2017 Nonprofit Industry Update Seminar Recap Part 2 of 3: Nonprofit Accounting Standards UpdateBy John D'Amico | January 16, 2018
Over the past several years, there have been several accounting standard updates issued by the Financial Accounting Standards Board (FASB) that impact nonprofit entities.
“Nonprofits need to take note of upcoming effective dates of these accounting standard changes since these added disclosures will significantly increase the size of their financial statements,” stated John D’Amico while leading an accounting standards update at our 2017 Nonprofit Industry Update Seminar in New York City.
The FASB was established in 1973 as an independent, private not-for-profit organization setting financial accounting and reporting standards for public and private companies, as well as not-for-profit organizations that follow Generally Accepted Accounting Principles (GAAP).
The upcoming effective dates are:
- Revenue reporting standards change in calendar year 2018 for public firms and in calendar year 2019 for non-public entities
- The way leases are treated changes in calendar year 2019 for public companies and in calendar year 2020 for non-public entities
- Presentation of nonprofit financial statements becomes effective calendar year 2018
Revenue Recognition: ASU 2014-09
In May 2014, FASB issued Accounting Standards Update (ASU) No. 2014-09, which detailed new revenue recognition standards. This new revenue standard aims to improve accounting for contracts with customers by:
- Providing a robust framework for addressing revenue issues as they arise
- Increasing comparability across industries and capital markets
- Requiring better disclosure
The core principle behind this update clarifies revenue recognition as the result of a transfer of goods or services, employing the following steps:
- Identify contract(s) with the customer
- Identify performance obligations
- Determine transaction price
- Allocate transaction price
- Recognize revenue when (or as) performance obligation is satisfied
Proposed ASU – Clarifying the Scope and the Accounting Guidance for Contributions Received and Made
Audience member follows along during John D’Amico’s presentation at Marks Paneth’s 2017 Nonprofit Industry Update Seminar.
D’Amico noted, “We were surprised by the FASB ASU clarifying the definition of government contracts with nonprofits as a ‘contribution’ from an ‘exchange transaction’ – one where both parties receive something of equal value. FASB stated that government contracts that benefit the general public are not exchange transactions as the government is not directly getting anything in exchange.
This proposed ASU was issued to clarify that government grants are not within the scope of the ASU revenue recognition guidance.
This situation raises several issues around the exchange vs. non-exchange transaction classification:
- Many nonprofits treat government grants/contracts as exchange transactions, (regardless of substance
- Some nonprofits equate government with the general public – the issue is whether the government receives direct, commensurate value in return for the money it pays out (because of the public benefit)
- Many nonprofits believe the government does not give “contributions”
It also raises the issue of classifying a grant or contract as conditional vs. unconditional:
- Nonprofit stakeholders may find it difficult to distinguish between a conditional and unconditional contribution – causing diversity in application
- If funds are provided with certain stipulations, there’s difficulty distinguishing whether the contribution is conditional vs. restricted, or both
D’Amico recommended a structured nonprofit revenue recognition decision process be employed in order to properly identify classification of each transaction in order to properly account for it.
Leases: ASU 2016-02
The next part of the discussion focused on how leases are treated from an accounting standpoint. The new FASB guidance now stipulates that leases need to be counted for as an asset – including leased trucks, buses, vans and even office space.
D’Amico observed, “This is a major change by FASB. It was done to better reflect liabilities not previously on the books. It’s a matter of scale – as there are over $1.25 trillion off-balance sheet operating lease commitments for SEC-registrants.”
Examples of the “right-of-use” model for leases were reviewed, along with a lessee accounting overview for treatment on the balance sheet, income statement and cash-flow statement along with required lessee disclosures.
Presentation of Financial Statements of Nonprofit Entities: ASU 2016-14
This ASU addresses the presentation of financial statements for nonprofit organizations. One of the major changes is the change in classification from the current unrestricted, temporarily, and permanently restricted to net assets without donor restrictions and net assets with donor restrictions. “This ASU also stipulates enhanced disclosures around organizational liquidity,” noted D’Amico.
It also deals with board designates net assets – now requiring the disclosure of the amounts and purpose of board-designated net assets either on the face of the financial statements or in the notes. Here, it’s important that the Board of Directors understand these new financial reporting requirements.
The new ASU also changes the way expenses are reported by nonprofit organizations. This includes the need to report expenses by function and by natural classification in one place, either in a separate statement, on the statement of activities or in the notes to the financial statements. There are also new enhanced disclosure requirements about the methods used to allocate costs among the programs and supporting functions
“These are significant changes for all nonprofits,” noted D’Amico. “And all nonprofits should start the process of ensuring that that are very familiar with these new requirements.”
For more information about our FASB nonprofit reporting and compliance capabilities, please contact:
John D’Amico, CPA
Director, Professional Standards Group
212.710.1808 | firstname.lastname@example.org
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This material has been prepared for general informational and educational purposes only and is not intended, and should not be relied upon, as accounting, tax or other professional advice. Please refer to your advisors for specific advice.
About John D'Amico
John D'Amico, CPA, is a Partner within the Professional Standards Group at Marks Paneth LLP, which is responsible for monitoring quality control in the firm as mandated by professional standards. He specializes in pre-issuance reviews and inspections of nonprofit organizations, governments and Single Audits. Mr. D’Amico also provides consultation on accounting and attestation matters and tests and monitors the firm's quality review policies and procedures. He teaches continuing education classes for the firm and on... READ MORE +
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