Regular readers of the Nonprofit Advisor will be aware of the variety of new and amended accounting rules that will affect nonprofit organizations in the coming years. The sector is facing a flurry of significant new guidance that will require thoughtful evaluation to ensure smooth adoption by affected organizations. The three most significant accounting changes on the horizon are the new Nonprofit Financial Statement presentation rules (ASU 2016-14), the new revenue recognition rules (ASU 2014 –09), and the new lease rules (ASU 2016 -02). All of these changes have been discussed in previous editions of the Nonprofit Advisor. However, as adoption dates begin to approach, it is worth considering some practical steps preparers can take now to help ensure a smooth transition for your organization.
The first change will be the required adoption of the new rules on the presentation of financial statements for nonprofit entities. These rules were finalized in August of 2016 and are required to be adopted beginning with fiscal years ended December 15, 2018 or later. Because early adoption is permitted, we have started to see the first financial statements publicly available of early adopters. These real life examples are adding to the examples contained within the guidance and can help inform decisions that an organization needs to make about how to apply the standard. We encourage preparers of nonprofit financial statements to get a handle on the changes that will affect their specific organization and to start discussions with those in governance (board or audit committee) now about the changes that will result. In particular, the inclusion of a liquidity disclosure in the financial statements of the organization is perhaps the biggest change of the guidance, and we encourage that financial statement preparers begin to prepare for this disclosure. Preparation would include understanding the flexibility that the standard offers for disclosure options and also to consider the released illustrative examples available. Management should consider what message it wishes to convey in the liquidity discussion and have a robust conversation with the board to explain the disclosure requirements and discuss the best presentation for achieving the transparency and impact it desires. Due to expanded required disclosures, policies on board designations on net assets should also be reviewed with the board and recommendations and policy changes should be discussed as well. Now is the time to have these discussions so board members are able to offer their thoughtful input in a timely manner for efficient adoption of the standard.
After the implementation of the new financial statement presentation standard, organizations will have a short turnaround before needing to implement new standards on revenue and lease accounting that will be effective for fiscal years ending after December 15, 2019 and December 15, 2020, respectively. From a practical standpoint, the current thinking is that many organizations will elect to adopt the lease standard early, so both of these pieces of new guidance will be implemented together in the first fiscal year end after December 15, 2019. The revenue recognition standard is expected to be further complicated with a forthcoming amendment from the Nonprofit Advisory Council of FASB, which will make some clarifications on grant accounting. Financial statement preparers should begin the process of evaluating their revenue streams under the new standard to determine whether any current accounting treatment may need to be changed. A first step would be to compile a list of all the organization’s exchange transaction revenue streams specifically looking for items such as membership dues, royalties, advertising and sponsorship revenue, tuition or federal, state or private grants where the donor is receiving commensurate value in return. All of these types of revenue would be subject to the new standard. We recommend that an organization evaluate each type of revenue under the standard and evaluate any difference between existing accounting and accounting under the new guidance. Any immaterial variances can be passed upon, and that may be the most likely outcome; however, in order to reach that conclusion, an organization must perform its evaluation and reach a conclusion in consultation with its outside CPAs. The aforementioned new amendment that is forthcoming in final form soon, is expected to result in certain contracts that are currently accounted for as exchange transactions to instead be looked upon as conditional contributions. One example of this would be a grant where the value of services to be performed is not going to the donor but instead to the general public. Because an exchange transaction can only exist where the donor is also the primary beneficiary, many grants where this is not the case will no longer be considered exchange transactions but instead fall into contribution accounting. These types of contracts should be evaluated and when it is determined that there is a right of return and a barrier to overcome, the organization would account for this as a conditional contribution and revenue would be earned as the conditions are satisfied. This change ultimately may not have an impact on timing of revenue recognition, but it will be necessary for management to evaluate this and discuss its conclusions with its auditors.
The lease standard will have the impact of quantifying operating lease payment commitments and grossing up the liabilities (future payments) and assets (right to use asset) of the Statement of Financial Position. We recommend that organizations take steps now to quantify the leases that may be impacted and to be prepared to quantify the initial adoption entry and ongoing accounting under the new standard. Most importantly, organizations need to evaluate any impact on financial covenants as a result of these structural changes of the statement of financial position and make plans to accommodate as necessary.
These three new accounting rules will affect the financial statements and accounting for every nonprofit organization. The time is now for proactive preparation and analysis to reduce any negative impacts of adoption when the time comes. To ensure a smooth transition, the best approach is for management of each organization to evaluate each of these items independently and to reach conclusions as to what changes are or are not necessary. At that point, consultation with independent auditors can occur and a shared conclusion from both parties should allow for a smooth adoption of the new standards. At Windes, we expect to have regular engagement with our clients to help them through this transition period smoothly. Please reach out if we can help with any clarification on the new standards.
If you have questions or would like more information about the new standards, please contact Michael Barloewen at mbarloewen@windes.com or 844.4WINDES.
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