By Tammy Ricciardella, CPA
All entities, including nonprofit organizations, are facing the daunting task of addressing a slew of changes as a result of numerous Accounting Standards Updates (ASU) being issued by the Financial Accounting Standards Board (FASB). We have discussed many of these forthcoming changes in prior editions of the Nonprofit Standard and provided updates through our Nonprofit Standard blog. This article provides a summary of the upcoming standards, as of this point in time, that entities need to be aware of and actively working to implement.
ASU 2014-09, REVENUE FROM CONTRACTS WITH CUSTOMERS (TOPIC 606)
Summary: In May 2014, the FASB issued ASU 2014-09 which is a comprehensive new revenue recognition standard that will supersede existing revenue recognition guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To accomplish this objective, the standard requires five basic steps:
- Identify the contract with the customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations in the contract.
- Recognize revenue when (or as) the entity satisfies a performance obligation.
Entities will generally be required to make more estimates and use more judgment than under current guidance, which will be highlighted for users through increased disclosure requirements.
Entities should evaluate whether the following contracts (and others they may have) are subject to the ASU: memberships, subscriptions, products and services, royalty agreements, sponsorships, conferences and seminars, tuition, advertising, licensing, and federal and state grants and contracts.
Contributions received from donors are not specifically scoped out of the ASU. However, the ASU defines revenue as “inflows or other enhancement of assets of an entity or the settlement of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing and major activities.” In other words, revenue is a reciprocal transfer between parties in which the parties are expecting to exchange similar value. On the other hand, a contribution is defined as “an unconditional transfer of cash or other assets to an entity or a settlement or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner.” Since a contribution is both voluntary and nonreciprocal, it is scoped out of the ASU by definition.
Effective Date: FASB issued ASU 2015-14 that deferred the effective date of ASU 2014-09 until annual periods beginning after Dec. 15, 2018 for the majority of nonprofit organizations.
For those organizations that have issued, or are a conduit bond obligor for, securities that are traded, listed or quoted on an exchange or an over-the-counter market qualify as a public entity under the standard and therefore the standard is effective for annual reporting periods beginning after Dec. 15, 2017, and interim reporting periods within annual reporting periods beginning after Dec. 15, 2018.
Steps That Should be in Process: Organizations should be reviewing all their business activities and contracts to ascertain the effect this new standard will have on the recognition of revenue. Each type of contract that the entity has will need to be subjected to the five-step process and the revenue treatment ascertained.
ASU 2015-03, INTEREST – IMPUTATION OF INTEREST: SIMPLIFYING THE PRESENTATION OF DEBT ISSUANCE COSTS (SUBTOPIC 835-30)
Summary: This ASU requires that debt issuance costs be presented in the statement of financial position as a direct reduction from the carrying amount of the debt liability, consistent with debt discounts and premiums.
Effective date: The ASU is effective for financial statements issued for fiscal years beginning after Dec. 15, 2015.
ASU 2015-07, FAIR VALUE DISCLOSURES FOR INVESTMENTS IN CERTAIN ENTITIES THAT CALCULATE NET ASSET VALUE PER SHARE (OR EQUIVALENT) (TOPIC 820)
Summary: In May 2015, the FASB issued ASU 2015-07, which allows for those entities that have elected the practical expedient to use the net asset value (NAV) as a measure of fair value and to no longer categorize these investments within the fair value hierarchy. The practical expedient criteria differ from the criteria used to categorize other fair value measurements within the hierarchy. A reporting entity should continue to disclose information on investments for which fair value is measured at NAV (or its equivalent) as a practical expedient to help users understand the nature and risks of the investments and whether the investments, if sold, are probable of being sold at amounts different from NAV.
Effective Date: The ASU is effective for fiscal years beginning after Dec. 15, 2016, with early application permitted and should be applied retrospectively. The retrospective approach requires that an investment for which fair value is measured using the NAV practical expedient be removed from the fair value hierarchy in all periods presented in an entity’s financial statements.
Steps That Should be in Process: Organizations that have not adopted this yet should be reviewing the valuation methodologies of their investments. For those investments that are measured at NAV using the practical expedient they should be removing these from the Level 1, 2 and 3 columns in their footnote disclosures and drafting the revised presentation to present those investments carried at NAV separately. This disclosure should reconcile to the total investments on the face of the financial statements for all years presented in the footnotes.
ASU 2015-11, INVENTORY (TOPIC 330)
Summary: Topic 330, Inventory, currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value or net realizable value less an approximately normal profit margin. The amendments in this update require an entity to measure inventory currently being carried at first in, first out (FIFO) or average cost at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out (LIFO) or the retail inventory method.
Effective Date: The ASU is effective for fiscal years beginning after Dec. 15, 2016. The amendments in the ASU should be applied prospectively with early application permitted.
Steps That Should be in Process: Organizations that hold inventory should be evaluating their valuation methods and determining if the change to net realizable value impacts the carrying amount of inventory and whether there are any adjustments that are necessary. In addition, footnote disclosures will need to be updated to reflect the current method of determining the carrying value.
ASU 2016-02, LEASES (TOPIC 842)
Summary: The new lease standard applies a right-of-use (ROU) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. For leases with a term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU asset or lease liability. At inception, lessees must classify all leases as either finance or operating based on five criteria. Statement of financial position/balance sheet recognition of finance and operating leases is similar, but the pattern of expense recognition in the statement of activities/income statement, as well as the effect on the statement of cash flows, differs depending on the lease classification.
The new lease standard requires a lessor to classify leases as either sales-type, direct financing or operating, similar to existing accounting principles generally accepted in the United States of America (U.S. GAAP). Classification depends on the same five criteria used by lessees plus certain additional factors. The subsequent accounting treatment for all three lease types is substantially equivalent to existing U.S. GAAP for sales-type leases, direct financing leases, and operating leases. However, the new standard updates certain aspects of the lessor accounting model to align it with the new lessee accounting model, as well as with the new revenue standard under Topic 606.
Effective Date: The ASU is effective for fiscal years beginning after Dec. 15, 2019. Early adoption is permitted.
For those organizations that have issued, or are a conduit bond obligor for, securities that are traded, listed or quoted on an exchange or an over-the-counter market qualify as a public entity under the standard and therefore the standard is effective for annual reporting periods beginning after Dec. 15, 2018.
Steps That Should be in Process: Organizations that are lessees and/or lessors should be reviewing their leases and quantifying the asset and liability that will need to be reflected on the financial statements once this ASU is adopted. Organizations should also take the effect of the change in accounting for leases into account for calculating financial covenants per existing debt agreements in order to determine if they will still meet the covenant requirements. If this revised accounting will negatively impact the covenant calculations, organizations should be working with lenders to revise the covenant calculations.
ASU 2016-14, PRESENTATION OF FINANCIAL STATEMENTS OF NOT-FOR-PROFIT ENTITIES (TOPIC 958)
Summary: ASU 2016-14 improves the presentation of financial statements of not-for-profit entities. This is the first major change to the nonprofit financial statement model in over 20 years, which is intended to provide more useful information to donors, grantors and other users. The ASU impacts all not-for-profit entities in the scope of Topic 958. The ASU addresses the following key qualitative and quantitative matters:
- Net asset classes
- Investment return
- Liquidity and availability of resources
- Presentation of operating cash flows
In addition, the ASU includes illustrative financial statements of not-for-profit entities, which reflect changes made by the new standard.
Effective Date: The amendments in ASU 2016-14 are effective for annual financial statements issued for fiscal years beginning after Dec. 15, 2017, and for interim periods within fiscal years beginning after Dec. 15, 2018. Application to interim financial statements is permitted but not required in the initial year of application. Early adoption is permitted.
Steps That Should be in Process: Organizations should be reviewing the components of this ASU and working toward a resolution for presenting the new required items. There are numerous changes to the financial statements that will result from the adoption of this ASU that need to be addressed well in advance. In addition, there may be underlying accounting system changes that may be necessary if the entity determines that they need to change any of their expense allocations or if the current accounting system is not set up to track the new information that is required to be disclosed. See the BDO Institute for Nonprofit Excellence Resource Center for more information that can assist you with this endeavor.
ASU 2016-15, CLASSIFICATION OF CERTAIN CASH RECEIPTS AND CASH PAYMENTS (TOPIC 230)
Summary: This ASU was issued to address the diversity in practice with regard to how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The ASU addresses the following eight types of cash flow issues: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt, (3) contingent consideration related to a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from settlement of corporate-owned life insurance policies, (6) distributions received from equity method investments, (7) beneficial interests in securitization transactions, and (8) classification of cash receipts and payments that have aspects of more than one class of cash flows.
Effective Date: The ASU is effective for fiscal years beginning after Dec. 15, 2018. Early adoption is permitted but the entity must adopt all the amendments at that date. The amendments in this ASU should be applied using a retrospective transition method to each period presented. If it is impracticable to do so for certain of these items, the amendments for those issues would be applied prospectively as of the earliest date practicable.
Steps That Should be in Process: Organizations with these transactions should evaluate the revised retrospective presentation for these items in the statement of cash flows.
ASU 2016-18, STATEMENT OF CASH FLOWS: RESTRICTED CASH (TOPIC 230)
Summary: This ASU was issued to address diversity in practice with regard to the classification and presentation of changes in restricted cash on the statement of cash flows. The provisions of the ASU require that a statement of cash flows explain the change during the period in the total cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. To meet this requirement amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.
Effective Date: The ASU is effective for fiscal years beginning after Dec. 15, 2018. Early adoption is permitted and should be applied on a retrospective transition method to each period presented.
Steps That Should be in Process: Organizations that have not previously presented restricted cash in this format will need to assess the changes that are needed for their prior financial statements.
Proposed Accounting Standards Update, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made
Summary: The proposed amendments would assist entities in (1) evaluating whether transactions should be accounted for as contributions (nonreciprocal transactions) within the scope of Topic 958 or as exchange (reciprocal) transactions subject to other guidance and (2) distinguishing between conditional contributions and unconditional contributions.
Steps That Should be in Process: Organizations should stay abreast for the final issuance of this exposure draft. Once this is issued, organizations should review the final document and determine if the content of the final ASU affects their classification of items as a contribution or an exchange transaction. Once issued, this is projected to have the same effective date as ASU 2014-09 as amended.
SUMMARY OF IMPLEMENTATION DATES:
|Calendar Year Ending 2016/Fiscal Year Ending 2017
|Calendar Year Ending 2017/Fiscal Year Ending 2018
|Calendar Year Ending 2018/Fiscal Year Ending 2019
|Calendar Year Ending 2019/Fiscal Year Ending 2020
|Calendar Year Ending 2020/Fiscal Year Ending 2021
|ASU 2014-09 Revenue from Contracts with Customers*
|ASU 2015-03 Imputation of Interest – Simplifying the Presentation of Debt Issuance Costs
|ASU 2015-07 Fair Value Disclosures of Investments in Certain Entities that Calculate Net Asset Value per Share (or Equivalent)
|ASU 2015-11 Inventory
|ASU 2016-02 Leases*
|ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities
|ASU 2016-15 Classification of Certain Cash Receipts and Cash Payments
|ASU 2016-18 Statement of Cash Flows: Restricted Cash
|*For organizations that have issued, or are a conduit bond obligor for, securities that are traded, listed or quoted on an exchange or an over-the-counter market qualify as a public entity and the effective date noted above is not applicable. For the ASUs noted, they are effective earlier for these organizations and the earlier effective dates are indicated below.
Effective dates for organizations described above:
ASU 2014-09 – Calendar year ending 2018/Fiscal year ending 2019
ASU 2016-02 – Calendar year ending 2019/Fiscal year ending 2020
This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Winter 2018). Copyright © 2018 BDO USA, LLP. All rights reserved. www.bdo.com