Nonprofit Accounting Challenges: Mastering FASB

Nonprofit Accounting Challenges due to ASC 606

The long awaited standards update has brought forth nonprofit accounting challenges as well as clarification. Since its release, nonprofits have been struggling with the specifics. You may have read our intro to the new FASB here.

FASB’s new revenue recognition model (ASC 606) has replaced a good block of the the existing guidelines for recognizing revenue in exchange transactions. Most private companies, including nonprofits with calendar-year-ends, must implement the new revenue recognition rules as of the December 2019 reporting period. The breadth of impact will vary based on contract terms and the industry in which an NFP operates. For some, there may be no change in regards to the amount and timing of revenue recognition. For others, the change may be significant, especially a nonprofit with conduit debt.

The term conduit debt obligations refers to certain limited-obligation revenue bonds, certificates of participation, or similar debt instruments issued by a state or local governmental entity for the express purpose of providing capital financing for a specific third party that is not a part of the issuer’s financial reporting entity.

Not surprising, nonprofit accounting challenges may result out of confusion on reporting how a nonprofit manages its liquidity and the availability of financial assets. The new standard requires disclosure of qualitative and quantitative liquidity information.

Qualitative refers to how a nonprofit organization manages its liquid resources to meet operational cash needs within one year of the statement of financial position date. 

Qualitative refers to the amount of financial assets available to meet cash needs within one year of the statement of financial position date.

Qualitative and Quantitative Disclosures Should Include:

• NFP’s contracts with its customers
• Significant judgments made in applying the revenue recognition guidance to those contracts
• Information about any assets recognized for contract costs

To get a better understanding of what the new liquidity disclosure might entail, FASB provided a sample note disclosure in the Accounting Standards Update (ASU) as follows:

“NFP A has $XXX,XXX of financial assets available within one year of the balance sheet date to meet cash needs for general expenditures consisting of cash of $XX,XXX, contributions receivable of $XX,XXX, and short-term investments of $XX,XXX. 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.

Nonprofit Accounting Challenges due to Revenue Recognition

What should be included in your revenue stream to avoid nonprofit accounting challenges? Nonprofits must evaluate the following types of contracts to determine applicability to ASC 606:

• Sponsorships
• Federal and state grants and contracts
• Products and services
• Memberships
• Subscriptions
• Royalty agreements
• Conferences and seminars
• Tuition
• Advertising
• Licensing

What should be excluded to reduce nonprofit accounting challenges?

Certain types of contracts, contributions and collaborative agreements may be excluded to minimize nonprofit accounting challenges. Some contracts with customers that are specifically excluded from this standard include lease contracts, insurance contracts, financial contracts, and guarantees. It is important to note, since contributions are both voluntary and nonreciprocal, they also do not fall under ASC 606.

Nonprofit Accounting Challenges due to Evaluation of Grants and Contracts

FASB acknowledges the nonprofit accounting challenges in distinguishing between grants as exchange transactions or contributions. As a result, on June 21, 2018, FASB issued Accounting Standards Update (ASU) No. 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made.

Essentially, a contract is a legally binding document in which the parties make promises to deliver a product or service in exchange for money. On the other hand, a grant is when one party grants funds to another party to do something with the expectation that the task can be completed. The grants and contracts standard defines the distinction between donor-imposed conditions and donor-imposed restrictions on contributions. It amends a recipient’s capacity to use what is known as the simultaneous release accounting policy option.

Although the ASU does not change the current disclosure requirements for contribution transactions, many nonprofits will need to add the required disclosures for conditional contributions for transactions that were previously accounted for as exchange transactions.

Summary

To reduce your nonprofit accounting challenges, carefully evaluate whether to handle your nonprofit accounting internally or via an outsourced accounting firm. If you are interested in internal implementation, make sure you have the bandwidth and time to implement these critical changes on your own. 

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