-nomic benefits proportionate to resources provided, (b) operating purposes that are primarily other thanto provide goods or services at a profit or profit equivalent, and (c) absence of defined ownership inter-ests that can be sold, transferred, or redeemed, or that convey entitlement to a share of a residual distri-bution of resources in the event of liquidation of the organization.

These characteristics result in certain types of transactions that are infrequent in business enterprises,such as contributions and grants, and in the absence of transactions with owners.

The line between nonbusiness organizations and business enterprises is not always sharp since the inci-dence and relative importance of those characteristics in any organization are different. This suggests

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that, for purposes of developing financial reporting objectives, a spectrum of organizations exists rang-ing from those with clearly dominant nonbusiness characteristics to those with wholly businesscharacteristics.

Examples of organizations that clearly fall outside the focus of this Statement include all investor-ownedenterprises and other types of organizations, such as mutual insurance companies and other mutual co-operative entities that provide dividends, lower costs, or other economic benefits directly and propor-tionately to their owners, members, or participants.

Examples of organizations that clearly fall within the focus of this Statement include most human serv-ice organizations, churches, foundations, and some other organizations, such as those private nonprofithospitals and nonprofit schools that receive a significant portion of their financial resources from sourcesother than the sale of goods and services.

Borderline cases may exist where organizations possess some of the distinguishing characteristics butnot others. Examples are those private nonprofit hospitals and nonprofit schools that may receive rela-tively small amounts of contributions and grants but finance their capital needs largely from the proceedsof debt issues and their operating needs largely from service charges. As a result, the objectives of Con-cepts Statement 1 may be more appropriate for those organizations.

The objectives in this Statement stem from the common interests of those who provide resources to non-business organizations in the services those organizations provide and their continuing ability to provideservices.

Nonbusiness organizations generally have no single indicator of performance comparable to a business en-terprises profit. Thus, other indicators of performance usually are needed.

The performance of nonbusiness organizations generally is not subject to the test of direct competition inmarkets to the extent that business enterprises are.

Other kinds of controls introduced to compensate for the lesser influence of markets are a major charac-teristic of their operations and affect the objectives of their financial reporting. Controls, such as formalbudgets and donor restrictions on the use of resources, give managers a special responsibility to ensurecompliance. Information about departures from those mandates is important in assessing how well man-agers have discharged their stewardship responsibilities.

The objectives in this Statement apply to general purpose external financial reporting by nonbusinessorganizations.

The objectives stem primarily from the needs of external users who generally cannot prescribe the infor-mation they want from an organization.

In addition to information provided by general purpose external financial reporting, managers and, tosome extent, governing bodies need a great deal of internal accounting information to carry out theirresponsibilities in planning and controlling activities. That information and information directed at meet-ing the specialized needs of users having the power to obtain the information they need are beyond thescope of this Statement.

The objectives of financial reporting are affected by the economic, legal, political, and social environmentin which financial reporting takes place.

The operating environments of nonbusiness organizations and business enterprises are similar in manyways. Both nonbusiness organizations and business enterprises produce and distribute goods and serv-ices and use scarce resources in doing so.

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Differences between nonbusiness organizations and business enterprises arise in the ways they obtainresources. Noneconomic reasons are commonly factors in decisions to provide resources to particularnonbusiness organizations.

The objectives also are affected by the characteristics and limitations of the kind of information that finan-cial reporting can provide.

The information provided by financial reporting is primarily financial in nature: It is generally quantifiedand expressed in units of money. However, quantified information expressed in terms other than units ofmoney and nonquantified information may be needed to understand the significance of information ex-pressed in units of money or to help in assessing the performance of a nonbusiness organization.

The information provided by financial reporting pertains to individual reporting entities, often resultsfrom approximate rather than exact measures, largely reflects the effects of transactions and events thathave already happened, is but one source of information needed by those who make decisions aboutnonbusiness organizations, and is provided and used at a cost.

The objectives state that: Financial reporting by nonbusiness organizations should provide information that is useful to present

and potential resource providers and other users in making rational decisions about the allocation of re-sources to those organizations.

Financial reporting should provide information to help present and potential resource providers andother users in assessing the services that a nonbusiness organization provides and its ability to continueto provide those services.

Financial reporting should provide information that is useful to present and potential resource providersand other users in assessing how managers of a nonbusiness organization have discharged their steward-ship responsibilities and about other aspects of their performance.

Financial reporting should provide information about the economic resources, obligations, and net re-sources of an organization, and the effects of transactions, events, and circumstances that change re-sources and interests in those resources.

Financial reporting should provide information about the performance of an organization during a pe-riod. Periodic measurement of the changes in the amount and nature of the net resources of a nonbusi-ness organization and information about the service efforts and accomplishments of an organization to-gether represent the information most useful in assessing its performance.

Financial reporting should provide information about how an organization obtains and spends cash orother liquid resources, about its borrowing and repayment of borrowing, and about other factors thatmay affect an organizations liquidity.

Financial reporting should include explanations and interpretations to help users understand financial in-formation provided.

Background information relating to the development of this Statement is included in paragraphs 5766.Paragraph 67 contains a comparison of the objectives in this Statement to those in Concepts Statement 1.

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Statement of Financial Accounting Concepts No. 4Objectives of Financial Reporting by Nonbusiness OrganizationsSTATEMENTS OF FINANCIALACCOUNTING CONCEPTS

This Statement of Financial Accounting Concepts isone of a series of publications in the Boards conceptualframework for financial accounting and reporting. State-ments in the series are intended to set forth objectivesand fundamentals that will be the basis for developmentof financial accounting and reporting standards. The ob-jectives identify the goals and purposes of financial re-porting. The fundamentals are the underlying conceptsof financial accountingconcepts that guide the selec-tion of transactions, events, and circumstances to be ac-counted for; their recognition and measurement; and themeans of summarizing and communicating them to in-terested parties. Concepts of that type are fundamental inthe sense that other concepts flow from them and re-peated reference to them will be necessary in establish-ing, interpreting, and applying accounting and reportingstandards.

The conceptual framework is a coherent system of in-terrelated objectives and fundamentals that is expectedto lead to consistent standards and that prescribes the na-ture, function, and limits of financial accounting and re-porting. It is expected to serve the public interest by pro-viding structure and direction to financial accountingand reporting to facilitate the provision of evenhandedfinancial and related information that helps promote theefficient allocation of scarce resources in the economyand society, including assisting capital and othermarkets to function efficiently.

Establishment of objectives and identification of fun-damental concepts will not directly solve financial ac-counting and reporting problems. Rather, objectives givedirection and concepts are tools for solvingproblems.

The Board itself is likely to be the most direct benefi-ciary of the guidance provided by the Statements in thisseries. They will guide the Board in developing account-ing and reporting standards by providing the Board witha common foundation and basic reasoning on which toconsider merits of alternatives.

However, knowledge of the objectives and conceptsthe Board will use in developing standards also shouldenable those who are affected by or interested in finan-cial accounting standards to understand better the pur-poses, content, and characteristics of information pro-vided by financial accounting and reporting. Thatknowledge is expected to enhance the usefulness of, andconfidence in, financial accounting and reporting. Theconcepts also may provide some guidance in analyzingnew or emerging problems of financial accounting andreporting in the absence of applicable authoritative pro-nouncements.

Statements of Financial Accounting Concepts do notestablish standards prescribing accounting procedures ordisclosure practices for particular items or events, whichare issued by the Board as Statements of Financial Ac-counting Standards. Rather, Statements in this series de-scribe concepts and relations that will underlie future fi-nancial accounting standards and practices and in duecourse serve as a basis for evaluating existing standardsand practices.*

The Board recognizes that in certain respects currentgenerally accepted accounting principles may be incon-sistent with those that may derive from the objectivesand concepts set forth in Statements in this series. How-ever, a Statement of Financial Accounting Conceptsdoes not (a) require a change in existing generally ac-cepted accounting principles; (b) amend, modify, or in-terpret Statements of Financial Accounting Standards,Interpretations of the FASB, Opinions of the AccountingPrinciples Board, or Bulletins of the Committee on Ac-counting Procedure that are in effect; or (c) justify eitherchanging existing generally accepted accounting and re-porting practices or interpreting the pronouncementslisted in item (b) based on personal interpretations of theobjectives and concepts in the Statements of FinancialAccounting Concepts.

Since a Statement of Financial Accounting Conceptsdoes not establish generally accepted accounting prin-ciples or standards for the disclosure of financial infor-mation outside of financial statements in published fi-nancial reports, it is not intended to invoke application ofRule 203 or 204 of the Rules of Conduct of the Code of

*Generally accepted accounting principles for nonbusiness organizations are primarily set forth in publications of the American Institute of CertifiedPublic Accountants (AICPA) and other bodies, such as the National Council on Governmental Accounting (NCGA). The Board has agreed to exerciseresponsibility, except as noted below, for all the specialized accounting and reporting principles and practices in AICPA Statements of Position andGuides that are neither superseded by nor contained in Accounting Research Bulletins, Accounting Principles Board Opinions, FASB Statements, andFASB Interpretations. The Board deferred similar action with regard to those specialized accounting and reporting principles and practices contained inthe AICPA Industry Audit Guide, Audits of State and Local Governmental Units, and the three Statements of Position (75-3, Accruals of Revenues andExpenditures by State and Local Governmental Units; 77-2, Accounting for Interfund Transfers of State and Local Governmental Units; and 80-2,Accounting and Financial Reporting by Governmental Units) that supplement that Guide. In so doing, the Board noted that at the present time theaccounting and reporting by such governmental units is addressed by the AICPA and the NCGA. The Board also noted that discussions are continuingamong interested parties, including the AICPA, the Financial Accounting Foundation (FAF), and NCGA, as to what the appropriate structure for ac-counting standard setting for such governmental units should be. Until the matter is resolved, the FASB proposes no changes with respect to its involve-ment with pronouncements in that area (paragraphs 35).


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Professional Ethics of theAmerican Institute of CertifiedPublic Accountants (or successor rules or arrangementsof similar scope and intent).*

Like other pronouncements of the Board, a Statementof Financial Accounting Concepts may be amended, su-perseded, or withdrawn by appropriate action under theBoards Rules of Procedure.

FASB PUBLICATIONS ON CONCEPTUALFRAMEWORK

Statements of Financial Accounting Concepts

No. 1, Objectives of Financial Reporting by BusinessEnterprises (November 1978)No. 2, Qualitative Characteristics of Accounting In-formation (May 1980)

No. 3, Elements of Financial Statements of BusinessEnterprises (December 1980)Discussion Memorandums and Invitations toComment Having Issues Being (or Yet to Be)Considered by the BoardElements of Financial Statements and Their Meas-urement (December 2, 1976)Reporting Earnings (July 31, 1979)Financial Statements and Other Means of FinancialReporting (May 12, 1980)Reporting Funds Flows, Liquidity, and FinancialFlexibility (December 15, 1980)Other Projects in ProcessAccounting Recognition Criteria

CONTENTS

ParagraphNumbers

HighlightsIntroduction and Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

Scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 9General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2State and Local Governmental Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5Distinguishing Characteristics of Nonbusiness Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 9

General Purpose External Financial Reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1012Environmental Context of Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1322Characteristics and Limitations of Information Provided by Financial Reporting . . . . . . . . . . . . . . . . 2328Types of Users and Their Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2932

Objectives of Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3355Information Useful in Making Resource Allocation Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3537Information Useful in Assessing Services and Ability to Provide Services . . . . . . . . . . . . . . . . . . . . . . . 3839Information Useful in Assessing Management Stewardship and Performance . . . . . . . . . . . . . . . . . . . 4042Information about Economic Resources, Obligations, Net Resources, and Changes in Them.. . . 4354

Economic Resources, Obligations, and Net Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4446Organization Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4753

Nature of and Relation between Inflows and Outflows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4850Service Efforts and Accomplishments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5153

Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54Managers Explanations and Interpretations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

The Nonbusiness Objectives ProjectA Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56Appendix A: Background Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5766

Brief History of FASB Nonbusiness Objectives Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5764State and Local Governmental Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6566

Appendix B: Comparison of Objectives in This Statement to Those in Concepts Statement 1 . . . . . . 67

*Rule 203 prohibits a member of the American Institute of Certified Public Accountants from expressing an opinion that financial statements conformwith generally accepted accounting principles if those statements contain a material departure from an accounting principle promulgated by the Finan-cial Accounting Standards Board, unless the member can demonstrate that because of unusual circumstances the financial statements otherwise wouldhave been misleading. Rule 204 requires members of the Institute to justify departures from standards promulgated by the Financial Accounting Stand-ards Board for the disclosure of information outside of financial statements in published financial reports.


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INTRODUCTION AND BACKGROUND

Scope

General

1. This Statement establishes the objectives of gen-eral purpose external financial reporting by nonbusi-ness organizations. Those objectives, together withthe objectives set forth in FASB Concepts StatementNo. 1, Objectives of Financial Reporting by BusinessEnterprises, will serve as the foundation of the con-ceptual framework the Board is developing for finan-cial accounting and reporting. Based on its review ofthe similarities and differences between those twosets of objectives, the Board has concluded that it isnot necessary to develop an independent conceptualframework for any particular category of entities(e.g., nonbusiness organizations or business enter-prises). Rather, its goal is to develop an integratedconceptual framework that has relevance to all enti-ties and that provides appropriate consideration ofany different reporting objectives and concepts thatmay apply to only certain types of entities. Consider-ation of the differences between the objectives of fi-nancial reporting set forth in this Statement and thosein Concepts Statement 1 will be most useful in help-ing to identify those areas that may require uniquetreatment. Appendix A to this Statement providesbackground information. Appendix B compares theobjectives of this Statement and Concepts State-ment 1, noting the many areas of similarity and thefew, but important, areas of difference (paragraph 9).2. This Statement uses terminology that has beenchosen carefully to avoid prejudging issues that maybe subjects of other conceptual framework projects.For example, it uses the terms resource inflows andoutflows rather than revenues, expenses, and expendi-tures. The reasons for the Boards conclusions are in-cluded in the text rather than in a separate appendix.

State and Local Governmental Units

3. From its outset, the project leading to this State-ment has included governmental units in its scope,and the Exposure Draft included governmental ex-amples. On the basis of its study to date, the Board isaware of no persuasive evidence that the objectivesin this Statement are inappropriate for general pur-pose external financial reports of governmental units.

Nonetheless, the appropriate structure for setting fi-nancial accounting and reporting standards for stateand local governmental units continues to be dis-cussed.1 Pending resolution of that issue, the Boardhas deferred a final decision on whether the objec-tives set forth in this Statement should apply to gen-eral purpose external financial reporting by state andlocal governmental units.

4. If the responsibility for standard setting was ulti-mately given to the Financial Accounting StandardsBoard, the Board would expect to consider the find-ings of research in process by the National Councilon Governmental Accounting (NCGA), the Councilof State Governments (CSG) (paragraphs 65 and 66),and other intervening research. Before reaching a de-cision, it would also solicit additional views regard-ing the applicability of the conclusions in this State-ment to general purpose external financial reportingof state and local governmental units.

5. Based on its study, the Board believes that the ob-jectives of general purpose external financial report-ing for government-sponsored entities (for example,hospitals, universities, or utilities) engaged in activi-ties that are not unique to government should besimilar to those of business enterprises or other non-business organizations engaged in similar activities.Accordingly, examples of such government-sponsored organizations and activities are included inthe sections of this Statement that discuss the envi-ronment in which nonbusiness organizations operateand the users of their financial reports.

Distinguishing Characteristics of NonbusinessOrganizations

6. The major distinguishing characteristics of non-business organizations include:

a. Receipts of significant amounts of resources fromresource providers who do not expect to receiveeither repayment or economic benefits proportion-ate to resources provided

b. Operating purposes that are other than to providegoods or services at a profit or profit equivalent

c. Absence of defined ownership interests thatcan be sold, transferred, or redeemed, or that con-vey entitlement to a share of a residual distributionof resources in the event of liquidation of theorganization.

1The Board recognizes that standard setting for the federal government is not in question. Although the Board sees no conceptual reasons whythe objectives in this Statement could not be applied to general purpose external financial reporting by the federal government, the Board ac-knowledges that determination is the responsibility of others.


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These characteristics result in certain types of trans-actions that are largely, although not entirely, absentin business enterprises, such as contributions andgrants,2 and to the absence of transactions with own-ers, such as issuing and redeeming stock and payingdividends. Because the authoritative accounting lit-erature has largely focused on problems commonlyencountered in business enterprises, it has not dealtcomprehensively with these unique areas in nonbusi-ness organizations.

7. This Statement focuses on organizations that havepredominantly nonbusiness characteristics thatheavily influence the operations of the organization.The line between nonbusiness organizations andbusiness enterprises is not always sharp since the in-cidence and relative importance of those characteris-tics in any organization are different. This suggeststhat, for purposes of developing financial reportingobjectives, a spectrum of organizations exists rangingfrom those with clearly dominant nonbusiness char-acteristics to those with wholly business characteris-tics. Examples of organizations that clearly fall out-side the focus of this Statement include all investor-owned enterprises and other types of organizations,such as mutual insurance companies and other mu-tual cooperative entities that provide dividends,lower costs, or other economic benefits directly andproportionately to their owners, members, or partici-pants. The objectives of financial reporting set forthin Concepts Statement 1 are appropriate for thosetypes of organizations. Examples of organizationsthat clearly fall within the focus of this Statement in-clude most human service organizations, churches,foundations, and some other organizations, such asthose private nonprofit hospitals and nonprofitschools that receive a significant portion of their fi-

nancial resources from sources other than the sale ofgoods and services.3 As happens with any distinc-tion, there will be borderline cases. This will be trueespecially for organizations that possess some of thedistinguishing characteristics of nonbusiness organi-zations but not others.

8. Some organizations have no ownership interestsbut are essentially self-sustaining from fees theycharge for goods and services. Examples are thoseprivate nonprofit hospitals and nonprofit schools thatmay receive relatively small amounts of contribu-tions and grants but finance their capital needs largelyfrom the proceeds of debt issues and their operatingneeds largely from service charges rather than fromprivate philanthropy or governmental grants. As a re-sult, assessment of amounts, timing, and uncertaintyof cash flows becomes the dominant interest of theircreditors and other resource providers and profitabil-ity becomes an important indicator of performance.Consequently, the objectives of Concepts Statement1 may be more appropriate for those organizations.4

9. The objectives in this Statement stem from thecommon interests of those who provide resources tononbusiness organizations in the services those or-ganizations provide and their continuing ability toprovide services. In contrast, the objectives of finan-cial reporting of Concepts Statement 1 stem from theinterests of resource providers in the prospects of re-ceiving cash as a return of and return on their invest-ment.5 Despite different interests, resource providersof all entities look to information about economic re-sources, obligations, net resources, and changes inthem for information that is useful in assessing theirinterests.All such resource providers focus on indica-tors of organization performance and information

2These types of transactions are classified in APB Statement No. 4, Basic Concepts and Accounting Principles Underlying Financial Statementsof Business Enterprises, as nonreciprocal transfers. Nonreciprocal transfers are therein defined as transfers in one direction of resources or obli-gations, either from the enterprise to other entities or from other entities to the enterprise (paragraphs 62 and 182). Two types of such transfersnoted are: (a) transfers between the enterprise and its owners and (b) transfers between the enterprise and entities other than owners. Transactionsof the second type frequently are found in nonbusiness organizations.3The FASB Research Report, Financial Accounting in Nonbusiness Organizations, distinguishes two types of nonprofit organizations based ona difference in the source of the financial resources (page 161). A Type A nonprofit organization is therein defined as a nonprofit organizationwhose financial resources are obtained, entirely, or almost entirely, from revenues from the sale of goods and services (page 162). A Type Bnonprofit organization, in contrast, is defined as a nonprofit organization that obtains a significant amount of financial resources from sourcesother than the sale of goods and services (page 162). The Type B category corresponds to the type of organizations that clearly falls within thefocus of this Statement.4The organizations described in this paragraph correspond to the Type A category described in the preceding footnote. To the extent, however,that TypeAorganizations have the unique transactions described in paragraph 6, they naturally will be impacted by standards promulgated by theBoard in those areas.5Creditors of nonbusiness organizations are also interested in receiving cash. Because of the differences in environment (principally the motiva-tions of other resource providers) and different indicators of the performance of a nonbusiness organization, creditors also look to informationuseful in assessing the services that type of organization provides and its ability to continue to provide services to satisfy their basic interest in theprospect for cash flows.


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about management stewardship. Nonbusiness organ-izations generally have no single indicator of per-formance comparable to a business enterprisesprofit. Thus, other indicators of performance are usu-ally needed. This Statement sets forth two perform-ance indicators for nonbusiness organizations: infor-mation about the nature of and relation betweeninflows and outflows of resources and informationabout service efforts and accomplishments. More-over, the performance of nonbusiness organizationsgenerally is not subject to the test of direct competi-tion in markets to the extent that business enterprisesare. Other kinds of controls introduced to compen-sate for the lesser influence of markets are a majorcharacteristic of their operations and affect the objec-tives of their financial reporting. Controls, such asformal budgets and donor restrictions on the use ofresources, give managers a special responsibility toensure compliance. Information about departuresfrom those mandates that may impinge upon an orga-nizations financial performance or its ability to pro-vide a satisfactory level of services is important in as-sessing how well managers have discharged theirstewardship responsibilities. Paragraphs 1322 com-pare the environments of nonbusiness organizationsand business enterprises and provide a basis for thesimilarities and differences noted in this section andelsewhere in this Statement.

General Purpose External Financial Reporting

10. The objectives in this Statement apply to generalpurpose external financial reporting by nonbusinessorganizations. The aim of that type of financial re-porting is limited. It does not attempt to meet all in-formational needs of those interested in nonbusinessorganizations nor to furnish all the types of informa-tion that financial reporting can provide. For ex-ample, although managers and governing bodies ofnonbusiness organizations are interested in the infor-mation provided by general purpose external finan-cial reporting, they also need additional informationto help them carry out their planning, controlling, andother stewardship responsibilities (paragraph 32).Nor is general purpose external financial reportingintended to meet specialized needs of regulatory bod-

ies, some donors or grantors, or others having the au-thority to obtain the information they need (para-graph 31). Rather, general purpose external financialreporting focuses on providing information to meetthe common interests of external users who generallycannot prescribe the information they want from anorganization. Those users must use the informationthat is communicated to them by the organization.The most obvious and important users fitting that de-scription in the nonbusiness environment are re-source providers, such as members, taxpayers, con-tributors, and creditors (paragraph 36).

11. The objectives in this Statement are not restrictedto information communicated by financial state-ments. Financial reporting includes not only financialstatements but also other means of communicatinginformation that relates, directly or indirectly, to theinformation provided by the accounting system, thatis, information about an organizations resources andobligations.6

12. For convenience, financial reporting is used inplace of general purpose external financial reportingby nonbusiness organizations in the remainder of thisStatement.

Environmental Context of Objectives

13. Financial reporting is not an end in itself but isintended to provide information that is useful in mak-ing economic decisionsfor making reasonedchoices among alternative uses of scarce resources.7Thus, the objectives in this Statement stem largelyfrom the needs of those for whom the information isintended. Those needs depend significantly on the ac-tivities of nonbusiness organizations and the deci-sions that users of the information make about them.Accordingly, the objectives in this Statement are af-fected by the economic, legal, political, and social en-vironment within which those organizations functionin the United States. The objectives are also affectedby the characteristics and limitations of the informa-tion that financial reporting can provide (para-graphs 2328).

6Distinctions between financial reporting and financial statements are discussed at more length in Concepts Statement 1 (paragraphs 58), andare the subject of another phase of the Boards conceptual framework project.7Economic decisions about nonbusiness organizations may take different forms depending on the factors that are evident in the resource alloca-tion process affecting an organization. For example, if an element of compulsion is present as it is with members paying dues or taxpayers payingtaxes, this Statement describes processes, such as approval of budgets, elections, referendums, and involvement in legislative processes, throughwhich resource providers decide or influence decisions about matters that affect the amount and use of resources allocated to organizations. Amember may discontinue membership or a taxpayer may choose to locate in one governmental jurisdiction rather than another as a result ofassessment of their respective policies. That kind of action also represents, in part, the result of an economic decision.


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14. The operating environments of nonbusiness or-ganizations and business enterprises are similar inmany ways. Both nonbusiness organizations andbusiness enterprises produce and distribute goods orservices and use scarce resources in doing so. Theysometimes provide essentially the same goods orservices. For example, both municipal transportationsystems significantly subsidized by general tax rev-enues and private bus lines may carry passengerswithin a large city, and both private nonprofit organi-zations supported by significant philanthropy andinvestor-owned enterprises may operate theatrical,dance, and musical organizations.8 Both nonbusinessorganizations and business enterprises obtain re-sources from external sources and are accountable tothose who provide resources or their representatives.Both are integral parts of the national economy andinterrelate directly or indirectly with other organiza-tions. Both own or control supplies of resources,some of which are used in current operations andsome of which are held for use in future periods.Both incur obligations. Some nonbusiness organiza-tions, as well as business enterprises, incur and paytaxes, and both are subject to governmental laws andregulations. Both must be financially viable: Toachieve their operating objectives, they must, in thelong run, receive at least as many resources as theyneed to provide goods and services at levels satisfac-tory to resource providers and other constituents.9Both generally obtain resources from the same poolof resource providers, and the resources available foruse by all organizations are limited.

15. Differences between nonbusiness organizationsand business enterprises arise principally in the waysthey obtain resources. The following descriptions be-gin with areas of greatest similarity between nonbusi-ness organizations and business enterprises and endwith the areas of greatest difference.

16. Both nonbusiness organizations and business en-terprises obtain resources in exchange transactions inmarkets. Both obtain labor, materials, and facilities ortheir use by paying for them or agreeing to pay forthem in the future.10 Both may borrow funds throughbank loans, mortgages, or other direct loans orthrough issuing debt securities to creditors who com-monly may evaluate and compare the risks and re-

turns of securities of both nonbusiness organizationsand business enterprises.

17. Both nonbusiness organizations and business en-terprises may obtain resources by charging a price orfee for goods or services they provide, but the pur-pose of sales of goods or services is different. Somenonbusiness organizations may sell goods or servicesat prices that equal or exceed costs, but many non-business organizations commonly provide goods orservices at prices less than costs. Nonbusiness organ-izations also commonly provide goods or servicesfree of charge. Moreover, those that charge pricessufficient to cover costs often use resources fromthose sales to subsidize other activities within the or-ganization. For example, the football or basketballprogram at a college or university may finance bothintercollegiate and intramural athletic programs. Al-though sales of goods or services may be importantsources of financing for some nonbusiness organiza-tions, nonbusiness organizations generally are not ex-pected to and do not need to cover all costs, and per-haps earn profits, by sales because they relysignificantly on other continuing sources of financing(paragraph 18). For example, some nonbusiness or-ganizations have the power to assess dues, taxes, orother compulsory contributions, and others dependsignificantly on voluntary contributions. In contrast,business enterprises attempt to sell goods or servicesat prices that enable them to repay or compensate allresource providers, including owners and others whoexpect a monetary return for providing resources.Profit is the basis for compensating owners and oth-ers for providing resources, and expectations of profitare necessary to attract resources. Moreover, unprof-itable business enterprises find it increasingly diffi-cult to borrow or otherwise obtain resources. Sales ofgoods or services are not only significant sources ofresources for business enterprises but also underlietheir ability to obtain resources from other sources.

18. Members, contributors, taxpayers, and otherswho provide resources to nonbusiness organizationsdo so for reasons different from those of owners ofbusiness enterprises. All nonbusiness organizationsobtain significant resources from resource providerswho either expect no economic benefits or expect

8Other nonprofit organizations (paragraph 8) lacking all the distinguishing characteristics of nonbusiness organizations also may provide theservices described in this sentence.9Some nonbusiness organizations are established for short-term purposes and are not intended to survive after completing their operating objec-tives, such as an organization established to erect a memorial.10Nonbusiness organizations also may receive significant donations of labor, materials, and facilities or their use from resource providers.


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benefits received not to be proportionate to the re-sources provided. Those resources are often providedfor charitable, humanitarian, religious, or other non-economic reasons.11 As a result, those who provideresources to a nonbusiness organization and thosewho benefit from the goods or services it providesmay be different individuals or groups. Owners ofbusiness enterprises, in contrast, generally expect re-turns through dividends or price appreciation of theirsecurities commensurate with the perceived risk.

19. As the preceding paragraphs indicate, noneco-nomic reasons are commonly factors in decisions toprovide resources to particular nonbusiness organiza-tions. For example, contributors12 to philanthropicorganizations, such as charities, and to some mem-bership organizations, such as churches, generallyseek no direct economic benefits. Rather, their rea-sons for voluntarily providing resources relate totheir interests in furthering the purpose and goals ofthe organization. The goals may involve a wide rangeof endeavors including those of a charitable, cultural,educational, economic, religious, scientific, social, orpolitical nature. Some kinds of membership organi-zations, such as professional and trade associations,assess membership dues. Persons joining these or-ganizations often seek noneconomic benefits, such asrecognition or prestige, in addition to direct servicebenefits.

20. Nonbusiness organizations and business enter-prises have different degrees of involvement withmarkets. Most transactions of business enterpriseswith other entities involve exchange prices in activemarkets; that market mechanism provides a measureof the utility and satisfaction of goods and servicesbusinesses buy and sell and of the overall perform-ance of those enterprises. Nonbusiness organizationsalso borrow money and buy goods and services inmarkets and may or may not sell goods or services inmarkets. However, market transactions play a morelimited role in the resource allocation process of non-business organizations because those organizationsdo not finance their operations through equity mar-kets and they commonly receive resources and pro-vide goods or services in other than market transac-tions. Since market controls exist to a lesser degree

for nonbusiness organizations than for business en-terprises, other kinds of controls are introduced tocompensate for their absence.

21. Resource providers or governing bodies may re-strict or mandate the ways a nonbusiness organiza-tion may spend the resources provided. Spendingmandates generally take one of two forms: specificbudgetary appropriations or direct restrictions by do-nors or grantors. For example, a budgetary appropria-tion may limit the amount that a church may spendfor its educational program or that a governmentalunit may spend to subsidize its public transportationsystem, a donor or grantor may specify that a gift to amuseum must be used to construct a new wing, or anagency of the federal government may specify that itsgrant to a university must be used for medical re-search. Those mandates give managers of nonbusi-ness organizations a special responsibility to ensurecompliance. Although spending mandates also mayexist in business enterprises, they are less common.Their effects on the conduct and control of the activi-ties of business enterprises are less pervasive than innonbusiness organizations.

22. Budgets are particularly significant in the non-business environment. Both business and nonbusi-ness organizations use budgets to allocate and controluses of resources. However, in nonbusiness organiza-tions for which providing resources is compulsory(for example, many membership organizations andgovernmental units), budgets are significant factorsnot only in allocating resources within an organiza-tion but also in obtaining resources. For example,budgets in membership organizations and govern-mental units are often pivotal in establishing the levelof dues, taxes, or fees to be imposed; the level ofservices to be provided; and the desired relation be-tween the two. Members and taxpayers may have theopportunity, either by direct vote or through electedrepresentatives, to participate in developing and ap-proving budgets. Elections and referendums also of-fer opportunities to change policies and the amountsand uses of resources provided. In other kinds of non-business organizations, budgets may be important to

11Contributors to nonbusiness organizations often provide resources, such as property, materials, and uncompensated volunteer labor, in additionto financial resources. In many nonbusiness organizations, such as charities and youth groups, these donated materials and services are significantfactors in the organizations operations. In other nonbusiness organizations, especially those operated by religious bodies, services contributed bypersonnel at far less than their market value are equally significant. Such donated or contributed services and materials are rarely found in busi-ness enterprises.12Contributors include donors and prospective donors, grantors and prospective grantors, and federated fund-raising organizations that solicitcontributions and then redistribute those contributions to nonbusiness organizations after deducting fund-raising and other costs.


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voluntary donors in deciding whether to provide re-sources to nonbusiness organizations and in estab-lishing the level of their giving.

Characteristics and Limitations of InformationProvided by Financial Reporting

23. The objectives of financial reporting by non-business organizations are affected not only by theenvironment in which financial reporting takes placebut also by the characteristics and limitations of thekind of information that financial reporting, and par-ticularly financial statements, can provide. The infor-mation provided by financial reporting is primarilyfinancial in nature: It is generally quantified and ex-pressed in terms of units of money. Information thatis to be incorporated formally in financial statementsmust be quantifiable in terms of units of money.Other information can be disclosed in financial state-ments (including notes) or by other means, but finan-cial statements involve adding, subtracting, multiply-ing, and dividing numbers that depict economicthings and events and require a common denomina-tor. Quantified information expressed in terms otherthan units of money (such as number of employeesor units of services or products provided) and non-quantified information (such as descriptions of op-erations or explanations of policies) that are reportednormally relate to or underlie the financial informa-tion. Information that is not expressed in terms ofunits of money may be needed to understand the sig-nificance of information expressed in terms of unitsof money or to help in assessing the performance of anonbusiness organization (paragraphs 4753). Finan-cial reporting by nonbusiness organizations, how-ever, is limited in its ability to provide direct meas-ures of the quality of goods and services provided inthe absence of market-determined exchange prices orthe degree to which they satisfy the needs of servicebeneficiaries and other consumers.

24. The information provided by financial reportingpertains to individual nonbusiness reporting entities.This Statement, however, does not include criteria fordetermining the appropriate reporting entity for pur-poses of financial reporting by nonbusiness organiza-tions. That matter will need to be addressed by otherprojects.13

25. The information provided by financial reportingoften results from approximate, rather than exact,measures. The measures commonly involve numer-ous estimates, classifications, summarizations, judg-ments, and allocations. Thus, despite the aura of pre-cision that may seem to surround financial reportingin general and financial statements in particular, withfew exceptions the measures are approximationswhich may be based on rules and conventions ratherthan exact amounts.

26. The information provided by financial reportinglargely reflects the effects of transactions and eventsthat have already happened. Governing bodies andmanagers may use budgets to communicate informa-tion about plans or projections, but most of the infor-mation provided by financial reporting is historical,including comparisons of actual results with previ-ously approved budgets. The acquisition price ofland and the current market price of a marketable eq-uity security are other examples of historical data in-cluded in financial reports. No future amounts orevents are involved. Estimates resting on expecta-tions of the future are often needed in financial re-porting, but their major use, especially of those for-mally incorporated in financial statements, is tomeasure financial effects of past transactions orevents or the present status of an asset or liability.

27. Financial reporting is but one source of informa-tion needed by those who make economic decisionsabout nonbusiness organizations. They need to com-bine information provided by financial reporting withrelevant social, economic, and political informationfrom other sources.

28. The information provided by financial reportinginvolves a cost to provide and use. The cost includesnot only the resources directly expended to providethe information but also may include adverse effectson an organization from disclosing it. For example,comments about a pending lawsuit may jeopardize asuccessful defense. The collective time needed to un-derstand and use information is also a cost. Gener-ally, the benefits of information provided should be

13A discussion of the reporting entity issue can be found in the FASB Research Report on financial accounting in nonbusiness organizations,pages 1821.


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expected to at least equal the cost involved.14 How-ever, the benefits and costs usually are difficult tomeasure. Different persons will honestly disagreeabout whether the benefits of the information justifyits cost.

Types of Users and Their Interests

29. Many people base economic decisions on theirrelationships to and knowledge about nonbusinessorganizations and, thus, are interested in the informa-tion provided by financial reporting. Among presentand potential users are members, taxpayers, contribu-tors, grantors, lenders, suppliers, creditors, employ-ees, managers, directors and trustees, service benefi-ciaries, financial analysts and advisors, brokers,underwriters, lawyers, economists, taxing authorities,regulatory authorities, legislators, the financial pressand reporting agencies, labor unions, trade associa-tions, researchers, teachers, and students. The follow-ing groups are especially interested in informationprovided by the financial reporting of a nonbusinessorganization:

a. Resource providers. Resource providers includethose who are directly compensated for providingresourceslenders, suppliers, and employees(paragraph 16)and those who are not directlyand proportionately compensatedmembers,contributors, and taxpayers (paragraph 18).15

b. Constituents. Constituents are those who use andbenefit from the services rendered by the organi-zation. In some nonbusiness organizations, con-stituents include resource providers (for example,members who pay dues or taxpayers), and distin-guishing constituents from resource providersmay serve no function. However, resource provid-ers and service beneficiaries are largely differentgroups or individuals in some organizations. Thedegree to which service beneficiaries are a distinc-tive part of a constituency depends largely on theextent of separation between those providing theresources and those using and receiving the serv-ice benefits.

c. Governing and oversight bodies. Governing andoversight bodies are those responsible for settingpolicies and for overseeing and appraising manag-ers of nonbusiness organizations. Governing bod-

ies include boards of trustees, boards of overseersor regents, legislatures, councils, and other bodieswith similar responsibilities. Oversight bodies alsoare responsible for reviewing the organizationsconformance with various laws, restrictions,guidelines, or other items of a similar nature.Oversight bodies include national headquarters oforganizations with local chapters, accreditingagencies, agencies acting on behalf of contributorsand constituents, oversight committees of legisla-tures, and governmental regulatory agencies. Insome nonbusiness organizations, governing bod-ies commonly are elected representatives of a con-stituency that is largely comprised of resource pro-viders. In other nonbusiness organizations,governing bodies may be self-perpetuatingthrough election of their successors.

d. Managers. Managers of an organization are re-sponsible for carrying out the policy mandates ofgoverning bodies and managing the day-to-dayoperations of an organization. Managers includecertain elected officials; managing executives ap-pointed by elected governing bodies, such asschool superintendents, agency heads, and execu-tive directors; and staff, such as fund-raising andprogram directors.

30. Present and potential users of the informationprovided by financial reporting by a particular non-business organization share a common interest in in-formation about the services provided by the non-business organization, its efficiency and effectivenessin providing those services, and its ability to continueto provide those services. Resource providers, suchas members and contributors, may be interested inthat information as a basis for assessing how well theorganization has met its objectives and whether tocontinue support. Taxpayers may need similar infor-mation to help them assess whether governmentalunits and government-sponsored entities haveachieved their operating objectives. In addition, theymay want to know how the services provided by thegovernmental unit or government-sponsored entityare likely to affect the amount of taxes and fees theywill be required to pay. Resource providers, such aslenders, suppliers, and employees, view a nonbusi-ness organization as a source of payment for the cash,

14Paragraphs 133144 of FASB Concepts Statement No. 2, Qualitative Characteristics of Accounting Information, expand on the cost/benefitconsiderations discussed in this paragraph. The Board intends to solicit views regarding its tentative conclusion that the qualities of informationset forth in Concepts Statement 2 also apply to accounting information of nonbusiness organizations.15Taxpayers provide resources to nonbusiness organizations both directly and indirectly. They pay taxes to all levels of government. Govern-ments (especially federal and state), in turn, provide funding to other levels of government, government-sponsored entities, and private nonbusi-ness organizations.


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goods, or services they supply. Their interest stemsfrom concern about the organizations ability to gen-erate cash flows for timely payment of the organiza-tions obligations to them. Governing and oversightbodies also use information about services renderedto help them evaluate whether managers have carriedout their policy mandates and to change or formulatenew policies for the organization. That informationalso is important to managers in evaluating the ac-complishment of the responsibilities for which theyare accountable to governing bodies, resource pro-viders, and other constituents. Constituents, includ-ing recipients and beneficiaries of services who as agroup are distinct from resource providers, share a di-rect interest in similar information.

31. Some users have specialized needs but also havethe power to obtain the information they need. Forexample, donors and grantors who restrict the use ofresources they provide often stipulate that they be ap-prised periodically of the organizations compliancewith the terms and conditions of the gift or grant.Creditors also may be able to stipulate that certainspecialized types of information be provided.Special-purpose reports directed at those kinds ofneeds are beyond the scope of this Statement.

32. Managers and, to some extent, governing bodiescommonly are described as internal users. In addi-tion to the information provided by financial report-ing, they need a great deal of internal accounting in-formation to carry out their responsibilities inplanning and controlling activities. Much of that in-formation relates to particular decisions or to manag-ers exercise of their stewardship responsibility to en-sure that resources are used for their intendedpurposes. For example, governing bodies and man-agers need information to evaluate properly the com-peting requests for funding of capital projects. Theyalso need information to assist them in complying oroverseeing compliance with spending mandates es-tablished by budgetary appropriations or donor orgrantor restrictions. They need to know how much ofa budgetary appropriation or restricted grant is un-spent or uncommitted. They need to know that re-stricted resources were expended or committed incompliance with related mandates. Generally, boththe number of spending mandates and the detailabout them required to meet the informational needsof managers are so great that the usefulness of gen-eral purpose external financial reports would be re-duced significantly if they reported the status of com-pliance with each mandate (paragraph 41). Since thetype of reporting described in this paragraph needs to

be tailored to meet the specialized needs of managersand governing bodies of particular organizations, it isbeyond the scope of this Statement.

OBJECTIVES OF FINANCIAL REPORTING

33. The following objectives of financial reportingflow from the preceding paragraphs and proceedfrom the general to the specific. The objectives beginwith a broad focus on information that is useful to re-source providers and other users in making rationaldecisions about allocating resources to nonbusinessorganizations. The focus is then narrowed to theneeds of resource providers and other users for infor-mation about the services an organization providesand its ability to continue to provide those services.That directs their attention to information about theorganizations performance and how its managershave discharged their stewardship responsibility. Fi-nally, the objectives focus on the types of informationfinancial reporting can provide to meet those needs.The reasons for focusing the objectives of financialreporting on decisions generally made by resourceproviders are given in paragraph 36. That focus andwording do not mean that the objectives apply toonly resource providers. On the contrary, informationthat satisfies the objectives should be useful to allwho are interested in a nonbusiness organizationspresent and future capacity to render service andachieve its operating goals.

34. The objectives are those of financial reportingrather than goals for resource providers or others whouse the information or for the economy or society asa whole. The role of financial reporting in theeconomy and society is to provide information that isuseful in making decisions about allocating scarce re-sources, not to determine what those decisionsshould be. For example, information that tries to indi-cate that a relatively inefficient user of resources is ef-ficient or information that is directed toward a par-ticular goal, such as encouraging the reallocation ofresources in favor of certain programs or activities ofnonbusiness organizations, is likely to fail to servethe broader objectives that financial reporting is in-tended to serve. The role of financial reporting re-quires it to provide neutral information.

Information Useful in Making ResourceAllocation Decisions

35. Financial reporting by nonbusiness organiza-tions should provide information that is useful topresent and potential resource providers and other us-ers in making rational decisions about the allocation


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of resources to those organizations. The informationshould be comprehensible to those who have a rea-sonable understanding of an organizations activitiesand are willing to study the information with reason-able diligence.

36. Resource providers are important users of infor-mation provided by financial reporting who generallycannot prescribe the information they want. Their de-cisions significantly affect both nonbusiness organi-zations and the allocation of resources in society gen-erally. In addition, information provided to meet theneeds of present and potential resource providers islikely to be useful to others who are interested in es-sentially the same aspects of nonbusiness organiza-tions as resource providers.

37. The potential users listed in paragraph 29 under-stand, to varying degrees, the environment withinwhich a nonbusiness organization operates, the na-ture of its activities, and related matters. Their under-standing of information provided by financial report-ing and the extent to which they use and rely on italso varies greatly. Financial reporting information isa tool and, like most tools, cannot be of much directhelp to those who are unable or unwilling to use it orwho misuse it. Its use can be learned, however, andfinancial reporting should provide information thatcan be used by all who are willing to learn to use itproperly. Efforts may be needed to increase the un-derstandability of information provided by financialreporting. Cost/benefit considerations may indicatethat information understood or used by only a fewshould not be provided.16 Conversely, financial re-porting should not exclude relevant informationmerely because it is difficult for some to understandor because some choose not to use it.

Information Useful in Assessing Services andAbility to Provide Services

38. Financial reporting should provide informationto help present and potential resource providers andother users in assessing the services17 that a nonbusi-ness organization provides and its ability to continueto provide those services.18 They are interested inthat information because the services are the end forwhich the resources are provided. The relation of the

services provided to the resources used to providethem helps resource providers and others assess theextent to which the organization is successful in car-rying out its service objectives.

39. Resources are the lifeblood of an organization inthe sense that it uses resources to provide services. Anonbusiness organization cannot, in the long run,continue to achieve its operating objectives unless theresources made available to it at least equal the re-sources needed to provide services at levels satisfac-tory to resource providers and other constituents. Al-though decisions of potential and present resourceproviders to provide or continue to provide resourcesinvolve expectations about future services of an or-ganization, those expectations commonly are basedat least partly on evaluations of past performance.Thus, resource providers tend to direct their interestto information about the organizations resources andhow it acquires and uses resources. The focus of thatinterest is information about the organizations per-formance and how its managers have dischargedtheir stewardship responsibility during a period.

Information Useful in Assessing ManagementStewardship and Performance

40. Financial reporting should provide informationthat is useful to present and potential resource provid-ers and other users in assessing how managers of anonbusiness organization have discharged their stew-ardship responsibilities and about other aspects oftheir performance. Managers of an organization areaccountable to resource providers and others, notonly for the custody and safekeeping of organizationresources, but also for their efficient and effectiveuse. Those who provide resources to nonbusiness or-ganizations do not have a profit indicator to guidetheir resource allocation decisions and may not havean immediate choice about the amounts of their con-tributions. They must look to managers to representtheir interests and to make operating cost/benefitjudgments that achieve the objectives of the organi-zations with minimum use of resources. Managersalso are accountable for compliance with statutory,contractual, or other limitations.

16See footnote 14.17The term services in this context encompasses the goods as well as the services a nonbusiness organization may provide.18An organizations ability to continue to provide services ultimately depends on its ability to obtain resources from resource providers. Theability to obtain sufficient resources normally is not discussed in general purpose external financial reports unless that ability is in doubt. Para-graphs 4355 discuss the type of information financial reporting can provide to meet the objective in paragraph 38.


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41. Information about an organizations perform-ance (paragraphs 4753) should be the focus for as-sessing the stewardship or accountability of manag-ers of a nonbusiness organization. Users also needassurance that managers have exercised their specialresponsibilities to ensure that an organization uses re-sources in the manner specifically designated by re-source providers. General purpose external financialreporting can best meet that need by disclosing fail-ures to comply with spending mandates that may im-pinge on an organizations financial performance oron its ability to continue to provide a satisfactorylevel of services.

42. Financial reporting is limited in its ability to dis-tinguish the performance of managers from that ofthe organization itself. Nonbusiness organizations areoften highly complex institutions, and the processesby which they acquire resources and render servicesoften are long and intricate. Organizational successesand failures are the result of numerous factors. Theability and performance of managers are contributingfactors, as are events and circumstances that often arebeyond the control of managers. It is usually not pos-sible to determine the degree to which managers, orany other specific factors, have affected the result.Actions of past managers affect current periods per-formance, and actions of present managers affect fu-ture periods performance.

Information about Economic Resources,Obligations, Net Resources, and Changes inThem

43. Financial reporting should provide informationabout the economic resources, obligations, and netresources of an organization and the effects of trans-actions, events, and circumstances that change re-sources and interests in those resources.19 That typeof information is useful in achieving each of theabove objectives.Economic Resources, Obligations, and NetResources

44. Financial reporting should provide informationabout an organizations economic resources, obliga-tions, and net resources. That information helps re-

source providers and others identify the organiza-tions financial strengths and weaknesses, evaluateinformation about the organizations performanceduring a period (paragraphs 4753), and assess itsability to continue to render services.

45. Information about an organizations economicresources, obligations, and net resources also pro-vides direct indications of the cash flow potential ofsome resources and of the cash needed to satisfymany, if not most, obligations. The assessment ofcash flow potential is important because it relates di-rectly to the organizations ability to provide thegoods and services for which it exists.

46. Resources provided to nonbusiness organiza-tions often are restricted by providers as to time andfor particular purposes (paragraph 21). Accordingly,information about restrictions on the use of resourcesis important for assessing the types and levels ofservices an organization is able to provide. That in-formation is also important to creditors in assessingtheir prospects for receiving cash.20

Organization Performance47. Financial reporting should provide informationabout the performance of an organization during aperiod. Periodic measurement of the changes in theamount and nature of the net resources of a nonbusi-ness organization and information about the serviceefforts and accomplishments of an organization to-gether represent the information most useful in as-sessing its performance.

Nature of and relation between inflows andoutflows48. Financial reporting should provide informationabout the amounts and kinds of inflows and outflowsof resources during a period. It should distinguish re-source flows that change net resources, such as in-flows of fees or contributions and outflows for wagesand salaries, from those that do not change net re-sources, such as borrowings or purchases of build-ings. It also should identify inflows and outflows ofrestricted resources.

19In FASB Concepts Statement No. 3, Elements of Financial Statements of Business Enterprises, the Board has attempted to define many ele-ments (for example, assets and liabilities) in a way that they could apply to all types of entities. In the near future, the Board expects to considerand solicit views about which, if any, of the definitions are inappropriate or may require modification for nonbusiness organizations and whetherother elements are needed for financial statements of nonbusiness organizations.20Issues that affect how, if at all, restricted resources are displayed in financial statements, for example, by using multi-column presentations ordisclosure in the notes, are outside the scope of this Statement and may be the subject of future Board projects.


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49. Financial reporting should provide informationabout the relation between inflows and outflows ofresources during a period. Those who provide re-sources to a nonbusiness organization and otherswant to know how and why net resources changedduring a period. To meet that need, financial report-ing must distinguish between resource flows that arerelated to operations and those that are not.21 In thisway, financial reporting may provide informationthat is useful in assessing whether the activities of anonbusiness organization during a particular periodhave drawn upon, or have contributed to, past or fu-ture periods. Thus, it should show the relation of re-sources used in operations of a period to resource in-flows available to finance those operations. Similarly,it should provide information about changes in re-sources that are not related to operations. For ex-ample, resource providers to colleges or universitiesneed information about changes in an organizationsendowment and plant to understand more fully thechanges in its net resources during a period.

50. The information described in paragraphs 4749measured by accrual accounting generally provides abetter indication of an organizations performancethan does information about cash receipts and pay-ments.22 Accrual accounting attempts to record thefinancial effects of transactions, events, and circum-stances that have cash consequences for an organiza-tion in the periods in which those transactions,events, and circumstances occur rather than in onlythe periods in which cash is received or paid by theorganization. Accrual accounting is concerned withthe process by which cash is obtained and used, notwith just the beginning and end of that process. It rec-ognizes that the acquisition of resources needed toprovide services and the rendering of services by anorganization during a period often do not coincidewith the cash receipts and payments of the period.23

Service efforts and accomplishments51. Information about an organizations service ef-forts and accomplishments is useful to resource pro-viders and others in assessing the performance of anonbusiness organization and in making resource al-location decisions, particularly because:

a. The accomplishments of nonbusiness organiza-tions generally cannot be measured in terms ofsales, profit, or return on investment.

b. Resource providers often are not in a position tohave direct knowledge of the goods or servicesprovided when they also are not users or benefi-ciaries of those goods and services.

52. Financial reporting should provide informationabout the service efforts of a nonbusiness organiza-tion. Information about service efforts should focuson how the organizations resources (inputs such asmoney, personnel, and materials) are used in provid-ing different programs or services. Techniques formeasuring the costs of significant programs or serv-ices are well developed and this information nor-mally should be included in financial statements.

53. Ideally, financial reporting also should provideinformation about the service accomplishments of anonbusiness organization. Information about serviceaccomplishments in terms of goods or servicesproduced (outputs) and of program results24 may en-hance significantly the value of information providedabout service efforts. However, the ability to measureservice accomplishments, particularly program re-sults, is generally undeveloped. At present, suchmeasures may not satisfy the qualitative characteris-tics of accounting information identified in ConceptsStatement 2. Research should be conducted to deter-mine if measures of service accomplishments withthe requisite characteristics of relevance, reliability,

21Resource flows that are not related to operations have been described in various ways, for example, as nonexpendable, capital, or re-stricted flows. The Boards endorsement of distinguishing these types of flows is not intended to prejudge future determinations of (a) the crite-ria that should be used in making this distinction and (b) how and in what financial statements different types of flows might be displayed.22In some relatively small organizations, the benefits of the better information obtained from accrual accounting may not justify the costs ofobtaining that information (footnote 14).23Accrual accounting is concerned with the timing of recognizing transactions, events, and circumstances that have financial effects on an organ-ization. This paragraph is not intended to prejudge specific recognition and measurement issues involved in applying accrual accounting in thenonbusiness area. For example, whether certain inflows of financial resources, such as taxes, grants, and contributions, should be recognized inthe period when a claim arises, when they are received, when they are appropriated for use, when they are used, or when other events occur, isbeyond the scope of this Statement.24Service accomplishments generally may be viewed as the results of service efforts. The FASB Research Report, Reporting of Service Effortsand Accomplishments, distinguishes two possible measures of accomplishments, outputs and results. Outputs usually are observable directly asa result of service delivery; they describe goods and services provided by service delivery but do not measure impact upon clients orproblems. . . . Results . . . represent impact upon clients or problem situations (page 7). In discussing this latter measure, this Statement uses theterm program results.


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comparability, verifiability, and neutrality can be de-veloped. If such measures are developed, they shouldbe included in financial reports. In the absence ofmeasures suitable for financial reporting, informationabout service accomplishments may be furnished bymanagers explanations and sources other than finan-cial reporting.

Liquidity

54. Financial reporting should provide informationabout how an organization obtains and spends cashor other liquid resources, about its borrowing and re-payment of borrowing, and about other factors thatmay affect its liquidity. Information about those re-source flows may be useful in understanding the op-erations of an enterprise, evaluating its financing ac-tivities, assessing its liquidity, or interpretingperformance information provided. Informationabout performance and economic resources, obliga-tions, and net resources also may be useful in assess-ing an enterprises liquidity.

Managers Explanations and Interpretations

55. Financial reporting should include explanationsand interpretations to help users understand financialinformation provided. For example, the usefulness offinancial information to resource providers and oth-ers may be enhanced by managers explanations ofthe information. Since managers usually know moreabout the organization and its affairs than do resourceproviders or others outside the organization, they of-ten can increase the usefulness of information pro-vided by financial reporting by identifying certaintransactions, events, and circumstances that affect theorganization and by explaining their financial im-

pact.25 In addition, dividing continuous operationsinto accounting periods is a convention and mayhave arbitrary effects. Managers can enhance the use-fulness of information contained in financial reportsby identifying arbitrary results caused by allocationsbetween periods and by describing the effects ofthose allocations on reported information. Moreover,financial reporting often provides information thatdepends on, or is affected by, managers estimatesand judgments. Users are aided in evaluating esti-mates and judgments by explanations of underlyingassumptions and methods used, including disclosureof significant uncertainties about principal underly-ing assumptions or estimates.

THE NONBUSINESS OBJECTIVESPROJECTA PERSPECTIVE

56. Paragraphs 4354 focus on information that as-sists resource providers and other users in assessingan organizations financial viability, its performance,and how the organizations managers have dis-charged their stewardship responsibilities. Thoseparagraphs emphasize information about an organi-zations economic resources, obligations, and net re-sources and its performance during a period. The ob-jectives lead to, but leave unanswered, questionssuch as the identity, number, and form of financialstatements; elements of financial statements and theirrecognition, measurement, and display; and criteriafor determining the reporting entity. The Boards ap-proach to resolving those questions will be to inte-grate consideration of nonbusiness organizations intoits series of conceptual framework projects. That in-tegration may involve initiating new projects to dealwith issues that may be more prevalent in or uniqueto nonbusiness organizations.

This Statement was adopted by the unanimous vote of the seven members of the Financial AccountingStandards Board:

Donald J. Kirk,Chairman

Frank E. Block

John W. MarchRobert A. MorganDavid Mosso

Robert T. SprouseRalph E. Walters

25These discussions may include information about service efforts and accomplishments as described in paragraphs 5153.


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Appendix A

BACKGROUND INFORMATION

Brief History of FASB Nonbusiness ObjectivesProject

57. The Boards project on objectives of financial re-porting by nonbusiness organizations is related toand part of its effort to develop a conceptual frame-work for financial reporting. The Board began itswork on a conceptual framework in 1973 and used asa point of departure the Report of the Study Group onthe Objectives of Financial Statements, Objectives ofFinancial Statements (Trueblood Report), publishedby theAmerican Institute of Certified PublicAccoun-tants in October 1973. That report included govern-mental and not-for-profit organizations in its scope.

58. As more fully discussed in paragraphs 5762 ofConcepts Statement 1, the Board initially consideredthe 12 objectives of financial statements in the True-blood Report but decided to concentrate its initial ef-forts on formulating objectives of financial reportingby business enterprises. Initially, therefore, the Boarddid not attempt to reach conclusions on the objectivesof financial reporting for governmental and not-for-profit organizations.

59. The need to consider the objectives of generalpurpose external financial reporting by nonbusinessorganizations generally is recognized. An increasingnumber of public officials and private citizens arequestioning the relevance and reliability of financialaccounting and reporting by nonbusiness organiza-tions. That concern has been reflected in legislativeinitiatives and well-publicized allegations of seriousdeficiencies in the financial reporting of various typesof nonbusiness organizations.

60. In response to those concerns, the Board, in Au-gust 1977, engaged Professor Robert N. Anthony ofthe Harvard Business School to prepare a research re-port aimed at identifying the objectives of financialreporting by organizations other than business enter-prises. A 53-member advisory group was appointedto assist in that effort. When the Board began consid-eration of objectives of financial reporting by non-business organizations in August 1977, significantprogress already had been made on the objectives offinancial reporting by business enterprises. Ratherthan delay progress on that project to include non-business organizations in its scope, and to explore

thoroughly the issues in the nonbusiness area, theBoard proceeded with two separate objectivesprojects. The Board issued Concepts Statement 1 inNovember 1978. Paragraph 1 of Concepts State-ment 1 states:

This Statement establishes the objectivesof general purpose external financial report-ing by business enterprises. Its concentrationon business enterprises is not intended to im-ply that the Board has concluded that the usesand objectives of financial reporting by otherkinds of entities are, or should be, the same asor different from those of business enter-prises. Those and related matters, includingwhether and, if so, how business enterprisesand other organizations should be distin-guished for the purpose of establishing objec-tives of and basic concepts underlying finan-cial reporting, are issues in another phase ofthe Boards conceptual framework project.

61. In May 1978, the Board published the FASB Re-search Report, Financial Accounting in NonbusinessOrganizations, prepared by Professor Anthony. TheBoard added the nonbusiness objectives project to itstechnical agenda on May 11, 1978 and directed thestaff to prepare a Discussion Memorandum to solicitpublic comment. The Discussion Memorandum wasissued on June 15, 1978. It focused on specific issuesdiscussed in the Research Report and identified thoseon which the Board sought comments.62. The Board held public hearings in Washington,D.C. on October 12 and 13, 1978; in San Franciscoon October 19 and 20, 1978; and in Chicago on No-vember 3, 1978. The Board received 87 written re-sponses to the Discussion Memorandum, and 48 oralpresentations were made at the public hearings.63. The Board issued an Exposure Draft, Objectivesof Financial Reporting by Nonbusiness Organiza-tions, on March 14, 1980. In preparing the ExposureDraft, the Board deliberated the issues at meetingswhich were open to public observation. FASB Boardand staff members have met with and maintainedclose liaison with various groups and individuals inthe community of nonbusiness organizations sincethe outset of this project. In addition, persons fromacademe, public accounting, and various nonbusi-ness organizations provided counsel to the Board andits staff in preparing the Exposure Draft. The Boardreceived 77 letters of comment on the ExposureDraft and considered the issues raised by respondentsin those comment letters at meetings which wereopen to public observation.


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64. The major differences between this State-ment and the Exposure Draft are revisions to thescope of the document. The types of organizations towhich the objectives in this document apply havebeen clarified (paragraph 1 of the Exposure Draft),and a discussion has been added concerning the rela-tionship of this Statement to Concepts Statement 1.Other significant changes are (a) the addition of ex-amples of various types of nonbusiness organizationsin the environment section (paragraphs 1322);(b) greater emphasis on distinguishing flows that af-fect operations from those that do not (paragraph 49);(c) greater emphasis on the need for research to deter-mine if measures of service accomplishments withthe requisite characteristics of relevance, reliability,comparability, verifiability, and neutrality can be de-veloped; and (d) acknowledgement that, in the ab-sence of that financial reporting capability, informa-tion about service accomplishments may befurnished by managers explanations and sourcesother than financial reporting.

State and Local Governmental Units

65. Others have been studying the objectives of fi-nancial reporting by governmental units during theperiod that the Board has been deliberating the issuesand preparing this concepts Statement. The NationalCouncil on Governmental Accounting is sponsoringresearch in the broad area of a conceptual frameworkfor governmental

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