Seminar Recap: Accounting Standards Updates for Nonprofits

During AAFCPAs’ recent Nonprofit Seminar (recorded live, April 2024), Matthew Hutt, CPA, CGMA, Amy Staunton, CPA, and Jennifer A. L’Heureux, CPA briefed approximately 400 attendees on the latest applicable accounting standards updates (ASUs) and how they affect nonprofit organizations.

What we covered:

• The Lease Standard
• The Current Expected Credit Loss (CECL) Impairment Model
• Crypto Assets
• Reference Rate Reform
• Uniform Guidance

The full session was recorded and may be viewed as a webcast at your convenience. >>

These are summarized below.

The Lease Standard

Now in the second year of lease standard adoption, it is important to note that any changes made to terms and conditions of a lease contract are considered a lease modification, whether in scope or length or the addition or removal of right of use assets. Whenever you have an addition to a right of use asset, ask yourself: Will this modification result in a separate contract?

If you are adding an additional right of use asset to your lease, this might be a lease amendment. If you acquire a new asset, e.g., if a lease is amended to cover a shift from a one- to a two-office suite, this increase in square footage is accounted for in a separate contract. If that new suite has its own price assigned to it, e.g., the first is $200 and the second is $500 per month, this may be accounted for as a separate contract without requiring revisions to the original lease. If you are not adding an additional right of use asset to your lease, e.g., you have a new asset with a specific price and lease length has changed, reallocate this as one new lease.

Consider the removal of right of use assets as well, e.g., when a modification fully or partially terminates an existing lease. Using the same office lease example, whenever you decrease your right of use asset, you recognize those changes in the P&L. If not, simply remeasure lease liability and adjust the carrying amount for the right of use asset change.

Important Reminders

1. All new leases entered during year two will need to be assessed for classification.
2. Organizations using the discount rate as the lessee’s incremental borrowing rate will need to obtain a new rate for new leases. You cannot continue to use the rate obtained at the time of adoption. This rate is unique to each lease. Similarly, if you elected to use the risk-free rate, you must update to the risk-free rate at the commencement of each lease.
3. Record your lease at the lease commencement date, e.g., the date an asset is available for use by the lessee. This may differ from the date a lease is signed and from the date the lease begins.
4. As you enter into new leases, check immaterial leases such as copiers, storage, and postage.
5. If you have not already done so, update your written accounting policy.
6. Many still record leases under the old standard or on a cash basis only to reconcile and book adjustments at year end when recording lease liability and the right of use asset. We advise that clients fully adopt the standard and record monthly entries.
7. As you enter into new leases, consider how you will make calculations and if you have software or if you need to reach out to AAFCPAs for consulting. This should be managed well in advance of the audit.
8. When entering into new contracts, ask yourself whether it might qualify as an embedded lease or if you should reach out for a consultation to ensure embedded leases that require adoption aren’t discovered during the audit.
9. Software is worth its investment even if you have just three leases. Software can summarize all disclosures for you, which may be hard to calculate manually.

The Current Expected Credit Loss (CECL) Impairment Model

CECL, previously referred to as bad debt expense and allowance for bad debt, became effective for public companies in 2019 and is now applicable for all other organizations ending in calendar year December 31, 2023 or fiscal years ending in 2024.

Some nonprofits assume CECL will not apply to their organization because they don’t have bad debt. But CECL applies to any organization with ASC 606 revenue. Even if an organization concludes they do not need an allowance, organizations will need to acknowledge that there is risk and assess that risk. This is assessed the first day credit is extended—or day one of the receivables. The industry previously recorded the allowance and expense under an incurred model. We are now shifting to an expected model. So, we are looking at risk in the future, which may result in a lower reserve once analysis is performed.

What is ASC 606 revenue, and does your organization have receivables that fall into this scope?

A few examples of various types of ASC 606 revenue include certain investments, contract revenue, or revenue received as a fee for service along with membership dues and tuition received for a daycare or school. Likewise, for health care providers, 606 revenue includes third-party reimbursements. In the case of third-party reimbursements, this includes payments from insurers and from private pay individuals. Contracts or agreements with a counterparty also fall under 606 revenue. Under ASC 606, the organization will identify performance obligations, determine transaction price, and assign that price to those performance obligations. Once those performance obligations are satisfied, revenue is recognized. An organization would assess expected credit loss on that contract and record an allowance at the point of revenue recognition—after which you would collect the receivable or charge it off.

Excluded from this scope is ASC 958 revenue (or pledge receivables for not-for-profit entities), loans or intercompany receivables under common control, receivables arising from operating leases, financial assets measured at fair value through net income, and loans made to participants by defined contribution employee benefit plans.

We advise that organizations reflect the risk of loss even when that risk is remote. For instance, if you conduct an analysis and determine that your allowance is zero, you still want to perform a thorough analysis to assess risk since you are looking at past historical trends, current conditions, and future expectations. Your allowance might be zero, but there is a high bar to reach that threshold. If an organization has collateral, that collateral does not determine that your allowance is zero. Ask yourself, is our collateral cash, in our possession, and larger than the receivable? This is a piece of the analysis.

Some changes have also been made to terminology. For instance, bad debt expense under the scope of CECL is now called credit loss expense, while the allowance is the allowance for credit loss. Out of scope ASC 958 revenue is still called bad debt.

Once you determine what is involved, break receivables into similar pools. When you do, focus on risk characteristics, such as credit score rating or geographic location. Next, aggregate receivables into separate pools, assessing each and the reserve you should record for that pool. Finally, look at historical loss for receivables from counterparties along with current conditions and anything you could forecast about the future.

Consider whether your asset base has changed, as well. When you look at historical information, did you previously only have receivables from corporations and you now have receivables from individuals, as well? Were your receivables previously only to U.S. customers whereas you now have international? Look at historical information but adjust toward your current asset base. Are economic conditions stronger or weaker than historical data implies? In looking back a few years, do you see a hint of the pandemic? For those receiving additional funding or in a business that enjoyed a lot of demand during the pandemic, you will see different results than would organizations struggling during the pandemic and/or those experiencing substantial loss. Look at historical data and see how it compares to current conditions. Make adjustments based on that to reasonably predict the future while asking yourself: what might affect this?

We advise that organizations look at historical information without assuming a certain percent simply because they have always used this percent. Ensure your assumptions have support. Recalculate to see if the percentage is still accurate. Two calculation models include the Aging Method, which looks at aging, and the Loss Rate Method, which looks at write-offs each year versus average annual receivables to determine an average annual loss. The Loss Rate Method is the easiest yet least precise. If you think that is sufficient for your organization based on dollar amounts and the risk you face, be sure to document your rationale.

Clients should adhere to disclosure requirements by listing policies and policy elections. Then involve others across the board in the analysis. If your receivable base has changed, if you begin adding individuals, or if your receivable base changes and you now want to change the calculation to further refine it, document this in the policy memo and provide it to your auditors. This will ensure your auditors understand the thought process behind your ending balance. Keep in mind, the analysis includes unbilled. So even if you haven’t sent an invoice, you still extended credit. Consider not just balance at fiscal year-end but also expenses throughout the year.

Additional Topics of Interest

Crypto Assets

The accounting industry has worked to devise a method for measuring crypto assets at fair value versus accounting for as an intangible asset. A new standard affecting those with digital assets or those who are considering involvement in digital assets became effective for calendar year 2025 and fiscal year 2026.  However, early adoption is allowed. This shifts crypto assets from a model based on historical cost basis to fair value under certain situations.

Reference Rate Reform

The Reference Rate Reform is still in affect when moving to a more reliable and robust rate, such as the Secured Overnight Financing Rate (SOFR). Its sunset date has been moved to December 31, 2024. There is still time to use this simplified method if you change your reference rate.

Uniform Guidance

Final guidance for Uniform Guidance was issued in early April, making it official as of October 1, 2024. Most important is an increase in the single audit threshold from $750,000 to $1 million (for fiscal years beginning on or after October 1, 2024). The threshold for capitalizing equipment also increased from $5,000 to $10,000.

The de-minimis indirect cost rate of 10 percent is also increasing to 15 percent. This affects clients that do not want to go through another negotiated rate with their oversight agency. Instead, you can opt for up to 15 percent. If you’re currently between 10 to 15 percent, you might be best changing to the simplified method in the future or you may want to continue to use the negotiated rate. AAFCPAs can provide additional guidance on this and can walk you through the process.

Finally, clients offering a lot of sub-awards know indirect costs charged on a sub-award was possible for only the first $25,000. You may now charge up to the first $50,000. This might increase indirect cost reimbursement. If you have multiple sub awards, this might be an opportunity to recapture more indirect costs.

If you have questions, please contact Matthew Hutt, CPA, CGMA, Partner at 774.512.4043 or mhutt@nullaafcpa.com, Amy Staunton, CPA, Director & Consulting CFO at 774.512.9025 or astaunton@nullaafcpa.com, Jennifer A. L’Heureux, CPA, Manager at 774.512.4133 or jlheureux@nullaafcpa.com—or your AAFCPAs Partner.