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Not-for-profit accounting
The FASB continues to address accounting and reporting matters unique to Not-for-profit entities (NFPs). We offer insights and provide potential impacts to changes impacting a variety of different types of organizations (e.g., health care systems, higher education institutions, charitable organizations, museums, etc.).
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Read the latest developments on accounting by not-for-profits
Accounting for grants and contracts
- The FASB issued an exposure draft, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, aimed at clarifying and improving existing guidance to assist entities in (1) evaluating transfers of assets as either exchange transactions or contributions, and (2) distinguishing contributions as either conditional or unconditional.
- The proposed changes provides a useful decision framework to assist entities in accounting for grants. Step 1 of the framework asks whether a transfer of assets results in an “exchange of commensurate value” between the parties. That is, to be accounted for as an exchange transaction under the new revenue recognition standard, reciprocal benefits must flow directly between the parties in the arrangement. If benefits flow to the general public, rather than to the donor, the proposal would require the transaction be accounted for as a contribution.
- The proposed changes would require some grants received by NFPs to be accounted for under the contribution accounting model instead of the new revenue recognition standard.
- If a transaction is to be accounted for under the contribution accounting model, Step 2 of the decision framework asks whether a contribution is conditional or unconditional. The proposal defines a conditional grant as one that specifies that a barrier that must be overcome to be entitled to the promised funds, along with a right of return. If a grant does not contain these two criteria, it would be considered unconditional. The determination of conditional versus unconditional impacts the timing of revenue recognition.
- Given its scope, the proposed guidance will impact all entities but will exclude transfers of assets from the government made to business entities.
- The effective date for the proposed changes will be the same as the new revenue recognition standard (Topic 606):
- Public business entities and NFPs that are conduit bond obligors with publicly traded debt would apply the amendments to annual periods beginning after December 15, 2017, including interim periods within that annual period.
- All other entities would apply the amendments to annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.
- Entities would apply a modified prospective transition approach.
- Early adoption would be permitted.
- Public business entities and NFPs that are conduit bond obligors with publicly traded debt would apply the amendments to annual periods beginning after December 15, 2017, including interim periods within that annual period.
Consolidation of limited partnerships
- In January 2017, the FASB issued ASU 2017-02, Not-for-Profit Entities - Consolidation (Subtopic 958-810): Clarifying When a Not-for-Profit Entity That Is a General partner or a Limited Partner Should Consolidate a For-Profit Limited Partnership or Similar Entity, in response to the confusion that was created for NFPs when ASU 2015-02, Consolidation: Amendments to the Consolidation Analysis, was issued.
- ASU 2017-02 reinstated the existing guidance that for NFPs on how to evaluate the consolidation of interests in limited partnerships. Under the new guidance, NFP investors in a limited partnership or similar entity will continue to apply a presumption that a general partner has control and should consolidate the investment unless substantive kick-out or participating rights held by any limited partners overcomes that presumption.
- The new guidance should be adopted at the same time an NFP adopts the FASB's other new consolidation guidance, which is required for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted. NFPs that early-adopted the consolidation guidance should apply the new guidance retrospectively to the earliest period affected by that adoption.
- Learn more about the changes in our In brief, No. US2017-04, NFP consolidation: FASB clarifies how to evaluate limited partnerships.
NFP financial reporting
- On August 18, 2016, the FASB issued ASU 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial statements of Not-for-Profit Entities, which makes targeted improvements to the NFP financial reporting model. This new ASU marks the completion of the first phase of a larger project aimed at improving NFP financial reporting.
- The ASU makes a number of specific changes to the reporting by NFP entities. The major changes include streamlining the net asset classification scheme, adding new disclosure requirements regarding information useful in assessing liquidity and availability of resources, presenting an analysis of functional expenses by their natural classifications, and presenting investment returns net of external and direct internal investment expenses.
- See a summary of the final standard in our In brief, No. US2016-34, FASB finalizes first round of not-for-profit reporting changes.
- The ASU is effective for fiscal years beginning after December 15, 2017 and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted, but only for an annual fiscal period or for the first interim period within the year of adoption. The requirements must be applied retrospectively; however, entities that present comparative statements can elect to omit certain comparative disclosures in the year of adoption.
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Heather Horn
US Strategic Thought Leader, National Professional Services Group, PwC US
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David Schmid
IFRS & US Standard Setting Leader, National Professional Services Group, PwC US
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