Top Issues for Not-for-Profits This Year

May 9, 2018 Modified: October 12, 2018

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Don’t blink. From new FASB standards to cybersecurity concerns, there hasn’t been a dull moment in nonprofit accounting and assurance. Will you have a chance to catch your breath soon? Here’s a sneak peek at what’s in store.

FASB’s Not-for-Profit Financial Statement Presentation Standard

This time last year, perhaps you were just considering the effects of FASB Accounting Standards Update (ASU) 2016-14 on nonprofit financial reporting systems and processes. Now, it’s go time. For fiscal years starting July 1, 2018, implementation is here.

What challenges are you already facing? What speed bumps lie ahead?

For some, the new liquidity disclosures could be the biggest challenge. Not-for-profit entities are now required to provide qualitative and quantitative information about how they manage their liquid resources. You’ll need to decide on the best presentation approach for your organization, so be sure to look at examples. Also consider the importance of and potential effects on policies like board designation of net assets and operating reserves.

Functional expense presentation requirements under ASU 2016-14 also may present challenges. All not-for-profits must present an analysis of all expenses by nature and function in one location. Once again, you’ll have a choice to make. That information can go on the statement of activities, in the notes to the financial statements, or in a separate statement. In addition, you may find you need to adjust accounting systems, processes, and controls to get the data you need.

Auditors: Functional expenses may be a new focus area. You’ll want to watch for errors that could occur without careful attention to all the details provided in the new standard—like those regarding specific expense classification, for example. With the increased transparency in expense reporting, management may feel pressured to overstate program expenses. Be sure to pay close attention to the controls and processes surrounding cost allocation methodologies.

2017 Tax Cuts and Jobs Act Provisions

Ah, tax reform. While most of the buzz has focused on individual and corporate taxes, nonprofits were not left out. The 2017 Tax Cuts and Jobs Act (TCJA) spurred concern about a potential drop in charitable giving because of the increased standard deduction. We’ll have to wait and see how that plays out, but here are a few TCJA provisions that target exempt organizations specifically:

  • There is a 1.4% excise tax on the net investment income of certain private colleges and universities.
  • A deduction from one unrelated trade or business may not be used to offset income from a different unrelated trade or business for the same taxable year.
  • Exempt organizations are subject to a 21% excise tax on compensation over $1 million paid to any of their five highest paid employees.

Not-for-Profit Grants and Contracts

In June 2018, FASB issued Accounting Standards Update (ASU) No. 2018-08, Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made. The ASU clarifies how the new revenue recognition rules apply to nonprofit grants and contracts. Do these items fit the definition of a contract with a customer, such that the new revenue standard (FASB ASC 606) would apply? Or are they contributions (FASB ASC 958-605)? The new standard also clarifies the distinction between donor-imposed conditions and donor-imposed restrictions on contributions.

Reporting Contributions of Nonfinancial Assets

Donors, watchdog agencies, and regulators can be skeptical of gifts-in-kind (GIK) because they put revenue and expenses on the financial statements without an exchange of cash. In addition, GIK are often subject to donor or legal restrictions.

This area warrants careful attention by both nonprofit management and auditors. Here are just a few of the important questions to consider:

  • If a not-for-profit makes a payment in exchange for GIK, is it a 100% exchange transaction, or is it, in part, a contribution?
  • Are inputs for fair value measurement of GIK publicly available?
  • Which restrictions on GIK are characteristics of the assets and, thus, affect valuation; and which are donor-imposed use restrictions that affect the assets’ classification but not their value?

For a deeper dive into these important issues, AICPA Not-for-Profit Section members can view the archived webcast, Not-for-Profit Entities: 2018 Audit and Accounting Issues (search for date: 5/21/218).

Thank you to the 2018 AICPA Not-for-Profit Audit Risk Alert Task Force for their contributions to this article and this year’s alert.