Perspectives on New Accounting Standards for Not-for-Profits

March 20, 2019

All aboard! The last train is about to leave the station, departing from platform Accounting Standards Update (ASU) 2016-14—all not-for-profits must now be on board!

The time has come for the last of the adopters to implement FASB ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities. While it seems like this ASU has been on everyone’s radar for a long time already, time is up, and NFPs with a December 31, 2018 year-end or a fiscal year ending in 2019 must adopt and implement the standard.

Notwithstanding the attention garnered by ASU 2016-14, other important standards also have been issued, with varying effective dates and associated inherent complexities. While all accounting standards apply to all entities unless they are specifically scoped out, NFPs should be aware of a handful of new standards most likely to affect them, some significantly, others less so.

Below are perhaps the most important “new” standards for NFPs to consider, that is, those standards generally having the broadest applicability to NFPs. (Note: Be sure to refer to each standard for more detail regarding effective dates shown in the table below.)

nfp-fasb-asu-table

Anyone familiar with the issuance of new ASUs knows that new standards can fall anywhere on the continuum of pervasiveness, complexity, and difficulty of implementation. In some cases, a seemingly difficult-to-apply standard can be dismissed in whole or in part following a careful examination of an NFPs circumstances because the effect of applying the standard differs immaterially from that achieved by not applying the standard. In other cases, implementation can be simplified by using techniques such as aggregation, estimation, or other practical expedients. The key is to think things through calmly and rationally, and not in the heat of an eleventh-hour implementation.

However “preachy” this may sound, NFP financial managers and auditors are well served by surveying the landscape of new accounting standards, and by planning implementation and adoption strategies to ensure timely, accurate, and dare we say, “sane” transitions to those new standards. The graphic below offers the author’s take on the overall numbers of NFPs likely to be affected by each of the new standards listed in the above table, as well as the relative difficulties in understanding, applying, and implementing them. Clearly, there will be great variability among individual NFPs, and the XY Plots of the entire universe of NFPs will include locations outside the boundaries suggested. The intent is to stimulate your thinking, and hopefully, to encourage you to kick your planning efforts into a higher gear. After all, timely planning and effort now will be rewarded by calmer, less stressful days down the road. Simply having a strategy and plan in place can reduce a wall of worry to little more than a relatively easily surmounted obstacle.

nfp-asu-implementation-heatmap

If you are unfamiliar with some of these new standards, here is a suggestion: set aside a little time to read just the Summary that appears at the beginning of each ASU. Reading the summaries will allow you to get your bearings and help you identify and prioritize the next steps in your evaluation and implementation planning process. Attend trainings, talk to colleagues, meet with your auditors. Some of these new standards look like giant, ominous icebergs squarely in your path. Fortunately, after closer inspection and consideration, they may turn out to be more like ice cubes than icebergs. But you won’t know that until you do your homework. Get your action plan ready and then work it. You will be glad you did.

Here is an example of an iceberg turning into an ice cube. ASU 2016-14 now requires NFPs to report investment return net of all external and direct internal investment expenses. Most NFPs have not included direct internal investment expenses in this presentation, and to do so potentially would require time studies, allocation methodologies, tracking mechanisms, and other steps to ensure accurate calculations. On the other hand, many NFPs have at most, one individual who spends time managing investments and investment return, and the expenses associated with the likely-small allocation for his or her time may be clearly immaterial. In such case, that determination could be documented, and the associated tracking and allocating could be avoided. Iceberg = ice cube.

The point is, because not all NFPs are the same, application and implementation of the standards also will not be the same. Thinking the issues through on the front end is a wise course of action. The continuing cascade of new ASUs can be daunting, but I suggest only at first blush. Thoughtful consideration and assessment of the standards most often brings proper perspective, along with practical solutions.

Additional Resources:

Not-for-Profit Section Financial Accounting and Reporting Resource Library

Not-for-Profit Entities Industry Developments – Audit Risk Alert

Not-for-Profit Entities – Audit and Accounting Guide

AICPA Financial Reporting Center

AICPA Revenue Recognition Resource Center