Financial reporting for nonprofits is starting to undergo some significant changes which will continue over the next few years. Some of these changes were brought on by COVID-19 and its remaining uncertainties as well as new accounting and reporting standards issued by the Financial Accounting Standards Board (FASB). Below we have highlighted a few of these changes that not-for-profits should consider for their financial reporting.
Disclosure and Financial Statement Impact Resulting from COVID-19
- Increase Disclosures Around Contingencies
Due to COVID-19, there may be conditions or events that resulted in the loss or impairment of assets. Accounting principles require organizations to either accrue for or disclose these loss contingencies depending on the likelihood of loss. Examples of this include noncompliance with donor restrictions on assets which would need to be returned to the donor as well as uninsured risks. If there were any events that occurred during the year that may result in the impairment of an asset, organizations should evaluate the likelihood of loss and determine if the loss can be reasonably estimated.
- Increased Disclosures Around Risks and Uncertainties
Including a risks and uncertainties disclosure in the financial statements is often seen as an “early warning” that there is a reasonable possibility that there could be significant changes to reported amounts in the near term. Due to the unprecedented uncertainties surrounding COVID-19, organizations should evaluate the need for a risks and uncertainties disclosure in their financial statements to inform readers that there could be ongoing impacts to the financials.
- Subsequent Events
While hopefully most of the financial impacts from COVID-19 are behind us, there are still programs available for organizations to obtain additional government funding. Depending on when the event occurs, accounting principles require either recognition or disclosure of significant events that occur subsequent to year-end. Other examples include significant declines in market values of investments, modifications or restructuring of debt, and additional funding received outside the normal course of operations.
New and Upcoming Accounting Changes
- Revenue from Contracts with Customers (ASC 606)
The implementation of ASC 606, Revenue from Contracts with Customers, was delayed a year due to COVID-19 and is required to be implemented for fiscal years beginning after December 15, 2019. ASC 606 changes the revenue recognition model for contracts with customers to a five-step model, and can change when revenues are recognized (either over time or at a point in time). In addition to the change in timing of revenues, there are additional and enhanced disclosures related to revenue recognition. It is important to note that donor contributions and investment income are not included in the scope of ASC 606.
The implementation of ASC 842, Leases, was also delayed a year due to COVID-19 and is required to be implemented for fiscal years beginning after December 15, 2021. The new lease model requires the recognition by lessees of asset and liabilities that arise from all lease transactions. The substantial change from current lease accounting is the recognition of operation leases on the statement of financial position.
- Presentation of Contributed Nonfinancial Assets
ASU 2020-07 was issued to increase transparency around the accounting and disclosure of nonfinancial assets (commonly “in-kind donations” or “gifts in-kind”). This ASU will require the recognition of these contributions as a separate line on the statement of activities apart from other contributions. Additionally, there are enhanced disclosures surrounding the contributed assets. This ASU is effective for fiscal years beginning after June 15, 2021.