Over the past year and in the near future, there are many changes that have and will impact the accounting and financial reporting for nonprofit organizations. The Financial Accounting Standards Board (“FASB”) issues Accounting Standards Updates (“ASU”) that are aimed to improve and provide more clarity of an entity’s financial information to the users of its financial statements. This article does not encompass all the ASUs that the FASB has recently issued as the ASUs in this article are more commonly applicable to nonprofit organizations. This is a brief overview of the changes as a result of these ASUs.
The following ASUs have already gone into effect as they apply to the calendar year ended December 31, 2016 and fiscal year 2017:
ASU 2015-03 | Interest-Imputation of Interest:
Simplifying the Presentation of Debt Issuance Costs
- Costs directly associated with the issuance of debt will offset the debt balance on the statement of financial position and will be amortized to interest expense over the term of the debt agreement. Past standards were to capitalize and amortize these costs as an asset.
- Since this standard can be applied retrospectively (restated in the prior year) disclosures are needed to describe the adjustment and the impact it had on the financial statements.
ASU 2015-05 | Intangibles-Goodwill and Other-Internal Use Software:
Customer’s Accounting for Fees Paid in a Cloud Computing Environment
- Purpose is to provide guidance on whether a cloud computing arrangement includes a software license.
- If so, the customer should account for the software license element consistent with the acquisition of other software licenses, as an asset.
- If not, expense the costs similar to a service contract.
ASU 2014-15 | Presentation of Financial Statements-Going Concern:
Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern
- The intention of this ASU is to increase management’s responsibility to assess the entity’s ability to continue as a going concern.
- There is a one year look forward period which will start from the date of financial statement issuance, not as of the balance sheet date.
- More detailed disclosures will be required as to why management believes the entity will not meet its financial obligations and if management’s future operating plans do not mitigate this risk.
The following ASUs are in effect for this year as they apply to the calendar year ending December 31, 2017 and fiscal year 2018 (early adoption is permitted):
ASU 2015-11 | Inventory:
Simplifying the Measurement of Inventory
- Applies to entities that use the first-in first-out or average-cost measurement principles.
- Inventory is generally carried at the lower of cost or market value. This ASU changes the definition of “market” to be the net realizable value. Past practice was the current replacement cost.
ASU 2017-02 | Not-for-Profit Entities-Consolidation:
Clarifying When a Not-for-Profit Entity that is a General Partner or a Limited Partner Should Consolidate a For-Profit Limited Partnership or Similar Entity
- Makes the presumption that a nonprofit general partner controls a limited partnership regardless of the extent of its ownership interest and would consolidate the limited partnership, as opposed to assessing the need of consolidation through Variable Interest Entity standards.
- This presumption of control is overcome if the limited partners have either substantive kick-out rights or substantive participating rights.
- Depending on if the nonprofit is a limited partner with controlling (owns more than 50% of a limited partnership’s kick-out rights through voting interests) or non-controlling will determine if consolidation is required.
This ASU is in effect for the calendar year ending December 31, 2018 and fiscal year ending 2019. Although this is not in effect until next year, the organization’s Board of Directors and management should consider this now to ensure there are processes in place to account for these changes once it comes into effect (early adoption is permitted):
ASU 2016-14 | Not-for-Profit Entities:
Presentation of Financial Statements of Not-for-Profit Entities
- Simplified net asset classification: net assets with donor restrictions and net assets without donor restrictions. Footnote disclosures will provide for more information on the restrictions and describe any board designated net assets.
- Improvement of portraying an entity’s liquidity by means of adding qualitative (additional disclosures) and quantitative information (classified balance sheet) in liquidity. In addition, the listing of current liabilities should be presented based on mandatory payments to creditors (i.e. in the order of payment to creditors as if the organization was being liquidated: notes payable, accounts payable, salaries payable, unearned income, etc.)
- Expenses will be reported by both natural and functional classification with additional disclosures on how costs are allocated between program and support services (functional). This is already required for voluntary health and welfare organizations.
- Investment expenses will be netted against investment revenues. Disclosures can be eliminated for components of net investment return and the netted expenses.
This ASU does not come into effect until calendar year ending December 31, 2019. However, early adoption is permitted as early as calendar year ending December 31, 2017 for nonpublic entities:
ASU 2014-09 (and many subsequent ASUs) | Revenue from Contracts with Customers
- This ASU focuses on contracts with customers, except lease contracts, insurance contracts, financial instruments, guarantees and certain non-monetary exchanges.
- Establishes a single, principles-based revenue standard.
- Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services
- Revenue from a contract with a customer will be recognized either at a point in time or over time as the contract is fulfilled, based on the facts and circumstances.
- A new ASU is expected in early 2018 to address NFP revenue recognition issues for government grants and contracts as well as conditions vs. restrictions/unconditional contributions.
The following ASUs are to be made of aware of as they will take effect starting calendar year 2019 through fiscal year 2022 (early adoption is permitted):
ASU 2016-15 – Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments
ASU 2016-18 – Statement of Cash Flows: Restricted Cash
ASU 2016-02 – Leases
ASU 2016-13 – Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments
ASU 2017-04 – Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment
As these ASUs come into effect, the entity’s financial statements should disclose the nature and reason for the changes in accounting principles as it applies to them. As always, please reach out to us or go on our website for helpful information.
Tania Quigley, CPA
Tania Quigley has been a member of Cerini & Associates’ audit and consulting practice area for ten years where she focuses on serving the firms nonprofit and employee benefit plan clientele. Tania has experience in performing financial statement audits and reviews, tax return preparation, cost report preparation and filing, retirement plan audits, and other consulting. Tania brings her expertise, diversified background, and helpful approach to all of her engagements.