An Insider’s Guide to the FASB Accounting Standards Update
Over the past several years, nonprofit finance teams have had new guidance from FASB to learn and implement within their organization to stay compliant with updated accounting standards. Frankly, some standards can be challenging both to absorb and apply. So I was happy to have the opportunity to host Richard Cole as he presented a very informative session about the FASB Accounting Standards Update at the Nonprofit Finance Leaders Forum. He led us through a range of implementation matters coming out of recent updates concerning nonprofit financial statements, revenue recognition, leases, and more.
Richard Cole is a CPA and a partner at BKD CPAs & Advisors—a prominent, national advisory firm that has a specialized practice for nonprofit clients. Prior to his career with BKD, Richard worked at FASB for six years as a Supervising Project Manager specializing in accounting and financial reporting issues that impacted nonprofit organizations.
What follows next are key highlights and take-aways from Richard’s presentation:
Implementation Matters: Not-for-Profit Financial Statements
Most nonprofit organizations have already closed their books and implemented their first year of not-for-profit financial statements under the standards set out by ASU 2016-14. When the FASB wrote this, there were a couple of standards that were new presentation items and as more nonprofits follow through on this standard, you as a preparer might see other styles of presentation that you like better than what you did during year one.
Liquidity and Availability
With liquidity and availability there were two requirements in ASU 2016-14:
- Qualitative — Explaining how you make sure you have enough money to pay your bills.
- Quantitative — A calculation of financial assets of the organization as of the balance sheet date that were available for expenditures within one year. Organizations approached this calculation in a variety of ways. As you look at other organizations, year two might be an opportunity for you to make changes if you’ve seen other examples and think you can make improvements.
The second area of your financial statements that may merit additional attention is expenses. There is a requirement to report all expenses and do an analysis of expenses by both function and nature. Do you have enough detail or too little? Do you separate your operating expenses from non-operating expenses? There are a variety of styles nonprofits have used to meet this standard and as you look at others, you may find a style you think would be a better way to show your organization’s expenses and tell your story. Again, year two will provide an opportunity for you to make improvements.
Sage Intacct helps nonprofit finance leaders automate disclosures for their financial statements with a Disclosure Dashboard. It pulls all disclosures together in one place with discussion notes and footnotes about the reports.
Example: Sage Intacct Disclosures Dashboard
Example: Sage Intacct Liquidity Disclosures Dashboard with Qualitative Discussion
Implementation Matters: Revenue Recognition
The FASB updated standards addressed revenue recognition because existing standards did not clarify how to account for grants and contracts well enough. They provided improvements and clarifications regarding both from contracts with customers (Topic 606) and from grants and contracts (ASU 2018-08).
- Topic 606 is the broad revenue recognition standard nonprofit organizations need to follow.
- ASU 2018-08 was a project added to FASB’s Technical Agenda to improve and clarify existing guidance (ASU 2014-09) around revenue from contracts with customers.
Effective Dates for Updated Nonprofit Revenue Recognition
You’ll want to watch the full webinar replay for detailed information and advice about nonprofit revenue recognition, including methods for transitioning multi-year financials to the new standards. We examined how to determine if transactions are reciprocal or nonreciprocal and how to account for unconditional funding vs. revenue with donor-imposed restrictions. After presenting the technical details, Richard also walked us through several examples to help clarify the issues.
The right accounting and financial management technology can help your organization apply updated revenue recognition standards more easily—without tracking revenue on dozens of spreadsheets. Sage Intacct offers a nonprofit revenue recognition solution that enables the finance team to categorize revenue and systematically recognize revenue for conditional gifts and exchange transactions that provide a benefit over a term. For non-exchange transactions, you can recognize by milestone where at the completion of a task, recognition is automatically triggered. In the example below, the user is selecting a conditional milestone schedule for revenue recognition based on a conditional grant to build a new facility.
Implementation Matters: Leases
A lease contract conveys the right to use an underlying asset for a period of time in exchange for consideration. Under the previous standards, operating leases were essentially just disclosure-only items and were off-balance sheet items. Under the new guidance (Topic 842), capital leases are now called financing leases, but other than that, not much changes with this type of lease. However, operating leases will appear on the balance sheet. You will have a right-of-use asset and a lease liability that will be recorded. That’s a big paradigm shift for how your organization will treat leases.
You will need to identify whether each lease needs treatment on- or off-balance sheet. The new primary determinant is whether your organization has the right to control the use of an identified asset during the term of the lease:
Follow a three-step model to get a handle on the new lease standard. In step one, assemble an inventory of your leases. What do you have out there? Do you have control of the underlying assets? How centralized or decentralized is the contract writing for leases—does the finance office know about all of them? Second, examine your materiality. How modern is your capitalization policy? Do you capitalize everything over $500? Should that be higher? Finally, examine the debt covenants. To what extent will capitalizing your operating leases affect covenants based on leverage ratios? Will putting the leases on the balance sheet violate debt covenants? If so, contact your banks now and get a head start.
Other Updates and Projects in Process
Unfortunately, I lack the room in this article to recap all of the invaluable information Richard shared during his presentation. There were two other accounting standards updates he explained:
- The revised GAAP definition of collections of works of art, historical treasures and similar assets (ASU 2019-03)
- Goodwill and intangibles for nonprofit entities (ASU 2019-06)
Projects in Process
There are also several current projects at the FASB that will impact nonprofit organizations. Watch for finalization of future updates around these areas:
- Not-for-profit reporting of Gifts-in-Kind
- Reference rate, regarding contract modifications and hedge accounting (ASU 2020-04)
- Cloud computing agreements and resolving some diversity in practice of how entities should capitalize implementation costs (ASU 2018-15)
- Disclosure framework in terms of Fair Value Measurement (Topic 820) and Defined Benefit Plans (Topic 715-20)
As a nonprofit finance leader, it’s your responsibility to ensure the compliance of your organization with current accounting standards. The FASB has released substantial updates surrounding nonprofit revenue recognition, financial statement disclosures, and reporting operating leases on the balance sheet. The FASB is also working on a number of new projects that will impact nonprofit financial reporting in the future. To stay on top of changing guidance and standards, nonprofit finance teams need technology tools that help them automate disclosures and evaluate revenue recognition decisions. Sage Intacct continues to innovate ways to make compliance and accounting easier for nonprofits.
For more in-depth information about how to implement updated FASB guidance to your financial statements, revenue recognition, leases and other situations, I encourage you to watch a replay of the full presentation—and six other virtual sessions by nonprofit finance and technology experts—at the Nonprofit Finance Leaders Forum.
A native Texan, Joan has over 25 years of experience in the accounting, technology, publishing, and nonprofit fields. Bringing her experience as a nonprofit financial leader to Sage Intacct, Joan has been instrumental in creating solutions, and providing support and best practices that help ensure nonprofits achieve their mission.