New Accounting Policies for Not-for-Profit Organizations
AMS has relationships with a variety of key service providers who work with our nonprofit and for-profit clients, including CPAs,bankers, insurance and benefit providers. This guest article on “New Accounting Policies for Not-for-Profit Organizations” is courtesy of the McGladrey Muse, a monthly publication dedicated to providing ideas and education to tax-exempt organizations.
With the introduction of the new FASB Accounting Standards Codification (ASC) and the large volume of changes to accounting guidance contained in the codification, many not-for-profit organizations have found it difficult to keep pace. The codification changes are fundamental modifications that will affect how organizations report all of their financial information; however there are several other updates to the codification that will affect more specific reporting areas.
McGladrey & Pullen, LLP recently hosted the Annual Not-for-Profit Accounting Update webinar to introduce and evaluate specific changes that are likely to affect organizations. The webinar presented several recently issued and planned pronouncements that impact entities across the diverse nonprofit spectrum. Several of the recently issued standards are analyzed below.
Subsequent events ASC 855, Subsequent Events, is a topic that is not necessarily new for not-for-profit entities, but continues to cause difficulty for many of these organizations. ASC 855 became effective for periods ending after June 15, 2009, and requires all organizations to disclose the date through which the organization has evaluated subsequent events for recognition and/or disclosure in the financial statements. This date is normally the auditors’ report date.
ASU 2010-09, Amendments to Certain Recognition and Disclosure Requirements, was also recently released to clarify the requirements for conduit debt obligors as they pertain to evaluating subsequent events. This guidance requires that such organizations be treated like a public company when it comes to evaluating subsequent events, thereby requiring conduit debt obligors to evaluate subsequent events through the date that the financial statements are issued. ASU 2010-09 also defined the financial statement issuance date as the date on which financial statements are widely distributed.
Mergers and acquisitions Two revisions to the codification that are of specific interest to not-for-profit organizations are ASC 958-805 and 810, which established how entities determine a merger versus an acquisition and the proper accounting for such transactions. These changes are effective for mergers occurring after Dec. 15, 2009 and acquisitions occurring in the first reporting period beginning on or after that date (i.e. organizations with a Dec. 31, 2010 fiscal year end will be the first to apply the new guidance).
The new guidance states that a merger should be accounted for using the carry over basis on the date of the transaction. Meaning if an organization qualifies for merger accounting, it must account for the transaction by recording the assets and liabilities assumed at their current carrying value as of the date of the merger. An acquisition requires an entity to record the assets acquired and the liabilities assumed at fair value which is very similar to the requirements for for-profit entities. If you qualify for acquisition accounting, you may need to involve a valuation expert to accurately determine the fair value of certain assets and liabilities.
Another key feature of the new guidance is that acquisition costs are now expensed, except for debt issuance costs. In the past, legal, accounting and consulting fees incurred in the process of an acquisition were allowed to be capitalized; that is no longer allowed under this new standard.
So how do you determine what is considered a merger and what is an acquisition? These pronouncements define a merger as the combination of two or more governing bodies of not-for-profit organizations who give up control to a new nonprofit entity. An acquisition is where one organization obtains control of another. The presumption is that an organization will apply acquisition accounting unless it specifically qualifies for merger accounting.
An overlooked provision of this standard makes the previous FAS No. 142, regarding goodwill and intangibles, effective for not-for-profit organizations. FAS No. 142 previously specifically exempted not-for-profit organizations from its scope. In addition, the previous FAS 160, relating to non-controlling interests also becomes effective for not-for-profit organizations.
Another little known facet of this standard is that an acquisition can result in negative goodwill. If that’s the case, the negative goodwill is reflected as contribution revenue on day one in the statement of activities for the new organization. If you have positive goodwill, the new guidance also dictates that you must determine whether or not that goodwill should be capitalized, or flow through the statement of activities. The standard says that if your organization is predominantly supported by contributions or investment returns, then your goodwill should be recorded in the statement of activities rather than on the balance sheet.
Other provisions of this guidance relate to donor relationships. This guidance specifically states that donor relationships should not be recognized as an intangible asset separate from goodwill. However, donor lists may be capitalized if they are separable and could possibly be used by an acquirer.
Health care entities – Measuring charity care The FASB has been very busy in developing new standards relating to the health care industry. One of those new pronouncements is ASU 2010-23, Health Care Entities (Topic 954): Measuring Charity Care for Disclosure, which is effective for fiscal years beginning after Dec. 31, 2010, but early adoption is permitted. The new guidance should be applied retroactively to all prior periods presented. We recommend that organizations begin reviewing the standard now to determine its impact and ensure that information needed to comply with the new guidance is readily available.
The objective of this pronouncement is to reduce diversity in practice regarding the measurement basis used for the disclosure of charity care. Currently, there is much variation in terms of health care providers and how they disclose charity care in their financial statements. Today, some disclose the charges forgone and others disclose the cost to provide charity care. The standard requires that the cost to provide charity care to patients (both direct and indirect costs) to be used as the measurement basis for disclosure purposes.
The standard does not dictate how the costs should be determined, it only states that you must use a “reasonable technique” such as a cost to charge ratio. In addition, the standard requires disclosure of the method used to determine costs and any funds received that were intended to offset or subsidize charity care. This standard impacts disclosures only and does not change the current financial reporting for charity services.
Health care entities – Insurance claims and related insurance recoveries Another new standard affecting the health care industry is ASU 2010-24, Health Care Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries. This standard is also effective for fiscal years beginning on or after Dec. 15, 2010 and retrospective application and early adoption are permitted.
The objective of this standard is to reduce the current diversity in practice related to how entities account for medical malpractice claims and similar liabilities and their anticipated insurance recoveries. Currently, most health care entities currently net anticipated insurance recoveries against related accrued liabilities. However there are some that gross up these assets and liabilities on their balance sheet.
This new standard requires that those assets and liabilities be grossed up and states that entities should not net insurance recoveries against a related claim liability. If a difference exists between the assets and liabilities as a result of applying this new standard, then a cumulative-effect adjustment should be recognized in opening retained earnings in the period of adoption.
This new guidance is considered by many to be an improvement in current accounting requirements because it eliminates what was an industry exception that existed in terms of general accounting principles relating to net presentation. The health care industry was specifically exempt from the current accounting principles, which dictated when net presentation was proper on the balance sheet. This will create consistency with the health care industry and other industries.
For a further analysis of these standards, as well as insight into fair value measurements, technical practice aids specific to not-for-profits and pending accounting guidance that may impact your organization, view the full webinar.