Month: December 2019

Nonprofits: Are you ready for the new contribution guidance?

When the Financial Accounting Standards Board (FASB) updated its rules for recognizing revenue from contracts in 2014, it only added to the confusion that nonprofits already had about accounting for grants and similar contracts.

Fortunately, last year, the FASB provided some much-needed clarification with Accounting Standards Update (ASU) No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. Calendar-year nonprofits must follow this guidance when preparing their 2019 year-end financial statements.

Complicated rules

Nonprofits traditionally have taken varying approaches when they:

  • Characterize grants and similar contracts as exchange transactions (also known as reciprocal transactions) or contributions (nonreciprocal transactions), and
  • Distinguish between conditional and unconditional contributions.

The FASB’s updated revenue recognition guidance — ASU 2014-09, Revenue from Contracts with Customers — eliminated some of the previous guidance for nonprofits and imposed extensive disclosure requirements that didn’t seem relevant to contributions. ASU 2018-08 clarifies matters by laying out rules that will help nonprofits determine whether a grant or similar contract is indeed a contribution — and, if so, when they should recognize the revenue associated with it.

Exchange vs. contribution

To determine how to treat a grant or similar contract, you must assess whether the “provider” receives commensurate value for the assets it’s transferring. If it does, you should treat the grant or contract as an exchange transaction. ASU 2018-08 stresses that the provider (the grantor or other party) in a transaction isn’t synonymous with the general public. So, indirect benefit to the public doesn’t represent commensurate value received. Execution of the provider’s mission or positive sentiment received from donating also doesn’t constitute commensurate value received.

What if the provider doesn’t receive commensurate value? You then must determine if the asset transfer is a payment from a third-party payer for an existing transaction between you and an identified customer (for example, payments made under Medicare or a Pell Grant). If it is such a payment, the transaction won’t be considered a contribution under the ASU, and other accounting guidance would apply. If it isn’t such a payment, the transaction is accounted for as a contribution.

Conditional terms

According to ASU 2018-08, a conditional contribution includes:

  • A barrier the nonprofit must overcome to receive the contribution, and
  • Either a right of return of assets transferred or a right of release of the promisor’s obligation to transfer assets.

Unconditional contributions are recognized when received. However, conditional contributions aren’t recognized until you overcome the barriers to entitlement.

Is there a barrier to overcome before your organization can receive a contribution? Consider the inclusion of a measurable performance-related barrier, limits on your nonprofit’s discretion over how to conduct an activity or a stipulation that relates to the purpose of the agreement (not including administrative tasks and trivial stipulations such as production of an annual report). Some indicators might prove more important than others, depending on circumstances. And no single indicator is determinative.

Net effect

As a result of the updated guidance, nonprofits will likely account for more grants and similar contracts as contributions than they did under the previous rules. Check with your CPA to determine what that means for your financial statements, loan covenants and other matters.

© 2019

Year-end accounting recap

The Financial Accounting Standards Board (FASB) hasn’t issued any major new accounting rules in 2019. But there have been some important developments to be aware of when preparing annual financial statements under U.S. Generally Accepted Accounting Principles (GAAP).

Deferral of major accounting rules

Accounting Standards Update (ASU) No. 2019-09 delays the effective date of the updated guidance for long-term insurance contracts. For public business entities, except smaller reporting companies (SRCs), the effective date is delayed until fiscal years beginning after December 15, 2021. For all other entities, the effective date is postponed until fiscal years beginning after December 15, 2023.

In addition, ASU 2019-10 defers the effective dates for three other ASUs as follows:

1. ASU 2016-02, Leases. For public business entities (including SRCs) and certain nonprofit organizations and employee benefit plans, the effective date remains as fiscal years beginning after December 15, 2018. For all other entities, the effective date is deferred to fiscal years beginning after December 15, 2020.

2. ASU 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments. For public business entities that don’t meet the definition of an SRC, the effective date remains fiscal years beginning after December 15, 2019. For all other entities, the effective date is deferred to fiscal years beginning after December 15, 2022.

3. ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. For public business entities (including SRCs) the effective date remains as fiscal years beginning after December 15, 2018. For all other entities, the effective date is deferred to fiscal years beginning after December 15, 2020.

Effective dates going forward

ASU 2019-10 also updates the FASB’s philosophy for setting the effective dates for all major ASUs going forward. It will group entities into two overall buckets, as follows:

Bucket 1. Large public companies that are SEC filers and don’t meet the SEC definition of SRCs, and

Bucket 2. Entities other than large public companies, including SRCs, private companies, nonprofit entities and employee benefit plans.

In general, the FASB plans to set the effective dates of major ASUs for Bucket 2 entities at least two years after the initial effective dates for entities in Bucket 1.

Revenue recognition

Starting in 2019, private companies that follow GAAP must use an updated five-step method to recognize revenue from long-term contracts. Public companies that made the switch in 2018 report that the process was more difficult than expected.

Unfortunately, many private companies underestimate the amount of work it takes to apply the updated rules — and many accounting software solutions can’t effectively handle the changes, including the disclosure requirements. If you haven’t started implementing the updated revenue recognition guidance, contact us to get you back on track.

Other developments

Throughout 2019, the FASB has issued some other narrow-scope accounting rules, including guidance that 1) updates the rules for reporting share-based payments to customers and nonemployees, 2) extends the scope of private company alternatives for reporting goodwill to nonprofit organizations, and 3) clarifies major accounting standards updates. Contact us to discuss how the changes to GAAP, including various proposed amendments, will affect your financial statements in 2019 and beyond.

© 2019

2020 Q1 tax calendar: Key deadlines for businesses and other employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2020. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

January 31

  • File 2019 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
  • Provide copies of 2019 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.
  • File 2019 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS.
  • File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2019. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
  • File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2019. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944, “Employer’s Annual Federal Tax Return.”)
  • File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2019 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

February 28

  • File 2019 Forms 1099-MISC with the IRS if 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is March 31.)

March 16

  • If a calendar-year partnership or S corporation, file or extend your 2019 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2019 contributions to pension and profit-sharing plans.

© 2019