While an organization might be nonprofit, it can be affected by accounting standards made for the for-profit world, according to Allen L. Fetterman, a speaker at the NYSSCPA’s Nonprofit Conference in January.

The Nonprofit Conference, the Society’s 38th annual, was held first in Rochester on Jan. 7, where 111 people attended, and then in New York City on Jan. 14, drawing 316. The conference featured practitioners who specialize in the nonprofit sector and regulators from agencies overseeing it.

Speaking to his audience at the Marriott Marquis in New York City, Fetterman, a specialist in nonprofit accounting, said that for many years, it wasn’t entirely clear whether not-for-profits were public or private entities. He added that he remembers this question going back to the 1970s when he was a young auditor, but it wasn’t until 2013 that the Financial Accounting Standards Board (FASB) gave a definitive answer: They’re neither. The FASB decided that not-forprofits are their own type of entity.

This means that many parts of the accounting literature simply don’t apply to them. The revenue recognition standard, for example, concerns contracts with customers, which Fetterman said are different from donors. But this doesn’t mean the standard can be ignored entirely.

Fetterman pointed to a gray area in the revenue recognition standard that could mean not-for-profits still need to apply the rule: government contracts and other sponsored agreements. What if, he posed, a government entity contracted a not-for-profit to run a teen after-school program?

“Is the government, in this arrangement, a customer? If you think yes, it’s an exchange transaction. But if you think no, it’s not an exchange transaction—it’s a contribution,” he said.

Until the FASB comes out with guidance addressing this ambiguity, Fetterman said he thinks of it as a conditional contribution, because it represents a future uncertain event.

Hospitals and schools will also need to comply with the new standard, he said, because medical payments and tuition both count as contracts with customers.

Leases are another area that doesn’t immediately seem to apply to nonprofit accounting. Fetterman explained that the new standard only concerns commercial real estate, but does not apply to nonprofits working with donated space. But even if the standard doesn’t apply, Fetterman warned against not recording the space’s value.

Because U.S. Generally Accepted Accounted Principles (GAAP) is silent on the subject of donated space, Fetterman believes that CPAs should turn to the AICPA’s accounting and auditing guidance for notfor-profit entities because it’s very similar to the GAAP standard. Under this guidance, nonprofits that are donated space or leased property at no charge need to recognize the right-to-use asset at fair value.

“For example, I donate office space to a nonprofit—10 years, free of charge. The fair rental value of the property is $40,000 a year—$40,000 times 10 is $400,000. Discount it back to present value using [a] riskfree rate—$110,000. Entry? Debit leasehold,” he said.

Another for-profit standard that can affect a nonprofit organization is the one on uncertain tax positions. Fetterman said that while nonprofits are generally tax-exempt, they still need to pay for unrelated business income, and so would still need to disclose uncertain tax positions. This goes for all nonprofits. He recommended that private foundations disclose as well, though conceded that not everyone agrees.

“Private foundations say that doesn’t apply to us because we pay an excise tax on our net investment income. I would say to them that the IRS calls it an excise tax, but it’s an income tax. … I’ve heard others say no. I leave that to your professional judgment.”

Not that nonprofits are entirely absent from recent accounting standards. The standard on classification of donated financial assets and the standard on services received from personnel of an affiliate both concern nonprofits specifically.

The first standard says that when organizations receive donations of financial assets and sell them immediately, the sale is considered part of operating cash flow, not investment cash flow. Fetterman told the audience that the standard is already in effect, but there are too many organizations that aren’t aware of it.

“I talk to firms who don’t even realize this was out there, or their clients have not adopted this standard. But it’s a standard, and it has to be done,” he said.

The second standard requires that nonprofits getting free services from a parent, subsidiary or commonly controlled entity must recognize those services at the cost incurred by the donating entity. Fetterman said it became effective for the 2014—2015 fiscal year. He warned against confusing this standard with FASB Statement 116, Accounting for Contributions Received and Contributions Made, since this standard only concerns donated services from an affiliate.

In general, Fetterman advised that nonprofits seek other guidance, if the authoritative standards don’t seem to apply to them, such as that offered by the AICPA’s Financial Reporting Executive Committee. Even if the guidance isn’t authoritative, it can still reflect best practices, and so should be followed.

“If you don’t, you could be called [upon] to explain to a peer review, an ethics committee or a court of law why you didn’t follow what is considered best practice,” he warned.

 

The FASB’s Not-for-Profit Project

While Fetterman discussed standards that may or may not apply to nonprofit organizations, Richard Cole, supervising project manager for the FASB, spoke about something that pertained to them directly: the FASB Not-for-Profit Project.

Today’s nonprofit financial statements are difficult to understand for anyone who is not, in Cole’s words, a “nonprofit nerd” like himself. The goal of the project is to make the information on the financial statement more accessible to people who may not be experienced financial statement users. This is why the FASB exposure draft focused mainly on presentation and disclosure, rather than substantive accounting changes.

Cole said that ever since the exposure draft was first released in April 2015, the FASB has been collecting feedback on the proposal and incorporating it into the second draft.

Cole also said that the scale of the project has meant the FASB will be splitting it into two phases. The first phase will address less contentious proposals, such as collapsing the three main asset classes into two. Phase II will be devoted to more complex issues, such as operating measures.

Some aspects of the original proposal that Cole said will remain in the Phase I exposure draft, expected to be released in June, include—

• reporting assets as either with or without donor restrictions, vs. the current practice of categorizing them as unrestricted, temporarily restricted or permanently restricted;

• enhanced disclosures;

• the option to use the direct method of reporting, whereas currently, people must use the indirect method; and