We remain in a relatively quiet time for changes in accounting and reporting standards affecting not-for-profit organizations, notwithstanding larger proposals affecting the intermediate and longer term. Some of the near term changes are essentially tweaks to ensure organizations are following standards with consistency rather than having the diversity in practice that can sometimes arise. Despite not having any major changes to report, we encourage all organizations to pay close attention to all new accounting rules as they may find themselves in a special or unique circumstance that could affect their reporting.
Items Affecting December 31, 2015 and Later Year Ends
OMB Audit Requirements
The Uniform Grant Guidance released by the Office of Management and Budget (OMB) and the Council on Financial Assistance Reform (COFAR) at the end of 2013 consolidates rules and eight OMB Circulars, including A-133. Changes are mainly designed to focus on larger, riskier programs. Organizations generally had to apply the new requirements for cost principles and administrative requirements for new funding received after December 26, 2014, including documenting internal controls under the latest COSO guidance. The changes to the audit requirements kick in December 31, 2015, and later.
Some organizations may find that the outside audit process is somewhat streamlined in terms of how many programs need to be audited. The threshold for a single audit has increased to those entities with more than $750,000 of federal expenditures (the previous threshold was $500,000). Additionally, the guidance increases the threshold for Type A/B Major Program determination. Percentage of coverage also dropped for entities now covering 20-40 percent of funds, depending on the auditee. All of these factors might lead, in some cases, to fewer major programs being selected. This could result in some savings in terms of audit fees, or could at least offset some of the other items related to the outside audit of federal awards. We encourage you to talk to your auditor about the impact of these changes on your entity.
For more detail about the changes click on OMB Makes Sweeping Changes to A-133 Audit Requirements.
Disclosures about Fair Value Levels of Investments Accounted for under the Net Asset Value (NAV) per Share Method
This standard requires that the investment amounts accounted for under the NAV method be removed from the leveling tables in the fair value hierarchy. The FASB made this change due to confusion in current practice. NAV investments are effectively categorized under the current fair value hierarchy based on speed of redemption versus valuation method. Although many users had adopted their footnotes to describe this, others did not. Additionally, the standard and users often associate levels within the fair value hierarchy as an indicator of risk, but that has not been the case with NAV investments, which for most not-for-profits represent the bulk of level 2 and 3 investments.
These standards are required to be adopted in public entities for years beginning after December 15, 2016 and for private entities for years beginning after December 15, 2017. For most organizations, this should be a simple evolution of presentation in the footnotes and early adoption is encouraged.
For more information about these changes, click on Classification & Disclosure of Fair Value Hierarchy No Longer Required for Qualifying Investments.
Private Entity Alternative for Accounting for Certain Interest Rates Swaps
Private entities have a simplified hedge accounting approach to use for interest rate swaps in select scenarios. The practical expedient allows these entities to use cash flow hedge accounting for swaps that are created to economically convert variable rate interest payments to fixed rate payments. The approach assumes no ineffectiveness and allows for income statement charges for interest that are similar to the amount that entity would have incurred if it had initially entered into a fixed-rate form of borrowing.
The alternative took effect for annual and interim periods after December 15, 2014. The bad news is many not-for-profits are considered public entities under the standards, and thus this benefit is not available to many organizations.
For more information, click on Accounting for Interest Rate Swaps for Private Companies Simplified.
Items Affecting December 31, 2016 and June 30, 2017 Year Ends
Presentation of Debt Issuance Cost
In fiscal years beginning on or after December 15, 2015, entities must present debt issuance as a direct deduction from the carrying amount of debt rather than an asset. Many organizations currently present debt issuance costs as an asset. This may result in a reduction of total assets for entities that have capitalized debt issuance costs. Public business entities must also implement the change for interim periods within fiscal years after December 15, 2015, but private entities won’t have to implement the change for interim periods until on or after December 15, 2016. Given that there is sometimes less clarity about which entities meet the public test, we suggest that all entities consider making these simple presentational changes at your next fiscal year end reporting period.
For more information about the changes, click on Presentation of Debt Issuance Cost Simplified.
Accounting for Fees Paid in a Cloud Computing Arrangement
Entities will now have guidance to determine whether a cloud computing arrangement includes the sale or license of software. When a license is involved, the entity accounts for the software license in a similar manner to other software licenses. Arrangements with no licenses should be accounted for as a service contract.
Public entities will adopt the requirement for fiscal years and interim periods beginning after December 15, 2015. Nonpublic entities will adopt for fiscal years after December 15, 2015 and interim periods within fiscal years after December 15, 2016. Early adoption is permitted. Learn more about the standard here.
Items Affecting December 31, 2017 Year Ends and Later
Practical Expedient Employee Benefit Plan Measurement Date
A practical expedient is available for those entities with fiscal year ends that do not coincide with the end of the month. Entities may use the nearest month end to their fiscal year end to measure defined benefit plan assets and obligations. Once adopted, the practical expedient must be used for all plans. If a contribution or significant event would occur between the month end and the fiscal year end, the entity must adjust the measurement of plan assets.
Public entities will adopt the requirement for fiscal years and interim periods beginning after December 15, 2015. All others will adopt for fiscal years after December 15, 2016, and interim periods within fiscal years after December 15, 2017. Early adoption is permitted.
For more information, click on Practical Expedient Created for Defined Benefit Plans.
Not-for-Profit Financial Statement Presentation
The FASB is evaluating how to streamline the financial statement presentation for not-for-profits and healthcare entities. It released an exposure draft in 2015 that proposed reducing the number of net asset classes from three to two, modifying the statement of activities and changing the presentation of cash flows. The FASB also wants not-for-profit organizations to disclose more information about their liquidity. Comments on the proposed changes were due August 20, 2015. On October 28, 2015, the FASB met and decided to split the project into two phases. The first phase will reconsider items that are not dependent on other accounting projects and are improvements FASB believes can be finalized in the near term. Such items include net asset classification, reporting of expenses, improving disclosures of information useful in assessing liquidity and operating measures and changes to the cash flow statement. The second phase is likely to require more time to resolve due to similar topics being addressed in other projects, particularly related to the proposed operating measure laid out by the proposal as well as the realignment of certain line items on the cash flow statement. The FASB hopes to get final guidance out on the first phase by June 30, 2016, and no specific timeframe has been noted for implementing final guidance. We expect that final guidance may not be issued until December 31, 2018 or later. For more information about these changes click on:
Revenue recognition changes can impact not-for-profit entities that have transactions that meet the definition of a contract with a customer. In 2015, the FASB officially delayed the implementation date by one year. Now, public business entities, certain employee benefit plans and not-for-profit entities that have issued or are a conduit bond obligor for securities that tracked, listed or quoted on an exchange or over-the-counter market, are required to adopt the new guidance by fiscal years beginning on or after December 15, 2017. All other entities are required to adopt by fiscal years beginning on or after December 15, 2018, and interim fiscal periods after December 15, 2019. The FASB continues to work on multiple proposals to streamline the implementation and application of the standard.
Many not-for-profits will need to take a closer look at the guidance to determine if they need to plan for these changes. For some organizations, this will entail conducting an evaluation of the revenue streams in a carefully documented way in to ensure they align with the standards. The guidance excludes contribution transactions and the effect of earnings on various investment type securities, but for many not-for-profits there are substantial earned revenues or sponsored arrangements that may need review.
For more information about these changes, click on:
The FASB voted on November 11, 2015, to move forward with a long-awaited and much debated standard that would require organizations to include lease obligations on their balance sheets when they enter a lease with a corresponding right of use asset. Public business entities will need to follow this method for years beginning December 15, 2018, and later, and private entities will need to follow the standard for fiscal years beginning December 15, 2019, and later. There are still some steps to take place before the final standard is published, which is expected to take place in early 2016. The challenge here will be planning for the conversion as all operating leases will need to be examined for retroactive application. The application would require entities to follow the new standard as though it were in place in prior reporting periods, which is expected to make the application of this standard a notable effort.
For more information on the proposed leasing standard, click on FASB to Draft Final Leasing Standard Update.
For More Information
If you have specific comments, concerns or questions about the accounting changes on the horizon, please contact us here.
Mike Burns is a Managing Director at CBIZ Tofias and is the CBIZ MHM National Not-for-Profit Practice Leader. He can be reached at 617.761.0584 or email@example.com.
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