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FASB

2022 Updates to GAAP Standards

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person using calculator at desk with spreadsheetsWe typically report on changes to GAAP standards as they arise. This year has been a particularly active one with numerous changes impacting leases, gifts in kind, reference rate reform, and costs associated with cloud computing. Below are the highlights; for specifics, see the linked information.

Topic 842: Lease Standards

FASB 842

Although the standard was presented six years ago, it must now be fully implemented for all entities reporting on a GAAP basis for calendar year 2022 and fiscal years ending in 2023. The accounting standards for lessors has not changed. However, there are several changes for lessees which must be included on the balance sheet.

Lessees’ commitments and rights can now be recognized on the balance sheet as a liability for the total payments made throughout the term of the lease. The “right to use” the asset can also be recognized as a liability on the balance sheet.

Lease classifications have also changed. Instead of operating and capital leases, they are now to be classified as operating or financing.

Topic 958: Gifts-In-Kind

Update 2020-07

Effective for all entities for calendar year 2022, reporting after June 15, 2021, there are changes to reporting gifts-in-kind (GIK). The standard to determine whether something is a gift hasn’t changed, but the reporting requirements have been updated.

You will need to disclose specific information for each category:

  • Your organization’s policy for gifts-in-kind.
  • Potential donor-imposed restrictions on GIK.
  • How you arrived at the value determination and fair market value.
  • Whether GIK was monetized or utilized.

For more information, please read: An Overview of Gifts—In-Kind

Reference Rate Reform

Topic 848

ASU 2020-04

LIBOR, or the London Inter-Bank Offer Rate, has been the norm since the 1980s as a reference rate for interest. Now, however, it is being retired as a point of reference. This change is effective March 2022 through December 2022 and impacts many loans, leases, and derivatives.

The current GAAP requirement is that entities analyze whether a change in interest rate for a loan is a debt modification or debt extinguishment. This is time-consuming and can be quite complicated. Refer to ASU 2020-04 for helpful tips to make the transition easier and smoother.

Cost Associated with Cloud Computing

ASU 2018-15 Subtopic 350-40

This change is effective for nonpublic entities for the calendar year 2021 and fiscal years ending in 2022. Entities may choose to apply it either prospectively or retrospectively.

Cloud computing software is used on a licensing arrangement. Either the license is a subscription or a license. Licenses are usually recorded as an intangible asset for the software license and a liability for remaining payments due. For subscription-based cloud software, it is expensed as incurred.

For more information on this topic, read: New FASB Cloud Computing Standard Reduces Complexity.

Need Help Navigating GAAP Changes?

If you’d like some assistance navigating these GAAP changes, we’re here to help. We can also assist you with choosing the right nonprofit software to make accounting, including following accepted best practices, and implementing changes to your general ledger and overall accounting software.

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.

Making Functional Expense Classifications for Nonprofits Useful for Public Trust

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Under FASB ASC 958, nonprofits are required to classify functional expenses by category. Most nonprofits choose to do this in one of three ways:

  1. As a separate statement of functional expenses
  2. As a schedule in the notes of their financial statement
  3. Within the statement of activities itself

All nonprofit organizations should classify functional expenses according to their nature and category. Doing so, and sharing the information publicly in the annual report, helps build public trust by making all expenses transparent and easy to understand.

The following tips will help you make your nonprofit’s functional expenses classifications useful for both your organization and for building trust with the public.

Four Tips for Functional Expense Classifications

  1. Use common sense when determining the number of natural categories.

Some nonprofits seem to believe that the more natural categories they include, the better. The opposite is true: less is more. Too many categories can confuse the public and give the appearance of wastefulness.

U.S. GAAP does not specify a particular quantity of expense categories that must be included in the report of functional expenses, so it’s truly up to your organization on how many you’d like to include. Given that the expenses are often depicted in a table or on one page, too many expense categories will be hard to read and understand. Choose a level of detail that paints an accurate picture of your organization’s activities.

  1. Let your program activities tell the story.

Carefully consider which programs to disclose separately. Best practices for nonprofit financial accounting and reporting suggest disaggregating the major classes of program services to meet functional expense reporting requirements. In this way, your program’s finances can tell the story of how and why expenses are incurred.

  1. Review how employee services are classified.

Some expenses such as human resources, accounting, and other internal employee-related services should be reported as general administration and management because these activities benefited the organization as a whole. However, some nonprofits dislike linking all service-related internal positions to this category; it tends to “bloat” the amount, increasing the percent of funds allocated to overhead, which the public may perceive as inefficiencies or “too much money” spent on management needs. Review your allocations and consider how much of a given employee’s time is truly spent working for the good of the whole organization or for a particular program. If it can be clearly argued that an accountant is fully dedicated to a program line funded by a grant, for example, then their salary may be apportioned to that fund rather than general admin. There are many gray areas, so take this as a general guideline, and be thorough in your review of all your expense categories.

  1. Examine your allocation methodology.

One of the reporting requirements is that the allocation methodology is disclosed in your financial statements. Ask yourself, “Would someone looking at this expense understand our rational? Does it sound reasonable?” Because all the information and the methodology are disclosed to the public, it must meet the litmus test of both “is it reasonable” and is it “understandable.”

Clear Communication Improves Public Trust

Functional expense allocation is often tricky, and organizations tend to err on either side—too much disclosure or too little. A review of your current expense allocation and methodology and updating it to match current needs may help the public better understand how funds are spent and how your nonprofit handles its finances.

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.

Common Functional Expense Allocation Errors—and How You Can Avoid Them

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One of the most important questions potential donors ask themselves when reviewing nonprofit financials is how an organization uses it funds. Donors want to know that a nonprofit uses them wisely and puts most of its money towards its programs. An analysis of expenses by nature and function can tell a compelling story to potential donors and make it clear that your nonprofit is a responsible steward of its funds.

But there are several common functional expense allocation errors that occur among many nonprofits. Is your organization making these mistakes?

7 Functional Expense Allocation Mistakes

  1. No expense allocation methodology: Now that GAAP requires nonprofits to disclose the methods they use to allocate costs among programs and various support functions, it’s more important than ever to ensure that you have a reasonable allocation method. It’s assumed that nonprofits will each choose their own allocation method. What’s important is that the method makes sense (is considered “reasonable”) and that it is applied consistently. Lack of a documented expense allocation methodology is a common mistake that is easily rectified.
  2. Incorrectly classifying management and general expenses: GAAP rules (FASB ASC 720-958-45-7) stipulate that various expenses should be allocated to management and general expenses. This includes payroll, human resources, and accounting costs. In years past, nonprofits had more leeway to allocate these expenses. If your organization hasn’t updated its allocation guidelines, now’s the time to fix this common mistake.
  3. Allocating too few costs to programs: Another common error is not allocating enough costs to actual programs. An example is an accounting professional whose salary expense is allocated to management, but they provide 100% of support to a particular program. In that case, their costs should be allocated to the program instead of to the overall payroll budget.
  4. Not considering joint costs: If an activity supports multiple purposes, consider allocating it as a joint cost. FASB ASC Subtopic 958-720, Not-for-Profit Entities-Other Expenses describes the reporting requirements. Creating a systematic and reasonable basis for allocating joint costs and applying it consistently helps rectify this error. Consider and choose from among several allocation methods, too, such as the physical-units method, the relative-direct-costs method, and standalone method.
  5. Providing the appropriate level of detail: It can be challenging to provide the appropriate level of detail for the natural component of expenses in the functional expense analysis. To find the best level of detail, consider the needs of your audience. What do they want and need to know? Find a happy medium between disclosing too much and too little information.
  6. Not allocating fundraising expenses: Check that the salaries allocated to fundraising expenses are reasonable. Many organizations fail to allocate fundraising expenses appropriately. Ask yourself if the amount you are currently allocating is reasonable. You may need to make some adjustments.
  7. Misclassifying investment-related activity: Under current GAAP requirements, direct internal and external investment related expenses should be netted on the statement of activities with the investment return. Based on the new presentation requirements, such expenses should be omitted from the functional expense analysis.

Professional Judgment Is Vital

Nonprofit accounting professionals must use their judgment when considering functional expense allocation. Knowing the common errors and keeping them in mind when reviewing your organization’s financials can help you make prudent decisions that are in the best interests of your nonprofit.

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.

FASB Updates Gifts-in-Kind Standards

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FASB introduced accounting standards update 2020-07, Presentation and Disclosure by Not-for-Profit Entities for Contributed Nonfinancial Assets, to clarify the existing standard around gifts-in-kind. Such gifts may include assets like land, buildings, and equipment, or the use of such assets. Other items included in this category are utilities, materials and supplies, such as food, clothing, or pharmaceuticals, intangible assets, and recognized contributed services.

The standard must be applied retrospectively and organizations may choose to adopt the updated standard earlier than the effective date. The amendments take effect for annual reporting starting after June 15, 2021, and interim periods within annual reporting periods beginning after June 15, 2022.

What Is the Updated Requirement?

The newly updated standard requires nonprofit organizations to show contributed nonfinancial assets as a separate line item in the statement of activities. This should be kept separate from contributions of cash or other financial assets. Nonprofits are now required under the standard to disclose contributed nonfinancial assets within the statement of activities. These should be disaggregated by category. The categories should depict the type of nonfinancial asset being presented.

What Must Nonprofits Disclose?

Additional details should be disclosed around the statement of gifts-in-kind. Nonprofits should prepare statements that include the following disclosures:

  • Whether the asset was used or monetized during the reporting period.
  • If the asset was used, include a description of how the items were used and for which programs run by the nonprofit.
  • A policy statement from the nonprofit about how gifts can or cannot be monetized rather than using the gifts-in-kind.
  • A full description of any donor-imposed restrictions on how the gift may be used or monetized.
  • The valuation techniques used to assess the gift’s value upon receipt. For guidance, see
  • If the nonprofit is prohibited by a donor-imposed restriction on selling or using the item, the market by which fair value was estimated.

Challenges Involving Gifts-in-Kind

Accurately and clearly accounting for gifts-in-kind has always been challenging, but it can be particularly challenging for some nonprofits, especially if they aren’t used to receiving gifts-in-kind. The previously cited FASB Topic 820 offers help but common sense, previous experience, and prudent judgment must guide a nonprofit as they value items used for programs.

Some items are easier to value than others. An automobile donated to a nonprofit can be valued by using the Kelly Blue Book Value. But what about a horse or pony donated to an equine therapy program? Here, the marketplace where the animal might be sold offers some insight. Similar horses sold in the equine therapy program’s service area may be used as a basis for judging the value of the donated animal.

Some watchdog groups view gifts-in-kind differently than other donations. Because there is so much leeway in how such gifts can be valued, nonprofit accounting professionals must keep detailed records and notes of how values are obtained and reported.

Another consideration is that there may be donor or legal restrictions on gifts. A donor may choose to restrict a gift so that it cannot be sold or they may have specific conditions around the use of the gift. These conditions must be adhered to in order to be compliant with the terms of the gift.

Lastly, gifts are sometimes purchased at below market value by the nonprofit from a donor. How you account for this varies but should be considered as part of the gifts-in-kind guidelines within your nonprofit organization. You may need to establish policies around GIK so that such situations are treated consistently over time.

Gifts-in-kind can be a valuable addition to your nonprofit. Accounting for them clearly and consistently enables you to welcome them when donors step up with generous gifts.

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.