Even though the pace of new standard setting has appeared to have slowed, not-for-profit organizations will have no shortage of accounting considerations in the next year. Entities with fiscal year ends will be implementing the changes to their financial statement presentation for the first time, and all organizations will be tackling changes to contribution and revenue recognition accounting. On the horizon are the changes to the leasing standard, which will require analysis of all existing lease agreements. It’s never too early to start working on accounting changes. Getting a jump start on these and other updates may make year-end reporting significantly easier.
Not-for-Profit Organizations with Fiscal Year Ends
Financial Statement Presentation: The clock is running down for all fiscal year-end not-for-profit organizations as they prepare to apply the new financial statement presentation guidance for their 2019 (e.g. June 30, 2019) financial statements. Many of the updates in the standard will only necessitate minor changes to existing processes, but the new presentation requirements bring renewed focus to other areas of reporting, including the treatment of board designated assets and underwater endowments. Not-for-profit organizations should carefully evaluate the impact of implementing the standard and communicate with their board about the nature of those changes.
Revenue Recognition: Not-for-profits with direct or conduit debt that is traded on a public exchange will be considered “public” for purposes of adopting the revenue recognition changes under ASC Topic 606. These “public” not-for-profits will be required to adopt the standard for their June 30, 2019 financial statements, including interim periods within the year of adoption. All other not-for-profit organizations with fiscal year ends will implement the changes to revenue recognition for their 2020 (e.g. June 30, 2020) financial statements, which gives them a slightly longer lead time for making changes. For more information on preparing for the revenue recognition adoption, click here.
Contributions Made and Received: To clarify some of the confusion around how the revenue recognition standard applied to contributions to not-for-profit organizations, the FASB released ASU 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions received and Contributions Made. The accounting standards update defines a decision-making tree for organizations to follow to determine whether a donor contribution is a contribution or an exchange transaction. Donor contributions that are considered exchange transactions will follow the revenue recognition guidance. This update is effective at the same time the new revenue recognition standard is effective for those entities with fiscal year ends ending after June 15, 2019. More information on the decision-making tree can be found here.
Not-For-Profits with Calendar Year Ends
Revenue Recognition: The changes under ASC Topic 606 will affect Dec. 31, 2019, financial statements for not-for-profit organizations that are not considered “public” and that follow a calendar year. To apply the new revenue recognition standard, not-for-profit organizations will follow the five-step approach for recognizing revenue. The standard generally applies to activities such as memberships, subscriptions, products and services, sponsorships, conferences and seminars, tuition, royalty agreements, licensing, federal and state grants and contracts and advertising. Learn more. Those “public” not-for-profits will have already had to adopt the revenue recognition changes for their Dec. 31, 2018, financial statements.
Contributions Made and Received: All not-for-profits with calendar year ends will be applying ASU 2018-08 to their Dec. 31, 2019 financial statements. It will be important to note that under the changes to contribution accounting, 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 it is a contribution. For a detailed look at the decision-making tree, see our earlier article.
Recognition and Measurement of Financial Assets and 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 differently. 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.
Leasing: 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 must adopt the leasing changes for their Dec. 31, 2019 financial statement. The changes issued under ASU 2016-02, Leases (Topic 842) affect the balance sheet presentation of leased assets for lessees, and also include updates for lessor accounting. Changes require careful analysis of existing leasing arrangements, so not-for-profits will want to work through their necessary modifications early in the year to be prepared. Not-for-profits that are not considered “public” should still be working through the changes in 2019, so they can have adequate lead time to make the necessary updates to processes and leasing agreements. These considerations may make transitions to the leasing standard easier.
Minor 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
- Statement of Cash Flows (Topic 238): Restricted Cash
For More Information
For more information about the accounting changes headed your way in 2019, please contact us.
Mark Winiarski is a Director at CBIZ & MHM in the Kansas City office. He can be reached at 913.234.1656 or firstname.lastname@example.org.