As part of working on a big writing project, I’ve reread my notes from several continuing education classes this year. (More details later and a link to the published material much later.) Thought I would share a variety of stray ideas. Here are a few tidbits from the classes.
Probably need to note that I have not gone back and read the original pronouncements supporting each idea and therefore I do not have a specific citation for you. (Reading three of the documents is the next step for my writing project.)
For what it is worth here are some tidbits you might enjoy:
Leases – ASU 2016-02.
One of the key on/off switches is whether a particular transaction or document is a lease. That will require an assessment of each transaction.
Right of use assets (the new description) resulting from operating and financing leases need to be listed separately on the statement of financial position. Those two categories (operating right of use and financing right of use) will be presented separately from fixed assets.
The five criteria used to identify a financing lease roughly parallel the current criteria. Major idea is there is no bright line, no explicit percentage test.
As an intriguing policy option, an organization can elect modified retrospective implementation and choose to run off all old leases. I think this will likely be quite appealing to large number of organizations, especially charities.
Revenue recognition, Rev Rec – ASU 2014-09 now codified in ASC 606.
The AICPA has published a Revenue Recognition Accounting and Auditing Guide. There are 11 chapters addressing issues from particular industries. Chapter 8 addresses the not-for-profit sector.
The impact of ASU 2014-09 will vary widely based on industry. Impact on industries such as software and telecommunications are expected to be dramatic.
In general the impact on the not-for-profit sector will be nowhere as severe as those industries. However, the impact within the NFP community will vary dramatically. Colleges and universities will certainly encounter far more significant issues than churches and synagogues.
As an illustration of where there could be an unexpected impact is an opera house or museum that sells tickets or memberships which allow a discount in the gift shop. It’s possible the discount could be a separate performance obligation. If so, the accounting will be more complicated than most NFPs are prepared to handle. At a minimum an organizational will need to assess whether that discount is a performance obligation or not.
Another surprise awaiting many entities will be that loyalty programs could be a separate performance obligation. You know, those buy-five-get-next-one-free programs? Organizations will have to assess what to do with those. Likewise, consider mileage points for the airlines and awards points for credit card companies. Those will have to be assessed as to whether they are performance obligations, and if so, brought into the rev rec calculations.
Implementation options include full retrospective or cumulative effect. The cumulative effect approach might create an odd situation where some income could disappear from reported revenue since it wouldn’t be on previously issued financial statements and would flow into net assets or retained earnings upon implementation. Thus, it wouldn’t flow through current year income.
Next: Part 2 discussing financial statement presentation for not-for-profits and the risks inside spreadsheets.