End-of-Year Accounting Reminders for Not-for-Profits

For not-for-profits, the end of the year is a busy time. In addition to all the holiday events and fundraising campaigns, there are also new accounting standards to consider. The two most important standards for nonprofits are the new lease accounting standard, ASU 2016-02 (codified in ASC 842) and ASU 2020-07, Contributed Nonfinancial Assets (a.k.a. “gifts-in-kind") Presentation and Disclosure.

While complying with these new standards may seem like a daunting task, nonprofits need to ensure that their financial reports are accurate and up-to-date. Let’s take a closer look.

Lease Accounting Deadline Around the Corner

The waiting game is over: adoption of the new lease accounting standard, ASC 842, is now effective for not-for-profit organizations. If your organization hasn’t enacted this standard yet, you must do so for fiscal years beginning after Dec. 15, 2021, and interim periods beginning after Dec. 15, 2022.

FASB issued the new standard to bring greater transparency to leasing transactions and align leasing guidance with other recent accounting standards updates. It requires all leases except short-term leases to be recorded on balance sheets.

Not-for-profits need to understand and implement the standard as soon as possible because, depending on the number and complexity of an organization’s leases, the process can be complex and may require professional assistance. It may require significant legwork to thoroughly investigate your organization’s leases — some of which may even be hiding in plain sight, such as copy machines or other office equipment. Embedded leases may even be buried in contracts, from IT-related services to advertising.

It’s important to note that ASC 842 does not apply to leases for:

  • Intangible assets
  • Exploration of minerals, oils, gas or similar resources
  • Inventory
  • Biological assets
  • Assets under construction.

The first step in implementing ASC 842 is determining who will be in charge of the adoption process at your organization. This person will need to understand all of the definitions and concepts associated with the lease accounting standard and the formulas required to crunch the numbers.

Smaller not-for-profit organizations may have an advantage since fewer leases will make implementation much less time-consuming. However, larger organizations with vast leases may find themselves digging in the weeds. Acquiring lease accounting software may increase efficiency, reduce the risk of errors and shorten the adoption process.

If your organization needs help understanding ASC 842 during implementation, download our e-book, 4 Keys to Lease Accounting for CFOs. If you need professional assistance tackling the intricacies of ASC 842 for a smooth transition, please contact us.

A Look at the New Contributed Nonfinancial Asset Transparency Requirements

When a not-for-profit organization receives a donation of goods or services, it is classified as a contributed nonfinancial asset, commonly known as a gift-in-kind contribution. These types of donations are just as essential as money. FASB issued ASU 2020-07 Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets to increase transparency about contributed nonfinancial assets by changing presentation and disclosure requirements. It is effective for organizations with June 30, 2022, year-ends and later, and retrospective application is required.

For example, donated items such as food, clothing and medical supplies can be distributed to those in need. Additionally, donated services such as legal or accounting, can help further the organization's mission. The standard applies to nonfinancial assets such as food; clothing; pharmaceuticals; fixed assets; use of fixed assets; materials and supplies; cryptocurrencies; free or reduced rent; or use of land, buildings, equipment and services.

While the accounting for contributed nonfinancial assets did not change, an overview of the accounting requirements is helpful in understanding the new presentation and disclosure requirements.  Contributed services must be recorded if they create or enhance a financial asset or require a specialized skill, such as services by accountants, architects, carpenters, doctors, electricians, lawyers, nurses, plumbers, teachers and other professionals or craftspeople.

It is important to note that contributed nonfinancial assets must be valued at fair market value to be properly accounted for in financial statements. This valuation can sometimes be challenging, but it is essential to maintain accurate records. Disclosing contributed nonfinancial assets in financial statements is also important, as it helps donors see their contributions' tangible impact.

The existing presentation and disclosure requirements for contributed nonfinancial assets are that organizations must describe the programs or activities for which contributed services were used — including the nature and extent received and the period and the amount recognized as revenue — and disclose the fair value of contributed services received but not recognized as revenues, if practicable.

However, under ASU 2020-07, not-for-profits will now be required to apply additional presentation and disclosure requirements.

This includes:

  • Presenting contributed nonfinancial assets as a separate line item in the statement of activities
  • Disclosing a disaggregation by category of contributed nonfinancial assets
  • Disclosing, for each category, information about:
    • How the assets are used (or monetized),
    • Any associated donor/grantor restrictions, and
    • How they were valued at initial recognition.

If your organization needs help understanding or implementing ASU 2020-07, or any accounting standard, please connect with our not-for-profit accounting professionals. We can help you understand updates, changes or processes to streamline your organization efficiencies and ensure compliance.

Published on December 05, 2022