New accounting standards and guidance are always on the horizon, and the professionals at Ketel Thorstenson, LLP are here to assist you in keeping up with those changes. Organizations will need to be aware of what’s new in 2015 and beyond. Below is a brief summary of these changes for your guidance. Contact your CPA to assist you in determining how these standards might affect your organization.
Nonprofits:
ASU 2013-06: Services Received from Personnel of an Affiliate: GAAP requires recognition of donated services at fair market value when the service creates or enhances nonfinancial assets, or the service requires specialized skills that would need to be purchased if not donated (e.g. legal services). Under the new standard, accounting for donated services provided by an affiliate is changed.
If the affiliate charges for the donated services, they should be recorded at the cost recognized by the affiliate (i.e. actual salaries and fringe benefits paid to the employee). If the amount recorded would significantly misstate the value of services received, then the organization may record the donated services at fair value.
This standard is effective for fiscal years beginning after 6/15/14 (organizations with a 6/30/15 year end); however early implementation is permitted.
ASU 2014-05: Service Concession Arrangements: A service concession arrangement is a government contract with a private entity to provide goods and services. When the government can control, or significantly influence, the services being provided, who they are provided for, and at what price, as well as controlling any residual interest in infrastructure at the end of the arrangement, this guidance applies. The recipient organization should not account for the property as a lease and should not recognize it as an asset, as they do not own the property and do not have ultimate control over it. A common example of this type of arrangement is a City owned stadium operated by a sports team. The City records the stadium in their financial statements, and the sports team pays for all related maintenance costs. This guidance is effective for periods beginning after 12/15/14 (12/31/15 year end), but early adoption is permitted.
ASU 2014-08: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity: The guidance applies to:
- A component of an entity whose operations and cash flows are clearly distinguished from the rest of the entity
- A business conducted and managed for the purpose of providing a return
- A nonprofit activity capable of being conducted and managed for the purpose of providing benefits as fulfillment of the entity’s mission.
Any of the above operations or components of an entity must be reported as discontinued operations if the disposal represents a strategic shift that will have a major effect on operations and financial results when any of the following occurs:
- Operations are classified as held for sale
- Operations are disposed of by sale
- Operations are disposed of by abandonment
Examples of a strategic shift include disposal of a major geographic area or line of business. The guidance also requires additional disclosures in the financial statements depending on the details of the discontinued operations. This guidance is effective for transactions occurring within periods beginning on or after 12/15/14 (12/31/15 year end), but early adoption is permitted. Application of the standard should simplify accounting by requiring fewer entities to present discontinued operations in their financial statements.
ASU 2014-09: Revenue Recognition: This is the biggest change in accounting standards in many years, and financial preparers and users are still trying to interpret and understand its implications. The standard is over 700 pages and contains 63 examples. In short, how we recognize revenue will be changing, and enhanced disclosures will be required.
Organizations must walkthrough a 5 step process to determine how to recognize revenue:
- Identify the contract with the customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to performance obligations
- Recognize revenue when (or as) performance obligations are satisfied
What does this mean for nonprofits? Accounting for contribution revenue will not change; however, accounting for exchange transactions may change. Potential affected transactions include (but are not limited to):
- Membership dues (especially sign up fees)
- Grants
- Tuition
- Special Events
This standard will be effective in 2018; however it will require retrospective application for prior years reported in financial statements. We will be working closely with each of our clients to assist them in analyzing their revenue sources and implementing this standard, so stay tuned!
ASU 2014-15: Presentation of Financial Statements – Going Concern Disclosures: More positively known as “continuing operations disclosures”, this standard moves the responsibility for assessing continuing operations from the auditor to management. Accordingly, management should perform an annual assessment of whether the organization will be able to meet its obligations as they become due and continue as a going concern for one year after the audit report date. Certain financial statement disclosures may be required based on the results of this assessment. Management must start performing this analysis for annual periods ending after 12/15/16; however early adoption is permitted.
Governmental Entities
GASB 63: Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position and GASB 65: Items Previously Reported as Assets and Liabilities: These statements were applicable for year ends beginning after December 15, 2011; however, we wanted to remind everyone how they will affect the financial statements.
Deferred outflows and inflows of resources are new “sections” of assets and liabilities reported on the financial statements. These result from timing of when resources are received versus eligibility requirements being met.
- Deferred Outflows of Resources: consumption of net assets applicable to a future period
- Addresses the timing of the outflow
- For example: a state grant paid in advance of meeting time requirements
- Deferred Inflows of Resources: acquisition of net assets applicable to a future period
- Previously known as deferred revenue
- Examples include:
- Grants received prior to meeting any timing requirements
- Prepaid property taxes
- Revenues not recognized due to availability requirements not being met (property taxes and special assessments)
An important note for deferred outflows and inflows: no distinction is needed for current and noncurrent. Additional disclosures include identifying types of significant deferred outflows and inflows in the financial statement notes, if not already obvious on the face of the financial statements.
The guidance also changed the title of net assets to net position for proprietary, fiduciary, and government-wide positions, as many of you have seen on your financial statements.
GASB 67: Financial Reporting for Pension Plans: GASB 67 affects retirement plans, by requiring additional financial statements and disclosures. This was applied at the state level for SDRS retirement plans as of June 30, 2014.
GASB 68: Accounting and Financial Reporting for Pensions: The statement requires additional disclosures for single or multiple employer plans, or a cost sharing plan (e.g. SDRS), effective June 30, 2015.
Accounting for the liability and expense of a cost sharing plan is as follows:
- The liability represents the employer’s proportionate share of net position liability for the entire plan, and
- The pension expense is the employer’s proportionate share of total pension expense for all employers participating in the plan.
Accounting for the defined contribution plan remains as follows:
- The liability is the difference between the required and actual contributions
- The expense is the required contribution
Note disclosures will be revised to include the description of the plan and benefits provided, assumptions used to measure net pension liability, descriptions of any benefit changes or changes in assumptions, discount rate assumptions, and net pension liability and deferred outflows/inflows of resources.
Additional required supplementary information (RSI) will include: the actuarially determined annual pension contribution, amount of contribution made, difference between the determined and actual contributions, payroll of covered employees, and the ratio of actual employer contributions to covered payroll.
GASB 71: Pension Transition for Contributions Made Subsequent to the Measurement Date: This statement amends GASB 68, and requires that, at transition, a government recognize a beginning deferred outflow of resources for its pension contributions, if any, made subsequent to the measurement date of the beginning net pension liability. The statement should be applied simultaneously with GASB 68.
GASB 70: Accounting and Reporting for Nonexchange Financial Guarantees: A liability must be recognized in some situations when a government extends non-exchange financial guarantees for obligations of another entity, whether it is a governmental, nonprofit, or private entity. The liability must be recorded when it is more likely than not the guarantor will be required to make a payment. The determination is based on historical data and qualitative factors, and the liability estimate is based on future cash payments.
A simplified example would be as follows: The School has a $1 million construction bond which the State guaranteed (there is no consideration given to the state). The State has determined (based on historical and qualitative factors) 25% of the debt will eventually require a guarantee payment to be made by the State. As such, the State will record $250,000 liability under the guarantee.
This statement is effective for years beginning after 6/15/13 (June 30, 2014 year ends).
Uniform Grant Guidance
Ketel Thorstenson LLP’s three part series on the Uniform Grant Guidance <<add link>> provides highlighted summaries of the streamlined guidance which was once spread over multiple circulars. You can access the full text of the Uniform Grant Guidance at https//cfo.gov/cofar/. It focuses on performance over compliance and encourages use of fixed amount awards that minimize compliance requirements in favor of meeting performance milestones. Overall the intention is to strengthen oversight of federal funds to reduce risks of waste, fraud, and abuse.
As of December 26, 2014, organizations should adopt the new administrative requirements and cost principles relating to all new federal awards and additional funding on existing awards.
The audit requirements will be implemented as follows:
- March 31, June 30, and September 30, 2015 year-ends:
- Single audit requirements continue to use “old” regulation; however auditor requirements will be affected by clients’ adoption of the “new” requirements.
- December 31, 2015 year ends and beyond: new single audit requirements apply.
Good news for some, the audit requirement threshold will be raised from $500,000 to $750,000 and will be effective for fiscal years beginning on or after December 26, 2014, or December 31, 2015 year ends.
Overall
The full text of these standards can be found at www.fasb.org and www.gasb.org. Accounting guidance is constantly evolving, so be sure to contact one of our nonprofit/governmental professionals with questions.
