Complex standards and organizations’ implementation efforts related to those standards will continue to dominate the accounting conversations for not-for-profits throughout the year. Organizations that follow a fiscal year-end should now be putting the finishing touches on their revenue recognition and contribution accounting adoption efforts. Not-for-profits that follow a calendar year-end will soon be tackling the leasing standard. Below is a preview of what organizations can expect from their 2020 accounting.
Not-for-profit entities that hold or issue securities that are traded, listed, or quoted on an exchange or over-the-counter market are considered “public” for purposes of adopting the new leasing standard. These organizations should have adopted the leasing changes for their Dec. 31, 2019 financial statement (if calendar year-end) or will be adopting for their June 30, 2020 financial statement if they follow a fiscal year calendar.
Not-for-profits that are not considered public are not off the hook either, even though the FASB officially delayed the leasing standard effective date until the 2021 calendar year. Organizations need to be evaluating their transition to the new accounting requirements in 2020 with a focus on creating policies and controls, determining transition adjustments, and gathering disclosure information. Public companies voiced concerns that more software solutions and effort to implement the leasing standard were needed than they initially expected, which was part of the compelling case made for delaying the date for not-for-profit organizations.
Accounting Updates Affecting June 30, 2020 Financial Statements
Not-for-profit organizations with direct or conduit debt that is traded on a public exchange are considered “public” for purposes of adopting the revenue recognition changes under ASC Topic 606 and should have adopted the changes for their June 30, 2019 financial statement. All other not-for-profits that follow a fiscal year-end will be implementing the new standard for their reporting year that ends June 30, 2020. The five-step revenue recognition model generally applies to activities such as memberships, subscriptions, products and services, sponsorships, conferences and seminars, tuition, royalty agreements, licensing, contracts and advertising, and may also apply to federal or state grants.
Contributions Made & Received
Under the contribution accounting changes in the Financial Accounting Standards Board (FASB)’s Accounting Standards Update 2018-08 (ASU 2018-08), some arrangements that previously qualified as contributions will be considered exchange transactions and subject to the accounting for revenue recognition under ASC Topic 606. The decision-making tree includes an analysis of whether both parties in the transaction receive something of commensurate value. If they don’t, the entities then evaluate whether the payment was a transfer of an asset from an existing transaction that is outside the scope of the contributions received guidance. When there is no equal exchange of services or payments outside the scope of the contributions guidance, then the transaction is a contribution.
Recognition & Measurement of Financial Assets & Liabilities
Under ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, not-for-profit organizations will record equity investments that did not qualify for the equity method of accounting in a different manner. These investments can no longer be accounted for as available-for-sale securities or on a cost basis; rather, with some limited exception, they are accounted for at fair value with changes in fair value included in net income annually. Other financial assets and liabilities are presented by measurement category and form on the balance sheet, or in the disclosures to the financial statements.
Other Accounting Changes
Several other updates may have a significantly more narrow scope, including:
- Compensation: Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost - Updates improve the presentation of net periodic pension cost, and net periodic postretirement benefit cost.
- Statement of Cash Flows (Topic 238): Restricted Cash - The updates clarifies that not-for-profits should report restricted cash and restricted cash equivalents along with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in their statement of cash flows.
Accounting Updates Affecting Dec. 31, 2020 Financial Statements
Under ASU 2019-03, Not-for-Profit Entities (Topic 958): Updating the Definition of Collections, the FASB aligns the definition of a collection with the definition used by the American Alliance of Museums Code. The update is designed to assist not-for-profit organizations and other entities that hold collections of artwork and similar assets for public use.
Derivatives & Hedging
ASU 2017-12, Derivatives and Hedging Topic 815, Targeted Improvements to Accounting for Hedging Activities is intended to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The update may make hedge accounting more attractive, since it also simplifies the application of the hedge accounting in current GAAP.
Other Accounting Changes
Several other narrow scope accounting changes also affect Dec. 31, 2020 financial statements, including:
Benchmark Interest Rate: The London Inter-Bank Offered Rate (LIBOR) is effectively going away after 2021. Another benchmark rate will be added under ASU 2018-16, Derivatives and Hedging Topic 815, Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. Many contracts, loans, and other types of financial arrangements may have references to LIBOR that will need to be modified.
Fair Value Disclosure: Disclosures over fair value will be easier due to a change in ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. Various disclosure requirements are eliminated for private organizations as discussed above.
To Learn More
For more information about the accounting changes that could affect your 2020 accounting, please contact us.
Mark Winiarski is a Financial Services Director in the Kansas City office. He can be reached at 913.234.1656 or firstname.lastname@example.org.