nonprofit accounting
Jan 01

Understanding the New Nonprofit Accounting Standard

By Charles Hall | Accounting

Are you ready to implement FASB’s new nonprofit accounting standard? Back in August 2016, FASB issued ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities. In this article, I provide an overview of the standard and implementation tips.

Nonprofit accounting

New Nonprofit Accounting – Some Key Impacts

What are a few key impacts of the new standard?

  • Classes of net assets
  • Net assets released from “with donor restrictions”
  • Presentation of expenses
  • Intermediate measure of operations
  • Liquidity and availability of resources
  • Cash flow statement presentation

Classes of Net Assets

Presently nonprofits use three net asset classifications:

  1. Unrestricted
  2. Temporarily restricted
  3. Permanently restricted

The new standard replaces the three classes with two:

  1. Net assets with donor restrictions
  2. Net assets without donor restrictions

Terms Defined

These terms are defined as follows:

Net assets with donor restrictions – The part of net assets of a not-for-profit entity that is subject to donor-imposed restrictions (donors include other types of contributors, including makers of certain grants).

Net assets without donor restrictions – The part of net assets of a not-for-profit entity that is not subject to donor-imposed restrictions (donors include other types of contributors, including makers of certain grants).

Presentation and Disclosure

The totals of the two net asset classifications must be presented in the statement of financial position, and the amount of the change in the two classes must be displayed in the statement of activities (along with the change in total net assets). Nonprofits will continue to provide information about the nature and amounts of donor restrictions.

Additionally, the two net asset classes can be further disaggregated. For example, donor-restricted net assets can be broken down into (1) the amount maintained in perpetuity and (2) the amount expected to be spent over time or for a particular purpose.

Net assets without donor restrictions that are designated by the board for a specific use should be disclosed either on the face of the financial statements or in a footnote disclosure.

Sample Presentation of Net Assets

Here’s a sample presentation:

Net Assets
Without donor restrictions
  Undesignated  $XX
  Designated by Board for endowment      XX
     XX
With donor restrictions
  Perpetual in nature      XX
  Purchase of equipment XX
  Time-restricted XX
XX
Total Net Assets $XX

Net Assets Released from “With Donor Restrictions”

The nonprofit should disaggregate the net assets released from restrictions:

  • program restrictions satisfaction
  • time restrictions satisfaction
  • satisfaction of equipment acquisition restrictions
  • appropriation of donor endowment and subsequent satisfaction of any related donor restrictions
  • satisfaction of board-imposed restriction to fund pension liability

Here’s an example from ASU 2016-14:

nonprofit statement of activities

Presentation of Expenses

Presently, nonprofits must present expenses by function. So, nonprofits must present the following (either on the face of the statements or in the notes):

  • Program expenses
  • Supporting expenses

The new standard requires the presentation of expenses by function and nature (for all nonprofits). Nonprofits must also provide the analysis of these expenses in one location. Potential locations include:

  • Face of the statement of activities
  • A separate statement (preceding the notes; not as a supplementary schedule)
  • Notes to the financial statements

I plan to add a separate statement (like the format below) titled Statement of Functional Expenses. (Nonprofits should consider whether their accounting system can generate expenses by function and by nature. Making this determination now could save you plenty of headaches at the end of the year.)

External and direct internal investment expenses are netted with investment income and should not be included in the expense analysis. Disclosure of the netted expenses is no longer required.

Example of Expense Analysis

Here’s an example of the analysis, reflecting each natural expense classification as a separate row and each functional expense classification as a separate column.

expenses by function and nature

The nonprofit should also disclose how costs are allocated to the functions. For example:

Certain expenses are attributable to more than one program or supporting function. Depreciation is allocated based on a square-footage basis. Salaries, benefits, professional services, office expenses, information technology and insurance, are allocated based on estimates of time and effort.

Intermediate Measure of Operations

If the nonprofit provides a measure of operations on the face of the financial statements and the use of the term “operations” is not apparent, disclose the nature of the reported measure of operations or the items excluded from operations. For example:

Measure of Operations

Learning Disability’s operating revenue in excess of operating expenses includes all operating revenues and expenses that are an integral part of its programs and supporting activities and the assets released from donor restrictions to support operating expenditures. The measure of operations excludes net investment return in excess of amounts made available for operations.

Alternatively, provide the measure of operations on the face of the financial statements by including lines such as operating revenues and operating expenses in the statement of activities. Then the excess of revenues over expenses could be presented as the measure of operations.

Liquidity and Availability of Resources

FASB is shining the light on the nonprofit’s liquidity. Does the nonprofit have sufficient cash to meet its upcoming responsibilities?

Nonprofits should include disclosures regarding the liquidity and availability of resources. The purpose of the disclosures is to communicate whether the organization’s liquid available resources are sufficient to meet the cash needs for general expenditures for one year beyond the balance sheet date. The disclosure should be qualitative (providing information about how the nonprofit manages its liquid resources) and quantitative (communicating the availability of resources to meet the cash needs).

Sample Liquidity and Availability Disclosure

The FASB Codification provides the following example disclosure in 958-210-55-7:

NFP A has $395,000 of financial assets available within 1 year of the balance sheet date to meet cash needs for general expenditure consisting of cash of $75,000, contributions receivable of $20,000, and short-term investments of $300,000. None of the financial assets are subject to donor or other contractual restrictions that make them unavailable for general expenditure within one year of the balance sheet date. The contributions receivable are subject to implied time restrictions but are expected to be collected within one year.

NFP A has a goal to maintain financial assets, which consist of cash and short-term investments, on hand to meet 60 days of normal operating expenses, which are, on average, approximately $275,000. NFP A has a policy to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due. In addition, as part of its liquidity management, NFP A invests cash in excess of daily requirements in various short-term investments, including certificate of deposits and short-term treasury instruments. As more fully described in Note XX, NFP A also has committed lines of credit in the amount of $20,000, which it could draw upon in the event of an unanticipated liquidity need.

Alternatively, the nonprofit could present tables (see 958-210-55-8) to communicate the resources available to meet cash needs for general expenditures within one year of the balance sheet date.

Cash Flow Statement Presentation

A nonprofit can use the direct or indirect method to present its cash flow information. The reconciliation of changes in net assets to cash provided by (used in) operating activities is not required if the direct method is used.

Consider whether you want to incorporate additional changes that will be required by ASU 2016-18, Statement of Cash Flows–Restricted Cash. If your nonprofit has no restricted cash, then this standard is not applicable.

You can early implement ASU 2016-18. (The effective date is for fiscal years beginning after December 15, 2018.) Once this standard is effective, you’ll include restricted cash in your definition of cash. The last line of the cash flow statement might read as follows: Cash, Cash Equivalents, and Restricted Cash.

Effective Date of ASU 2016-14

The effective date for 2016-14, Not-for-Profit Entities, is for fiscal periods beginning after December 15, 2017 (2018 calendar year-ends and 2019 fiscal year-ends). The standard can be early adopted.

For comparative statements, apply the standard retrospectively. 

If presenting comparative financial statements, the standard does allow the nonprofit to omit the following information for any periods presented before the period of adoption:

  • Analysis of expenses by both natural classification and functional classification (the separate presentation of expenses by functional classification and expenses by natural classification is still required). Nonprofits that previously were required to present a statement of functional expenses do not have the option to omit this analysis; however, they may present the comparative period information in any of the formats permitted in ASU 2014-16, consistent with the presentation in the period of adoption.
  • Disclosures related to liquidity and availability of resources.
restricted cash
Dec 05

The Skinny on ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash

By Charles Hall | Auditing

FASB issued ASU 2016-18, Statement of Cash Flows, in November 2016. This standard changes the way restricted cash is shown in cash flow statements.

The standard is effective in 2019 for calendar year-end private companies. Early adoption is permitted

Here’s the skinny on the new standard. (To download the slidedeck, click here. The video below was created before I changed the name of my blog from CPA Scribo to CPA Hall Talk, but the information is current.)

 

changes in VIE accounting
Nov 30

ASU 2018-17: A VIEry Good Gift from FASB

By Charles Hall | Accounting

It's time for another change to VIE accounting! 

The variable interest entity (VIE) considerations just got much easier. FASB is—with ASU 2018-17—providing another get-out-of-jail-free card to private companies.

changes in VIE accounting

When FASB originally issued its variable interest entity guidance many years ago, it created a thorny issue for private companies—one almost incomprehensible to anyone but a seasoned CPA. FASB required companies to consider whether entities under common control should be consolidated, even if the reporting entity did not own a majority of the voting stock. While FASB’s intent was noble (it was addressing issues that arose from Enron’s use of special purpose entities), it created one of the most difficult accounting standards ever. In the ensuing years, private companies begged for relief. The first leg of that relief came with the issuance of ASU 2014-07 (more in a moment); the second leg of that relief comes now with ASU 2018-17. 

The original VIE guidance issued in the early 2000s required reporting entities to consolidate related companies if certain conditions were met. For example, if reporting entity rented real estate from a commonly owned company, then consolidation might be required. This original guidance applied to both public and private companies. Public companies tend to have the muscle and knowledge to make these complicated evaluations. Not so for private companies. That’s why private companies asked for relief. 

First, FASB had issued ASU 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. That standard allowed reporting entities, when specified conditions were met, to not consolidate lessee companies. A private company could elect to not apply variable interest entity guidance to a lessor entity if those specified conditions were met. 

Then, on October 31, 2018, FASB issued Accounting Standards Update (ASU) 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. ASU 2018-17 expands the provisions in ASU 2014-07, permitting the accounting alternative to include all private company common control arrangements (see criteria below). 

The New Alternative

Using 2018-17, a legal entity need not be evaluated by a private company (reporting entity) under the VIE model if all of the following are true: 

  1. The reporting entity and the legal entity are under common control. 

  1. The reporting entity and the legal entity are not under common control of a public business entity. 

  1. The legal entity under common control is not a public business entity. 

  1. The reporting entity does not directly or indirectly have a controlling financial interest in the legal entity when considering the voting interest model (see ASC 810-10-05; under the voting interest model, the usual condition for a controlling financial interest is ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity). 

The Alternative is an Election

Applying this accounting alternative is an accounting policy election. If the election is made, then the private company must apply the criteria above to all legal entities. If, for example, a reporting entity has consolidated companies A and B due to VIE considerations, the election must be applied to both entities. 

Combined Financial Statements (Still an Option)

If a private company reporting entity makes the alternative election, it can still create combined financial statements for entities under common control. For example, if a reporting entity consolidates companies A and B under the prior VIE guidance, it might no longer do so after the election. Nevertheless, the reporting entity could issue combined financial statements. The reporting entity might, for example, issue combined financial statements for the reporting entity and company B (and exclude company A). See ASC 810-10-55-1B. 

Entities that Can’t Use the Alternative

The entities that can’t use the VIE alternative (under ASU 2018-17) include: 

  • Public business entities 

  • Not-for-profit entities 

  • Employee benefit plans (within the scope of ASC 960, 962, and 965) 

Required Disclosures

A private company that makes the election to use the alternative is required to include information about the relationship of the entities. Those disclosures include (see 810-10-50-2AG, 810-10-50-2AH and 810-10-50-2AI for complete list of disclosures): 

  1. The nature and risks as a result of the reporting entity’s involvement with the legal entity under common control 
  2. How a reporting entity’s involvement with the legal entity under common control affects: 
    • Financial position 
    • Financial performance 
    • Cash flows 
  3. The carrying amounts and classification of the assets and liabilities in the reporting entity’s statement of financial position as a result of its involvement with the legal entity under common control 
  4. The reporting entity’s maximum exposure to loss based on its relationship with the legal entity under common control (if not quantifiable, then that fact should be disclosed) 
  5. If the maximum exposure to loss exceeds the carrying amount of the assets and liabilities, that information is to be disclosed (including the terms of the arrangements) 

Effective Dates 

For entities other than private companies, the amendments in ASU 2018-17 are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments in this Update are effective for a private company for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. All entities are required to apply the amendments in this Update retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented.  

Early adoption is permitted. 

Auditing Equity
Nov 27

Auditing Equity: The Why and How Guide

By Charles Hall | Auditing

Auditing equity is easy, until it’s not. 

Auditing equity is usually one of the easiest parts of an audit. For some equity accounts, you agree the year-end balances to the prior year ending balance, and you’re done. For instance paid-in-capital seldom changes. Often, the only changes in equity are from current year profits and owner distributions. And testing those equity additions and reductions in equity takes only minutes.

Nevertheless, auditing equity can be challenging, especially for businesses that desire to attract investors. Such companies offer complicated equity instruments. Why? The desire to attract cash without giving away (too much) power. And this balancing act can lead to complex equity instruments.  

Regardless of whether a company’s equity is easy to audit or not, below I show you how to focus on important equity issues.

Auditing Equity

Auditing Equity — An Overview

In this post, we will cover the following:

  • Primary equity assertions
  • Equity walkthroughs
  • Equity-related fraud and errors
  • Directional risk for equity
  • Primary risks for equity
  • Common equity control deficiencies
  • Risk of material misstatement for equity
  • Substantive procedures for equity
  • Common equity work papers
Continue reading
Notability app
Nov 26

Notability: How to Create Written and Audio Notes on an iPad

By Charles Hall | Technology

You can use the iPad app Notability to create written notes and audio files. In the video below I demonstrate how to use Notability, an iPad app that I use almost every day. (Click here for purchasing information. I receive no compensation for this endorsement. I just like the app!) This video was created when my blog was named CPA Scribo (before CPA Hall Talk), but the information is still relevant today.

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