This year, not-for-profits will have implemented the new NFP financial statement presentation standard. Phew, then NFP accounting staff can pause and catch their breath, right? Nope! They are on to the next challenges: implementing new standards for revenue recognition and grants and contracts and dealing with the effects of tax reform. All of that is in addition to navigating the everyday challenges of today’s global, technology-driven business environment.
Whether you work for a not-for-profit in a finance role, serve not-for-profit clients as an auditor or tax adviser, or sit on a not-for-profit board, you’ll want to take note of the highlights below. From new accounting standards to cybersecurity concerns, here’s a sneak peek at what’s in store for you in the coming year.
Revenue Recognition and Grants and Contracts
FASB’s new revenue recognition model (ASC 606) replaces virtually all existing guidance for recognition of revenue from exchange transactions. It affects all entities — public, private, and NFP — that enter into contracts with customers to transfer goods or services or nonfinancial assets, unless those contracts are within the scope of other standards (such as for contributions, leases, investments, or insurance contracts). One key implementation issue affecting NFPs is that certain transactions will require bifurcation between an exchange transaction and a contribution because they have elements of both (for example, membership dues or special events).
The extent of impact will vary based on contract terms and the industry in which an entity operates. For some, there may be no change to the amount and timing of revenue recognition. For others, there could be significant changes. New qualitative and quantitative disclosure requirements will include the entity’s contracts with its customers, significant judgments made in applying the revenue recognition guidance to those contracts, and information about any assets recognized for contract costs. These detailed disclosures will have the greatest impact on NFPs with conduit debt.
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 grants and contracts. Do these transactions 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 grants and contracts standard also clarifies the distinction between donor-imposed conditions and donor-imposed restrictions on contributions and amends a recipient’s ability to use what is known as the simultaneous release accounting policy option. Although the ASU does not change the existing disclosure requirements for contribution transactions, many NFPs will need to add the required disclosures for conditional contributions for transactions that were previously accounted for as exchange transactions.
Not-for-Profit Financial Statement Presentation Standard
Most NFPs have already closed—or soon will—their first fiscal year under the financial reporting guidance of FASB Accounting Standards Update (ASU) No. 2016-14. For many, the new liquidity disclosures have been the biggest challenge. Not-for-profit entities are now required to provide qualitative and quantitative information about how they manage their liquid resources. If you haven’t already decided on the best presentation approach for your organization, 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 are required to present an analysis of all expenses by nature and function in one location. Once again, NFPs 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.
For 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—such as those regarding specific expense classification. 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.
In addition, when changes are material, auditors will be considering whether it is appropriate to include an emphasis-of-matter paragraph in the auditor’s report to call attention to the note that discusses ASU 2016-14 implementation.
2017 Tax Cuts and Jobs Act (TCJA) Provisions Affecting Tax-Exempt Not-for-Profits
While we wait to see how the TCJA has affected charitable giving, there is a lot to consider in the area of unrelated business income tax. Namely, a new “parking tax” affected some NFPs by assessing an unrelated business income tax at the corporate rate (currently 21%) for qualified transportation fringe benefits and parking expenses used in connection with qualified parking. However, the Taxpayer Certainty and Disaster Tax Relief Act of 2019 repealed the “parking tax.” This means exempt organizations that reported and paid the parking tax can claim a refund. In addition, there is a TCJA provision applicable to organizations with more than one unrelated business activity. The new rules say that a loss from one unrelated trade or business activity may not be used to offset a profit from a different unrelated trade or business activity - with complicated nuances for calculating and utilizing net operating losses.
The TCJA also imposes new excise taxes on certain NFPs:
- There is a 1.4% excise tax on the net investment income of certain private colleges and universities.
- Exempt organizations are subject to a 21% excise tax at the corporate rate (currently 21%) on compensation over $1 million paid to any of their five highest paid employees as delineated within the tax law provisions.
Exempt organizations and their tax advisors will want to be sure they understand the implications of these new provisions, as well as the related changes to IRS forms that are effective for the coming year.
Cybersecurity Issues for Not-for-Profits
If you think cybersecurity is just an overused buzzword that doesn’t really apply to your work or organization, consider this: Regardless of size, type, or mission, no organization is entirely safe from cyberattacks. NFPs house a significant amount of data that is particularly valuable to hackers, including donor and member mailing lists and files containing payment information for those who make electronic donations or dues payments, as well as employee and client profiles containing Social Security numbers and other personally identifiable information.
Every business needs to consider the ever-present risk of a data breach and ensure they have proper safeguards in place. Your constituents—be they donors, customers, or clients—trust you to protect the personal information they share with you. A breach of that trust could result in severe reputational damage to your organization.
Here are just a few of the important questions to consider:
- Has your organization created a culture of awareness around cybersecurity, emphasizing that every individual is responsible for protecting sensitive information?
- Do you have a data security plan in place and monitor its effectiveness?
- Do you have multiple layers of information security controls, and are they sufficient and effective?
Thank you to the 2019 AICPA Not-for-Profit Audit Risk Alert Task Force for their contributions to this article and this year’s alert.