For nonprofits, the New Year is ushering in new hope. Organizations are learning to adapt to meet the challenges of the pandemic, and the upward trend in charitable giving is expected to continue in 2022. In 2021, charitable giving increased by 6% over 2020. The start of the new year also brings new accounting considerations. To help your organization prepare for your 2022 financial statement engagement, I’m sharing some insight on how relief funding, COVID-19, and regulatory matters could affect your financial statements this year.
The Impact of Relief Funding
Because the pandemic made additional relief funds available, nonprofits may have received more federal awards than they are accustomed to receiving in a typical year. If your organization carries out federal awards, whether as a recipient or subrecipient, and expends direct or indirect federal awards in excess of $750,000 within your fiscal year, you may be required to have a Single Audit of the federal program activities.
To record the Employee Retention Credit (ERC), nonprofits should follow Subtopic 958-605: Nonprofit Entities, Contributions Received. If the ERC was received as an advance, your organization would record a liability for the cash received if it received. Your organization would record the amount as grant revenue or other income only when the conditions to earn the credit are substantially met.
If your organization received a loan through the Paycheck Protection Program (PPP), you should present the loan on your balance sheet. US generally accepted accounting principles (GAAP) do not specifically address recording Paycheck Protection Program (PPP) loans. Depending on whether you expect the loan to be forgiven, your organization may follow ASC 470: Debt or Subtopic 958-605: Nonprofit Entities, Contributions Received to record the loan.
Goodwill & Other Intangibles
Nonprofits may now take advantage of the simplified accounting alternatives for reporting goodwill and certain identifiable intangible assets already available to private companies. Under the alternative for goodwill, nonprofits may choose to amortize qualifying goodwill on a straight-line basis over ten years (or less if more appropriate). If this alternative is elected, you must apply subsequent measurement, derecognition, presentation, and disclosure requirements to existing goodwill and all applicable future additions to goodwill. Nonprofits that adopt this accounting alternative may also choose to use the alternative for identifiable intangible assets to bypass the separate recognition of noncompete agreements and certain customer-related intangible assets.
The Financial Accounting Standards Board’s (FASB) accounting standards update (ASU) 2020-07 could affect your nonprofit organization in 2022. ASU 2020-07 requires nonprofits to disclose nonfinancial assets and cash contributions separately on the organization’s statement of activities. Nonprofits are also required to make related disclosures in their financial statements, including a breakdown of amounts by asset category; details on how, when, and why the assets were monetized or used; any donor-imposed restrictions; and valuation techniques, inputs, and principal market used to determine fair value.
ASU 2020-07 is effective for annual accounting periods beginning after June 15, 2021, and interim periods within annual periods beginning after June 15, 2022; however, it should be applied retrospectively, and early adoption is permitted.
New Standard of Lease Accounting
The FASB’s ASU 2020-05 gave nonprofit entities that had not issued their financial statements as of June 3, 2020, more time to adopt and comply with the new leasing and revenue standards. But time is almost up. For nonprofits, the new lease standard goes into effect for annual reporting periods beginning after December 15, 2021. It’s time to ensure your processes for identifying, classifying, and properly accounting for leases meet the new standards.
Going Concern & Other Issues Related to COVID-19
If your organization was among those that were hit harder by the effects of the pandemic, your status as a going concern may be affected, which will affect your basis of accounting and change the presentation of your financial statements.
Other COVID-19-related concerns that could alter your financial statement requirements, disclosures, and presentation include:
- subsequent events
- contingent losses
- asset impairment
- insurance recoveries
- fair value measurements
- modifications or extinguishment of liabilities
- other risks and uncertainties
Preparing for a Remote Audit
The audit process may look a little different this year, as many audits will be conducted remotely. If the remote format is new audit territory for your organization, check out our previous article, How Your Nonprofit Organization Can Prepare for a Remote Audit, to learn more.
ARB’s Nonprofit Services Team helps nonprofits stay on the leading edge at any stage of financial growth. My team provides resources, legislative updates, best practices, and services tailored to your industry and organization’s needs. To discuss your organization’s needs, contact me today.
by Amy Gardella, CPA
Amy Gardella is a manager at ARB. She specializes in providing accounting and auditing services to nonprofits and commercial entities. In her work with nonprofits, Amy provides services that help organizations meet their regulatory obligations and move toward their goals while keeping their limited resources focused on fulfilling their mission.