The close of the calendar year provides a good opportunity for not-for-profit organizations with June 30 fiscal year ends to plan ahead. Many accounting standard changes went into effect for 2017 fiscal years. The updates could affect financial statements in multiple places, from adding or changing disclosures to modifications in internal controls over financial reporting.
Not-for-profit organizations may want to take some down time this holiday season to identify which accounting provisions will need to be in effect before their fiscal year ends so they can make a good jump start on any needed transitions.
The most significant accounting change coming for 2017 fiscal year ends is the adoption of the revised consolidation model issued under ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis. Accounting updates to consolidation modify each significant "step" in the variable interest entity (VIE) consolidation model and include changes to the scope and application of the VIE model.
Changes to the VIE model, however, do not apply to not-for-profit organizations, which initially presented a problem in regards to how not-for-profit organizations should incorporate the changes in ASU 2015-02. An accounting standards update issued early in 2017 seeks to remedy that issue. ASU 2017-02, Not-for-Profit Entities- Consolidation (Subtopic 958-10) Clarifying When a Not-for-Profit That Is a General Partner or a Limited Partner Should Consolidate a Profit Limited Partnership or Similar Entity clarifies not-for-profit consolidation guidance by specifying that not-for-profit organizations with for-profit limited partnerships should follow the industry-specific guidance in ASC Subtopic 958-10 when applying the consolidation changes in ASC Topic 810.
In the updated standard, not-for-profit general partners would be presumed to control a for-profit limited partnership, regardless of the general partners' ownership interest, unless the limited partners have substantive kick-out rights or participating rights. Substantive, in this definition, would be kick-out rights that can be exercised by a simple majority vote of the limited partners' voting interests. The limited partners' voting interests would exclude general partners' voting interests as well as parties under common control with the general partners.
Organizations will adopt the consolidation changes and the changes in ASU 2017-02 at the same time and using the same transition method as they use for adopting ASU 2015-02. Entities adopt the consolidation guidance using either a modified retrospective or retrospective approach.
Equity Method of Accounting
ASU 2016-07, Investments- Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting simplifies the process for when certain investments become eligible for the equity method of accounting. Not-for-profit organizations would apply the equity method prospectively—rather than retrospectively as in current U.S. GAAP (Generally Accepted Accounting Principles)—when investments in equity instruments that are not accounted for through consolidation or equity methods first qualify for the equity method of accounting.
If the change to the equity method is caused by the purchase of additional equity interest, the cost of acquiring the additional interest in the investment is added to the basis of the investor's previously held interest. If the equity instrument was previously accounted for as an available-for-sale security, the investor recognizes the unrealized holding gain or loss that was accumulated in other comprehensive income into earnings when the equity method is applied.
Practical Expedient for Defined Benefit Obligation and Plan Assets
ASU 2015-04, Compensation - Retirement Benefits (Topic 715) Practical Expedient for the Measurement Date of an Employer's Defined Benefit Obligation and Plan Assets creates an option for defined benefit plans with year-ends that do not fall at a month's end to use the nearest calendar month-end to their year-end for determining fair value. Once adopted, the expedient must be applied to all eligible plans, and not-for-profit organizations must make a related disclosure that includes the fair value measurement date used.
ASU 2015-16 Business Combinations (Topic 805), Simplifying the Accounting for Measurement Period Adjustments requires not-for-profit organizations and other private entities to recognize business combination adjustments to provisional amounts during the measurement period in which the adjustments are made. This will require the not-for-profit to calculate the cumulative effect of the change on the income statement as if the change had been in place on the date of acquisition. The cumulative effect will be recorded to the provision amounts in the period of the change.
Fair Value Measurement
ASU 2015-17, Fair Value Measurement (Topic 820)- Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (Or Its Equivalent) may also affect not-for-profit organizations with certain investments. It permits organizations that report the fair value of investments using the net asset value (NAV) practical expedient to forgo classifying those investments within the ASC Topic 820 fair value hierarchy disclosures.
For More Information
For assistance in how the accounting standards updates will affect your organization, please contact your MHM professional or Mark Winiarski or Michelle Spriggs of MHM's Professional Standards Group. Mark can be reached at firstname.lastname@example.org or 816.945.5614. Michelle can be reached at email@example.com or 774.206.8336.
Published on November 29, 2017