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Wednesday, October 11, 2017

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What You Need to Know About Nonprofit Accounting in 2018


The last few years have seen seemingly endless accounting updates, and nonprofits are facing a series of implementation deadlines in 2018 and 2019. Will your organization be ready?

To help you prepare, we’ve compiled need-to-know information about the most significant updates from the Financial Accounting Standards Board (FASB), along with guidance on steps to take now.

Nonprofit Financial Reporting
The most far-reaching (and imminent) changes come as a result of the FASB’s multiyear project to revamp how nonprofits present their financials.

Accounting Standards Update No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, takes effect for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Early application is allowed.

This ASU is intended to provide improved information about nonprofits’ performance to donors, creditors and other stakeholders. It does so by presenting net assets in two classes instead of three, changing the classification of net assets and information presented in the financial statements and footnotes about an organization’s liquidity, financial performance and cash flows. As a result, stakeholders should find it easier to understand how nonprofits manage their funds.

Our thoughts: We believe this model of financial reporting will enable nonprofits to better tell their financial story. However, implementation will be challenging, as this ASU represents a conceptually different approach to how information is presented in financial statements. Keep in mind that certain financial statement users, such as your board of directors, may need formal training to understand the new ways in which information is presented.

Revenue Recognition
Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers, takes effect for most nonprofits in annual reporting periods beginning after December 15, 2018.

The guidance adopts the core principle that revenue should be recognized when customer performance obligations are met. The rule affects every nonprofit entity with earned income or “exchange transactions,” such as tuition, memberships, subscriptions and royalty agreements. A recent FASB exposure draft would further clarify when grants constitute exchanges vs. contributions.

Our thoughts: This update is a complete overhaul of revenue recognition rules and will require significant time and resources for implementation. We have compiled eight steps to prepare for a smooth revenue recognition transition, starting with an inventory of your revenue streams and an understanding of your performance obligations.

Lease Accounting
Accounting Standards Update 2016-02, Leases, takes effect for nonprofits and other nonpublic companies for fiscal years beginning after December 15, 2019.

The update will significantly change the way nonprofits account for leases on everything from vehicles to real estate to office equipment. Currently, operating leases are considered to be off-balance-sheet. Moving forward, those leases will need to be recognized on the face of the balance sheet (not just in the footnotes). The FASB’s stated goal is to increase transparency and comparability among organizations.

Our thoughts: While straightforward leases of real estate and vehicles won’t present too much of a challenge, complex judgment calls may be required for certain types of contracts. To get ready for this standard, consider the following steps:

  • Develop an inventory of all lease agreements—including service arrangements and third-party outsourcing contracts.

  • Understand the key provisions of each type of agreement.

  • Note any debt covenants or contracts that are based on financial metrics. For example, debt-to-equity covenants and compensation agreements based on a change in net assets may need to be renegotiated, since the proposed changes could significantly change those metrics.

We can help
The updates mean a lot of work for nonprofit finance professionals, but you don’t have to go it alone. The Armanino nonprofit accounting team stands ready to answer your questions and alleviate concerns about these and other nonprofit accounting updates.

RELATED ARTICLES

• Article : FASB Update Part 1: Accounting Update Reshapes Nonprofit Reporting
• Article : FASB Update Part 4: Disclosing Your Liquid Assets and Liquidity Management
• Article : FASB Update Part 3: Accounting for Your Cash Flows
• Article : Exchange vs. Contribution: FASB Proposal Shakes Up Grant Accounting
• Article : Impact of New Lease Accounting Rules on Nonprofits

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