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FASB

FASB Seeks Comments on Revenue and Grant Recognition Reporting

By | Accounting, FASB, Grant Management | No Comments

The Financial Accounting Standards Board (FASB) is looking for input. The group wishes to improve, clarify, and enhance revenue recognition standards for grants and contracts by nonprofits. They are seeking comments on the topic, and nonprofit organizations are welcome to respond.

Currently, many nonprofit stakeholders indicated confusion about when to report grant and contract revenue or how to consistently report revenue in these areas.  This difficulty is compounded in the area of government grants and contracts.

The comment period for the proposed Accounting Standards Update (ASU), titled Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made, ends November 1.

Proposed ASU Changes

The big changes proposed in the standards include distinguishing between contributions (nonreciprocal transactions) and exchange (reciprocal) transactions. If the proposed ASU changes proceed, more grants and contracts will be counted as contributions.

The proposed framework indicates that if a grant is an exchange transaction, revenues should be recorded in accordance with Revenue from Contracts with Customers. Details on this may be found in Topic 606 or other applicable topics.

Grants, on the other hand, are determined to be contributions and should be recognized as revenue for not for profit entities under Revenue Recognition Subtopic 958-605.

There are no sweeping generalities for grants. Each one must be evaluated and categorized individually. Grants can be considered exchanges if the value received is commensurate with the services rendered Then it is categorized as an exchange or reciprocal transactions.

The good news is that the ASU includes plenty of examples to help nonprofits determine whether grants are nonreciprocal or reciprocal transactions.

Conditional Contributions

If a grant does not have either a barrier or a right of return, it may be considered a conditional contribution. A conditional contribution is a grant that comes with strings attached – conditions that must be met in order for the grant to be considered fully received.

Some conditions include:

  • Measurable performance goals such as matching grants, levels of service, or other items that can be measured or quantified;
  • A stipulation that specific conditions must be met for the grant;
  • Something limiting how the funds can be spent;
  • Additional actions that would be required to be taken by the recipient organization in addition to the activities that it would normally pursue

For those fuzzy gray areas, the ASU states that donations requiring stipulations can be presumed to be conditional.

Some grants may be considered contracts with a customer. In that case, the specifications in Topic 606 take priority.

When Does This Go into Effect?

The new recommendations will go into effect on or around December 31, 2019, for the fiscal year ending in 2020. That may seem like a long way off, but for nonprofits dealing with a lot of grants that fit these categories and descriptions, it may be prudent to take steps now to conform to the new guidelines. Of course, changes may be made to the recommendations based on feedback received by FASB.

The good news is that the changes do not affect prior quarters in any way, so you don’t need to change anything prior to 2019. For more details, please visit FASB.

About Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.

Are You Ready for the FASB Accounting Standards Update (ASU) No. 2014-09?

By | Abila, Accounting, Audit, CPA, FASB, Nonprofit | No Comments

By now you’ve probably heard of FASB Topic 606. This is an accounting standards update that seeks to provide greater clarity to organizations on how to report revenue. After the initial release of the update, several clarification statements have been issued to help organizations and companies prepare for the new guidelines. As you’re getting ready to implement the new standards (they go into effect for certain not for profits starting December 15, 2017, and for most others December 15, 2018), it’s important to understand both the gist of the update as well as the clarifying statements that have been issued.

What Is FASB Topic 606?

FASB 606 deals with revenue from contracts with customers. FASB Accounting Standards Update No. 2014-09 seeks to streamline statement preparation, as well as provide better disclosure to the public and to others. Clear, transparent reporting is essential for nonprofits; it helps build trust between nonprofits and their constituents. With FASB Topic 606 and Accounting Standards Update No. 2014-09, the revised guidelines are intended to help nonprofits clearly disclose their relationship with their customers and the revenues such relationships and contracts provide.

Another reporting area that FASB No. 2014-09 seeks to improve is the ability for people to compare financial statements. If revenue is reported differently, it makes it harder to compare them across entities. If revenues follow a consistent reporting pattern, they can be compared more easily.

Clarifications on the Original Statement

Accounting professionals charged with the implementation of this revised standard have asked for, and received, clarification on several items. First, intellectual property issues required several clarifying statements. Organizations who license their IP needed information on how to record revenues. A nonprofit health association, for example, who licenses a special ‘badge’ that packaged food companies can put on their products to indicate they meet specific dietary guidelines needs to understand whether they should record revenues at once or over time as they occur.

So far, FASB has issued four clarifications:

  1. ASU No. 2016-08, which addressed principal versus agent considerations.
  2. ASU No. 2016-10 identified performance obligations and licensing
  3. ASU No. 2016-12, clarified a narrow scope improvements and practical expedients directed at items such as the reporting of noncash consideration, contract modification and completed contracts at transition, collectability matters, and similar matters.
  4. ASU No. 2016-20 which correct loan guarantees, contract costs—impairment testing, and provision for losses on construction-type and production-type contracts. Because this area is so complex, interested people should keep up to date with any further changes on 2016-20.

Caution: Implementation Ahead

With all of the clarifications and updates, it’s difficult to say whether or not organizations are truly ready to implement the new rule. Although many indicate that they are, it may be wishful thinking.

A few other cautions have come above. The new rule indicates that transaction prices should be allocated to each performance obligation based on the stand-alone price. Software companies are paying particular note of this requirement since it may accelerate revenue recognition for their products.

Another area where this may impact revenue recognition is on bundled items. Revenue recognition for bundled, package items may now be considered one item instead of many.

Lastly, revenues must be recorded when it appears probable that they can be collected. For nonprofits, this means that they cannot record as donations or revenues money left to them with conditions attached unless it becomes very clear that those conditions will be met.

Confused? Let Welter Consulting Help

If you’re confused about all the FASB changes and the implementation of these new guidelines, Welter Consulting can help. Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.

Financial Transparency

By | Accounting, Audit, Budget, FASB, Grant Management, MIP Fund Accounting, Nonprofit, Uncategorized | No Comments

According to the Merriam-Webster Dictionary, one of the definitions of “transparency” is “characterized by visibility or accessibility of information especially concerning business practices”.  Transparency in your financial statement means it should be user friendly, clear, easily understandable and everything should be properly disclosed.

Importance of transparent financial statements

  • Proactive transparency and communication are essential to organizational success. Stakeholder understanding and support  is a direct result of transparency and open communication.
  • A practice of continuous, transparent communication enables an organization to better respond to crises – such as physical disaster, fraud, or the sudden loss of a leader – and execute more robust crisis communication strategies.
  • Establishing a culture of transparency is critical for effective governance, constituent engagement, and responsive management.
  • Opening communication channels can help to establish meaningful and productive relationships with constituents. These relationships can have a significant impact on long-term performance.

Start with the Stakeholders

Know both internal stakeholders (board, committees, senior management, management team, staff, volunteer workers) and external stakeholders (customers, donors, funders, grantors, creditors, partners, government, public). It is imperative that you understand their needs and expectations. Information needs, communication methods, and information consumption patterns vary substantially from segment to segment. Meeting and exceeding the information needs for each of these groups is critical to delivering satisfaction. 

If that’s too overwhelming, start by identifying your top two to three stakeholders. Determine what they need/want and go from there.

Strategic messages with financial statements

Make the data you have today more understandable and relatable; enhance the story and improve disclosure. When we think about financial statements we think revenue inputs and expense outputs but we need to be thinking more about outcomes.

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.

New Standards Mean Changes to Disclosures and Financial Statements

By | Abila, Accounting, Audit, CPA, FASB, Grant Management, MIP Fund Accounting, Nonprofit | No Comments

In August 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-14. This document, entitled, “Presentation of Financial Statements for Not-for-Profit Entities” changed how information is presented in financial statements. The goal was to make information clear and easily understandable for the average person reading a nonprofit’s financial statements.

Areas that the new standards address include:

* Net asset restrictions: The previous categorization of net asset classifications confused many people, especially the term “unrestricted.” The new net asset restrictions bring the categories down from three to two to provide clarity.

* Liquidity: It was difficult under the old standard for people to see liquidity and compare liquidity amounts among various nonprofits.

* Cash flow: Previously, indirect reporting was required, but reviewers found that indirect reporting methods confused many people.

* Expenses: Not all nonprofits reported expenses the same way.

The Changes: Nothing New to Track, Simpler Reporting

The changes required by FASB for nonprofit accounting do not ask for any new information to be recorded or tracked. Instead, it simplifies the method of reporting and recording, streamlining it so that it is more consistent among nonprofits. This enables donors, members, and the public an easier way to compare nonprofit organizations and understand their finances.

The biggest changes are the net asset classifications, disclosure, and expense designation

1. Net asset classification: As previously stated, net asset classifications are changing from three previous potential classifications to two. The two new categories are net assets with donor restrictions and net assets without donor restrictions. Details about the categories are disclosed in the footnotes. The footnotes are expected to provide detail on the funds themselves and how they are apportioned.

2. Liquidity disclosure: On the liquidity disclosure, the new rules require that qualitative details communicate how the nonprofit manages the liquid resources available to meet its cash flow needs within a one year period. Quantitative information must also be provided about the resources available within one year. Additional information is required on the nature and type of liquid assets and any external limitations placed on them by grantors, donors, local laws, etc. Board limits must also be specified.

3. Expenses: Expenses must now be disclosed by natural and functional categories. The methods used to allocate costs must also be described.

The changes recommended by FASB aren’t a surprise, but are long in coming. The continual push to improve communications around financials for nonprofit entities is a welcome one that adds a layer of transparency to the nonprofit world that donors have been seeking.

If you’d like assistance meeting the new FASB requirements, speak with Welter Consulting today. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.