Nonprofit Focus on Accounting Standards Updates

October 6, 2020 | Article

By Kellen Garrison

The accounting industry tends to face continual change, and over the last couple of years, nonprofit accounting standards have experienced substantial change as well. The Financial Standards Accounting Board (FASB) works with users of financial statements as well as other stakeholders, including those in the nonprofit sector, to improve overall accounting and financial reporting. To accomplish this goal, FASB issues new Accounting Standards Updates (ASU) yearly.

Nonprofit organizations should remain aware of what’s new, what’s up-to-date, what’s effective currently and what may arise to ensure their accounting and financial statements are compliant with Generally Accepted Accounting Principles (GAAP).

We have taken a look at the ASUs from a nonprofit perspective. The updates below summarize the new ASUs for 2020, the ASUs that are effective for years ending December 31, 2020, and other fiscal years ending 2021 as well as what’s on the horizon.

Do you know what updates apply to your nonprofit organization?

WHAT’S NEW FOR NONPROFIT ORGANIZATIONS IN 2020?

In the first half of 2020, FASB was active and issued several ASUs. Fortunately for accounting professionals, the updates are generally targeted at easing the transition to new guidance, reducing complexities in current guidance or clarifying existing guidance. Although the ASUs do not provide significant changes to standards, it is important for organizations to be aware of the changes to ensure they are prepared to properly incorporate the updates in their accounting and financial reporting. Below is a summary of the 2020 ASUs, updated through August 2020, and their effective dates.

2020-05—Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities
Summary: FASB issued this ASU as a direct result of the effects of COVID-19 on organizations. The ASU allows for the deferral of the effective date for Topic 606, Revenue from Contracts with Customers, for all private entities that have not yet adopted the guidance. The ASU additionally clarifies that the deferral of Topic 842, Leases, is available for any nonprofit organization that has not yet issued its GAAP compliant financial statements or made those financials statements available for issuance, including those that have published financial information that reflects adoption of Topic 842 (for example, quarterly financial statements filed on EMMA).
Effective date Immediately
2020-04—Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
Summary: The LIBOR reference rate is being phased out, which will require organizations to update their contracts to a new reference rate. FASB issued this ASU to ease the transition to new reference rates by allowing several optional expedients, which will reduce the cost and complexity of accounting for the change. The ASU affects all organizations that have contracts, hedging relationships or other transactions that reference LIBOR or another reference rate that is expected to be discontinued due to reference rate reform.
Effective date From March 12, 2020, through December 31, 2022 (There are limited transactions which may extend beyond 2022)
2020-01—Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force)
Summary: The ASU is a consensus of the Emerging Issues Task Force and it clarifies certain items related to ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU (1) clarifies that when an entity is either applying the equity method or upon discontinuing the equity method, it should consider observable price changes in orderly transactions for the identical or a similar investment with the same issuer for valuing basis of the investment and (2) clarifies that, when determining the accounting for certain forward contracts and purchased options, an entity should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option.
Effective date Fiscal years beginning after December 15, 2021
Early adoption Permitted

WHAT’S EFFECTIVE FOR NONPROFIT DECEMBER 31, 2020, FINANCIAL STATEMENTS?

In addition to the new ASUs, nonprofit organizations should be aware of previously issued standards that are effective for their December 31, 2020, financial statements. The following ASUs are effective for all December 31, 2020, financial statements (applicable to all organizations, unless otherwise noted). Look to see if there are any changes you need to make to your 2020 financial statements.

2019-03—Not-for-Profit Entities (Topic 958): Updating the Definition of Collections
Summary: This ASU modifies the definition of the term collections and requires that a collection-holding organization disclose its policy for the use of proceeds from when collection items are deaccessioned (that is, removed from a collection). If a collection-holding organization has a policy that allows proceeds from deaccessioned collection items to be used for direct care, it should disclose its definition of direct care.
Effective date Fiscal years beginning after December 15, 2019
Early adoption Permitted
2018-13—Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
Summary: This ASU includes significant disclosure changes for Level 3 investments. Other changes relate to disclosures for transfers between Level 1 and Level 2 investments and investments in certain entities that calculate net asset value.
Effective date Fiscal years beginning after December 15, 2019
Early adoption Permitted
2018-08—Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made
Summary: This ASU provided a more robust framework for contribution accounting for resource recipients and resource providers. While contribution accounting is more significant to not-for-profit organizations, the ASU is applicable to all entities, including business organizations, that receive or make contributions of cash or other assets.
Effective date (resource recipient/contributions received) All other organizations should apply the amendments for transactions in which the entity serves as the resource recipient to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.
Effective date (resource provider/contributions made) All other organizations should apply the amendments for transactions in which the entity serves as the resource provider to annual periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020.
Early adoption Permitted
2016-02—Leases (Topic 842) (the following are updates related to Leases) 2020-05—Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities; 2019-10—Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates; 2019-01—Leases (Topic 842): Codification Improvements; 2018-20—Leases (Topic 842): Narrow-Scope Improvements for Lessors; 2018-11—Leases (Topic 842): Targeted Improvements; 2018-10—Codification Improvements to Topic 842, Leases; 2018-01—Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842
Summary: This ASU is a comprehensive change to the accounting for leases. The ASU results in two types of leases: financing and operating. Financing leases accounting will be similar to capital leases under prior guidance. Entities will see a significant change related to operating lease accounting since, under prior guidance, operating leases were “off-balance sheet.” Under the new guidance, entities will record a right-to-use (ROU) asset on the balance sheet.
Effective date for conduit debt NFPs Fiscal years beginning after December 15, 2019 (if they have not yet issued financial statements, or made available for issuance, reflecting the adoption of Leases)
Effective date for all others Fiscal years beginning after December 15, 2022
Early adoption Permitted

WHAT’S ON THE HORIZON FOR 2021 AND BEYOND FOR NONPROFIT ORGANIZATIONS?

There are several ASUs that are effective in 2021 and beyond. A widely-applicable update is ASU 2016-13 related to credit losses. While the ASU will have a significant effect on financial institutions and organizations making loans, its effects will also reach non-financial institutions as most businesses have certain financial instruments (including trade receivables) that are included in the scope of the update. The ASU shifts away from the current GAAP of waiting until credit losses are probable to a model based on expected losses. There are also several updates that will be applicable to several entities and industries, including ASUs related to pensions. Below is a summary of upcoming ASUs listed by their effective year.

Fiscal years beginning after December 15, 2020 (December 31, 2021 calendar year-end financial statements)

2018-18—Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606
Summary: This ASU provides guidance on how to assess whether certain transactions between collaborative arrangement participants should be accounted for within the revenue recognition standard. It provides more comparability in the presentation of revenue for certain transactions between collaborative arrangement participants.
Effective date Fiscal years beginning after December 15, 2020
Early adoption Permitted
2018-15—Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force)
Summary: This ASU provides guidance for the accounting of implementation costs related to a hosting arrangement that is a service contract and aligns the accounting with the accounting for implementation costs incurred to develop or obtain internal use software that is not a service contract.
Effective date Fiscal years beginning after December 15, 2020
Early adoption Permitted
2018-14—Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans
Summary: This ASU is part of the disclosure framework project and is aimed at improving employer pension disclosures. The ASU removes several required disclosure items, adds disclosures related to the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and adds disclosures of the reasons for significant gains and losses related to changes in the benefit obligation. The ASU also clarifies certain items that are required to be disclosed for the projected benefit obligation and the accumulated benefit obligation.
Effective date Fiscal years ending after December 15, 2021
Early adoption Permitted

Fiscal years beginning after December 15, 2022 (December 31, 2023 calendar year-end financial statements)

2017-04—Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment; 2019-10—Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates
Summary: This ASU simplifies the accounting for goodwill impairments by eliminating Step 2 from the goodwill impairment testing. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with its carrying amount. Under the new guidance, entities will perform their annual, or interim, impairment test by comparing the fair value of a reporting unit with its carrying amount. The ASU also aligns the impairment assessment for reporting units with a zero or negative carrying amount with the impairment assessment for all other reporting units.
Effective date Fiscal years beginning after December 15, 2022; refer to ASUs for additional details on effective dates
Early adoption Permitted
2016-13—Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (the following updates are related to Credit Losses) 2019-11—Codification Improvements to Topic 326, Financial Instruments—Credit Losses; 2019-10—Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates; 2019-05—Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief; 2019-04—Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments; 2018-19—Codification Improvements to Topic 326, Financial Instruments—Credit Losses
Summary: This ASU is a comprehensive change to the accounting for credit losses. The ASU requires organizations to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts.
Effective date Fiscal years beginning after December 15, 2022
Early adoption Permitted
2019-04—Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments
Summary: This ASU clarifies certain accounting aspects related to credit losses (ASU 2016-13), hedging activities (ASU 2017-12), and financial instruments (ASU 2016-01). ASUs 2016-13 for credit losses and 2017-12 for hedging activities are discussed below. The significant updates related to financial instruments (ASU 2016-01) clarify (1) that non-public business entities are exempt from fair value disclosure requirements for financial instruments not measured at fair value on the balance sheet (i.e. held-to-maturity debt securities measured on an amortized cost basis), (2) the measurement alternative for equity securities without readily determinable fair values is a nonrecurring measurement and requires the applicable disclosures, (3) that equity securities without readily determinable fair values are subject to the measurement alternative at historical exchange rates and the rate used should be the acquisition date unless there is a more recent fair value measurement date.
Effective date If the organization has adopted 2016-13, the updates related to credit losses and hedging activities should mirror the adoption dates for those ASUs. For organizations that have not yet adopted 2016-13, fiscal years beginning after December 15, 2022

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