by Eric Smith
In this article, we will cover two of the recent accounting standards updates that dramatically change how nonprofits present their financial statements and recognize revenue.
New Nonprofit Financial Statement Presentation Standards
The Financial Accounting Standards Board (FASB) issued Update 2016-14 – Presentation of Financial Statements of Not-For-Profit Entities, which affects nonprofits with fiscal years beginning after December 2017. We are currently assisting many of our nonprofit clients in understanding the changes that are occurring, which include the following:
- Classification of Net Assets – You can bid farewell to temporarily and permanently restricted net assets. Going forward, there will only be net assets with and without donor restrictions. However, the disclosure of net assets with restrictions will need to be expanded upon in the footnotes to cover the type of restrictions that are in place.
- Liquidity Disclosures – Nonprofits will need to disclose in the footnotes what liquid resources are available to meet cash needs for general expenditures within one year of the date of the Statement of Financial Position.
- Statement of Functional Expenses – This statement will now need to be included as either a basic financial statement or disclosed in the footnotes. Previously, this was optional unless the organization was a voluntary health and welfare organization. There will also need to be a footnote which includes the methodology for how the expenses were allocated.
- Other minor changes affect the presentation of investments and the statement of cash flows.
Revenue Recognition Standards
Along with the new financial statement standards, the change in revenue recognition standards will also have a significant impact on nonprofit organizations. Both recently issued Update 2014-09 – Revenue from Contracts with Customers, as well as Update 2018-08 – Clarifying the Scope of Accounting Guidance for Contributions Received and Contributions Made, could spark numerous changes. Each take effect for years beginning after December 2018, but 2018 financial information may need to be adjusted to match the 2019 changes if an organization wants comparative statements for their 2019 audited financial statements.
The driving factor of these changes is an attempt to standardize how revenue is recognized across all industries. In order to clarify the changes, there now is a five-step approach to identifying the existence of contracts and the performance obligations within them:
1. Identify the contract
2. Identify what the performance obligations are in the contract
3. Determine the transaction price
4. Allocate the transaction price to the specific performance obligations
5. Recognize revenue when or as the entity satisfies a performance obligation
Further information can be found in this AICPA article.
These new standards do not affect the revenue recognition for unrestricted donations received from individuals. However, the following types of arrangements may need to be revisited:
- Fees for service arrangements – if a nonprofit is providing services, the revenue should not be recognized until the performance obligations have been met. Contracts with substantial upfront payments, as well as multiple deliverables or performance obligations, may need to be revisited for a change in how or when revenue is being recorded.
- Grants – confusion has existed over whether or not grants, especially federal awards, should be considered a contribution or an exchange transaction (contract for services). The new guidance attempts to clarify that issue by giving additional guidance into what differentiates reciprocal (exchange) and nonreciprocal (contribution) transactions. If the nonprofit organization receives a grant that requires them to follow specific criteria in conducting a study with the grantor retaining the rights to the study, this would typically be a reciprocal (exchange) transaction. If the rights to the study were retained by the nonprofit organization and the only requirement was to send quarterly financial reports to the grantor, this would be considered a nonreciprocal (contribution) transactions.
- Delving further into government grants – even if a grant should be considered a nonreciprocal contribution, there may still be conditions in place that would prevent the entire amount of the award from being recorded as a contribution at the start of the grant. These examples include a barrier that must be overcome, a right of return of assets, or a right of release of the grantor from its obligation to transfer assets. In those cases, revenue would be recognized as it was earned, much like the treatment for exchange transactions.
Even though an organization’s calendar year-end audit may not start until later this year, it’s important to address these issues now so that all parties are on the same page. If you have any questions, please feel free to contact us.