Now that not-for-profit entities and institutions of higher education have grappled with implementing significant changes to the presentation of their financial statements—Accounting Standards Update (ASU) 2016-14—the next significant Financial Accounting Standards Board (FASB) accounting standards that organizations will be asked to implement apply to lease accounting and reference rate reform:
- ASU 2016-02, Leases
- ASU 2020-04, Reference Rate Reform (Topic 848)
A summary of the above and additional accounting standards that may impact not-for-profit entities and institutions of higher education in the current or upcoming fiscal years—and require consideration by management—are detailed below.
ASU 2016-02, Leases
This update requires entities to record a right to use (ROU) asset for all leases with a corresponding lease liability.
ASU 2016-02 also changes the criteria to determine if a lease is recognized as a capital or operating lease. Capital leases separately report interest expense and amortization of the ROU asset, while operating leases report a single lease cost—recognized generally on a straight-line basis over the lease term.
The lease accounting standard update includes exceptions for the following:
- Short-term leases—those with a maximum possible term of 12 months or less
- Contracts that transfer ownership
- Leases of assets that are investments
- Certain regulated leases
The update is currently effective for fiscal years beginning after December 15, 2020, for all nonpublic entities and fiscal years beginning after December 15, 2018, for public not-for-profits.
Public not-for-profits are defined as those that have issued or are a conduit bond obligor for securities that are traded, listed, or quoted on an exchange or an over-the-counter market.
Early adoption is permitted.
Due to the pandemic, the FASB issued a proposed ASU on April 21, 2020, to delay the effective date for certain types of entities. The proposed ASU would:
- Amend the effective dates for this standard
- Defer implementation by one year for nonpublic entities—effective for fiscal years beginning after December 15, 2021
- Defer implementation by one year for public not-for-profits that haven’t yet issued their financial statements—effective for fiscal years beginning after December 15, 2019
This proposed amendment is subject to change pending issuance of the final ASU.
ASU 2020-04, Reference Rate Reform
The update provides optional guidance for a limited period of time to ease the potential burden in accounting for reference rate reform on financial reporting. The London Interbank Offered Rate (LIBOR) is expected to be phased out in 2021. Reference rate reform refers to the transition toward new reference rates moving away from the LIBOR and other interbank-offered rates.
The update provides optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts and other transactions that reference LIBOR or another reference rates expected to be discontinued due to reference rate reform. The amendment doesn’t apply to contract modifications or transactions entered into or evaluated after December 31, 2022.
The amendments generally are effective for all entities as of March 12, 2020, through December 31, 2022. The transition provisions are varied, depending on the type of arrangement, agreement, and instrument.
ASU 2019-03, Updating the Definition of Collections
This standard modifies the definition of the term collections and requires a collection-holding entity to disclose its policy for the use of proceeds when collection items are deaccessioned or removed from a collection.
The update is effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning December 15, 2020. Early application is permitted. Amendments in this ASU should be applied on a prospective basis.
ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that Is a Service Contract
This update aligns the capitalization requirements for implementation costs incurred in a hosting arrangement that is a service contract with those for implementation costs incurred to develop or obtain internal-use software.
The update is effective for fiscal years beginning after December 15, 2019, for public business entities and after December 15, 2020, for all other entities. Early adoption is permitted.
ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
This update modifies the disclosure requirements for fair value measurements under Topic 820. It removes the disclosure requirements for the following:
- Transfers between Level 1 and Level 2 of the fair value hierarchy
- Policy for timing of transfers between levels
- Valuation processes for Level 3 measurements
- In the case of nonpublic entities, changes in unrealized gains and losses for the period included for earnings for recurring Level 3 measurements
Level 3 Roll Forward
In lieu of the Level 3 roll forward, nonpublic entities are required to disclose the following aspects of their Level 3 assets and liabilities:
- Transfers in and out
Investments Measured at Net Asset Value
For investments in certain entities that calculate net asset value, entities are required to disclose the following:
- Timing of liquidation of an investee’s assets
- The date when restrictions from redemption might lapse
Finally, public entities must also disclose the following:
- Changes in unrealized gains and losses for the period included in other comprehensive income for Level 3 measurements
- The range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements
The update is effective for the fiscal years beginning after December 15, 2019. An entity is permitted to early adopt any removed or modified disclosures while delaying adoption of the additional disclosures until their effective date.
ASU 2018-08, Not-for-Profit Entities (Topic 958) Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made
This standard provides guidance for evaluating whether transactions should be accounted for as contributions within the Scope of Topic 958, Not-for-Profit Entities, or as exchange transactions subject to Topic 606.
It also states that an entity will determine whether a contribution is conditional on the basis of whether an agreement includes both:
- A barrier that must be overcome
- Either a right of return or release
The amendments in this update should be applied on a modified retrospective basis. Using this method, in the first set of financial statements following the effective date, the amendments are applied to agreements that either:
- Aren’t completed as of the effective date
- Are entered into after the effective date
The amendments should only be applied to the portion of revenue or expense that hasn’t yet been recognized before the effective date. No prior-period results should be restated, and there shouldn’t be a cumulative-effect adjustment to the opening balance of net assets at the beginning of the year of adoption.
Required disclosures include:
- The nature of and reason for the accounting change
- Explanation of the reasons for significant changes in each financial statement line item resulting from the application of the amendments
The effective dates of this ASU vary depending on the type of entity and whether the entity is receiving or providing resources.
For public business entities and public not-for-profit entities, the amendments in this ASU apply as follows:
- When acting as a resource recipient. Amendments apply to contributions received during annual periods beginning after June 15, 2018, including interim periods within those annual periods.
- When acting as a resource provider. Amendments apply to contributions made during annual periods beginning after December 15, 2018, including interim periods within those annual periods.
All other entities must apply the amendments in this ASU as follows:
- When acting as a resource recipient. Amendments apply to contributions received during annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.
- When acting as a resource provider. Amendments apply to contributions made during annual periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020.
Early adoption is permitted.
FASB Exposure Drafts
The following hasn’t been adopted by the FASB, but it provides a glimpse into a topic that may impact not-for-profits in the near future.
Proposed ASU 2020-100, Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets
This proposed ASU would provide additional transparency into the reporting of gifts-in-kind and donations of goods or services to not-for-profits. It would require contributed nonfinancial assets to be presented as a separate line item in the statement of activities, apart from contributions of cash or other financial assets.
Additionally, the proposed ASU would require disclosures of contributed nonfinancial assets received by category that depicts the type of nonfinancial assets, descriptions of donor restrictions on the nonfinancial assets, and the valuation techniques and inputs used to arrive at the fair value measurement for the assets.
The proposed ASU was issued February 10, 2020, with a comment deadline of April 10, 2020.
Generally Accepted Government Auditing Standards
In 2018, the US Government Accountability Office issued an update to Generally Accepted Government Auditing Standards (GAGAS) with its 2018 Yellow Book. It’s effective for financial audits, attestation engagements, and reviews of financial statements for periods ending on or after June 30, 2020, and for performance audits beginning on or after July 1, 2019. Early adoption isn’t permitted.
As part of this update, stricter independence rules have been implemented, which may require a reevaluation of nonattest services that are being performed by auditors. This includes evaluating work done when helping clients prepare financial statements. Auditors must have documentation showing appropriate safeguards are in place and that they remain independent for audits performed under GAGAS.
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