Top issues for not-for-profits this year

Although we may have turned the corner, the world as we knew it before COVID-19 has not returned to “normal.” Not-for-profits (NFPs) and businesses alike are still feeling the effects of pandemic-related challenges financially and operationally. Some are cautiously optimistic—stabilizing, but wondering what the next major disruption will be.

Finding ways to build agility into our operations and finances will better equip us to face the unknown hurdles yet to come. As CPAs and finance professionals, your expertise is essential to helping NFPs successfully navigate current challenges and manage continuing uncertainty.

With that, here’s our annual list of top issues that not-for-profit leaders, accounting and finance managers, auditors, tax advisers, and board members should be aware of as we look ahead to the coming year.

COVID-19 effects on NFPs

The U.S. government has taken unprecedented actions to prevent worsening economic conditions amid the COVID-19 pandemic, including passing the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020 and the $1.9 trillion American Rescue Plan Act in March 2021. The results of these actions have not been fully realized to date.

The CARES Act created the Paycheck Protection Program (PPP), authorizing the U.S. Treasury to use the Small Business Administration’s small business lending program to fund forgivable loans of up to $10 million per borrower that qualifying businesses could spend to cover payroll, mortgage interest, rent, and utilities.

The CARES Act also provided charitable giving incentives by raising the limitations on deductible charitable contributions of cash by individuals who itemize, providing a $300 above-the-line deduction to individuals who do not itemize, and raising the cap for deductible charitable contributions of cash by corporations.

The Families First Coronavirus Response Act, signed into law on March 18, 2020, temporarily expanded the Family and Medical Leave Act to permit certain employees to take up to 12 weeks of expanded family and medical leave for specified reasons related to COVID-19.

The American Rescue Plan Act of 2021 enabled many large NFPs to apply for PPP loans for the first time, provided additional or extended employment-related funding and benefits, and provided additional federal funding for numerous nonprofit programs (e.g., child care, arts and humanities, food assistance, and homeless prevention).

The Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (enacted December 27, 2020) established the Shuttered Venue Operators (SVO) Grant program, which includes $15 billion in grants for shuttered venues such as performing arts organizations, museums, zoos, and aquariums who meet certain criteria. Eligible entities may qualify for SVO grants equal to 45% of their gross earned revenue up to $10 million.

COVID-19 response legislation is fluid, and this article may not capture the latest changes. Readers are encouraged to visit the websites of the various regulatory bodies and program administrators as well as aicpa.org/covid19 for the latest information. Be sure to read the NFP Section eAlerts for the latest information on how COVID-19 response legislation is affecting NFPs. We encourage you to browse and bookmark the AICPA’s CARES Act resources, which include tools and webcasts related to the Paycheck Protection Program and other areas.

Many organizations have questions regarding how to obtain, account for, and report grants and loans under the CARES Act programs. In addition to the AICPA, SBA, and Department of the Treasury, FASB and IRS staff continue to answer FAQs and provide guidance. Visit the following resource centers if you have questions:

• fasb.org/COVID19

• irs.gov/coronavirus-tax-relief-and-economic-impact-payments

Further affecting accounting and auditing, standard setters delayed effective dates for implementation of certain new standards.

Additional accounting and financial reporting considerations related to COVID-19 include the following:

• Subsequent events

• Risks and uncertainties (see FASB ASC 275-10)

• Asset impairment

• Fair value measurements

• Revenue recognition

• Modifications or extinguishment of liabilities

• Insurance recoveries

• Contingent losses

• Going concern evaluations (see FASB ASC 205-40)

• Leases

• Business combinations (see FASB ASC 958-805)

Additional auditing considerations related to COVID-19 impacts include the following:

• Internal controls and segregation of duties may be affected by staff absences and reductions.

• Going concern issues may be present for organizations experiencing significant financial impacts.

• Fraud risk may be heightened due to increased health and financial threats.

• Inventory observations may need to be postponed or conducted remotely.

Remote auditing may be necessary, and access to client books and records could be limited. Consider the following best practices:

• Use available technology, such as screen-sharing and secure portals for file exchange.

• Confirm supporting documentation via video conferencing.

• Keep communication lines open via team-based chats and frequent check-ins.

• Build in additional fieldwork prep time, since client personnel working remotely may experience delays in getting to the office to pull testing selections.

• Stay vigilant regarding cybersecurity.

• Remain flexible.

The following are just a few examples of the many NFP governance and management considerations related to the COVID-19 crisis:

• Cash management is critical. Build your operating reserves, prepare cash forecasts and review them frequently, tighten your billing and collection processes, and employ cost containment strategies.

• Use scenario analysis and more robust budgeting and financial planning techniques.

• Keep your board and finance committee informed with more frequent meetings and reports.

• Assess the challenges your organization faces with respect to remote working. Develop or create policies and invest in technology as needed.

• Take the opportunity to find silver linings. Have you, out of necessity during the pandemic, cross-trained employees, streamlined processes, or employed technology in new ways that can become permanent?

Please visit the AICPA COVID-19 Audit and Assurance site for more coronavirus tools and information for auditors.

Grants and contracts implementation

With the issuance of ASU No. 2020-05, FASB offered a 1-year delay of the revenue recognition standards (ASC Topic 606) to nonpublic entities that have not yet issued or made available for issuance financial statements reflecting their adoption. The Board decided to retain the effective dates for ASU No. 2018-08, Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made. This decision reflects the FASB’s acknowledgement that the guidance in ASU No. 2018-08 will be helpful to organizations that are accounting for COVID-related assistance.

The ASU was effective for most NFPs in calendar year 2019. The NFP Section offers numerous tools and resources for grants and contracts implementation. Additionally, the AICPA Financial Reporting Executive Committee issued Technical Question and Answer, Q&A 3200.18, to assist entities in applying accounting standards to PPP loans and this video covers how to account for PPP loans under the conditional contribution model.

Revenue recognition implementation and disclosures

Many NFPs implemented Topic 606 during 2020; others will do so during 2021. Among the most significant lessons learned from those who have adopted the new standards are the time it takes to go through the new 5-step model, and the time needed to provide the extensive new disclosures.

Be sure to read the full standard if your NFP or NFP client is adopting Topic 606 this year. You may also find the NFP Section’s revenue recognition resources such as the revenue recognition disclosure examples, as well as AICPA publications such as the NFP Audit Risk Alert and NFP Audit and Accounting Guide, helpful.

FASB’s Leases implementation

ASU No. 2020-05 also delayed the required adoption date of the new leases standard (ASU No. 2016-02 and related ASUs) until fiscal years beginning on or after December 15, 2021, for not-for-profit entities in the “all other” category that as of June 3, 2020, had not yet issued (or made available for issuance) financial statements reflecting the adoption of the leases guidance. NFPs should still pay attention to the key changes from the leases standard because there can be substantial preparation involved in its implementation. Taking an inventory of leases that will be in force at the anticipated adoption date is a good place to start in obtaining an understanding of the level of effort required. Additional implementation information is available from FASB and the AICPA Not-for-Profit Section. NFP Section members also have access to the archived webcast, Is your not-for-profit ready to implement FASB’s Leases?, during which presenters walk through the details of the new requirements and an example.

New SASs bring sweeping changes

During 2019 and 2020, the Auditing Standards Board (ASB) issued new Statements on Auditing Standards (SASs) Nos. 134-140. As amended by SAS No. 141, Amendment to the Effective Dates of SAS Nos. 134–140, the new standards are generally effective for audits of financial statements for fiscal years ending on or after December 15, 2021 (calendar year-end 2021 and fiscal year-end 2022 financial statements), although early adoption is permitted. SAS Nos. 134 and 136–140 are interrelated and intended to be implemented concurrently.

Visit the AICPA Audit and Attest Standards webpage to find links to these and other recently issued standards. You can also use the AICPA Standards Tracker to stay up to date on the most recent guidance available from standard setters.

Final regulations for unrelated business income silos

IRC Section 512(a)(6) was enacted with the 2017 Tax Cuts and Jobs Act and requires tax-exempt organizations to calculate unrelated business income tax separately for each trade or business. The IRS issued final regulations regarding IRC Section 512(a)(6) on November 19, 2020. Under the final regulations, an organization’s various trade or business “silos” will be separately identified using a 2-digit North American Industry Classification System (NAICS) code. There are currently 20 such codes. Any shared expenses are to be allocated among the various silos on a reasonable basis.

Investment activities, including qualifying partnership interests, qualifying S corporation interests, and debt-financed properties, may be treated as a separate unrelated trade or business (one silo) for purposes of IRC Section 512(a)(6).

The regulations did not provide guidance on the following:

• Allocation of expenses, depreciation, and similar items between an exempt activity and an unrelated trade or business or between two or more unrelated trades or businesses

• Application of IRC Section 172 changes concerning net operating loss deductions made by the CARES Act

Changes to IRS Form 990-T

IRS Form 990-T has not seen significant changes since 1951 — until now. For 2020, Form 990-T is a 2-page summary form. At the organization’s election, each separate trade or business may be classified by a 2-digit NAICS code. Filing organizations will have to attach a separate Schedule A to Form 990-T for each unrelated trade or business. Although all unrelated trade or business activities or “silos” are to be reported on separate Schedules A, only those showing a profit for the year will be aggregated and reported on the new Form 990-T at Part I, Line 2.

The new Form 990-T allows filing organizations to deduct charitable contributions (if applicable) on Part I, Line 4 against aggregated unrelated business income. Thus, the charitable contribution deduction does not have to be allocated across all of an organization’s unrelated business activities.

Changes to NFP reporting of gifts-in-kind

ASU No. 2020-07, Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets, issued in September 2020, requires new presentation and disclosure standards for gifts-in-kind. The new standards are effective for annual periods beginning after June 15, 2021 (and for those who do interim reporting, interim periods within annual periods beginning after June 15, 2022). Early adoption is permitted.

This ASU improves transparency for gift-in-kind transactions by requiring the following:

• Presentation of contributed nonfinancial assets as a separate line item in the statement of activities

• Disclosure of the amount of contributed nonfinancial assets received, disaggregated by category, that depicts the type of contributed nonfinancial assets, as well as additional information for each category of contributed nonfinancial assets received

With respect to valuation of GIK, NFPs can find more information from the following resources:

• FASB ASC 820

• AICPA Audit and Accounting Guide Not-for-Profit Entities, “Fair Value Measurement of Gifts-in-Kind,” paragraphs 5.128–5.144

• Gifts-in-Kind: Reporting Contributions of Nonfinancial Assets

• Example gifts-in-kind NFP financial statement disclosures

Thank you to the 2021 AICPA Not-for-Profit Audit Risk Alert Task Force for their contributions to this article and this year’s alert.