Draft NFP Audit and Accounting Guide Released

*UPDATED 8/30/12 9:08am*

The AICPA has recently released their draft of the overhauled Not-for-profit Audit and Accounting Guide, and made it available for download and comment.  Unfortunately, the draft is not a redline version, so figuring out what has changed can be a little tricky in the 476 page document.

An article posted by the Journal of Accountancy gives some insight into changes included in the draft, and hopefully more articles come out soon by people who have time to cross reference the new draft with the old guide:

  • A greatly expanded section about reporting relationships with other entities. The guide will provide guidance and examples for reporting relationships with not-for-profit and for-profit corporations, limited liability partnerships, general partnerships, and financially interrelated entities.
  • New sections about reporting and measuring noncash gifts, including gifts in kind; contributions of fundraising materials, informational materials, advertising, and media time or space; below-market interest rate loans; and bargain purchases.
  • A greatly expanded section about municipal bond debt, including IRS considerations, third-party credit enhancements, capitalization of interest, extinguishments and debt modifications, and the effects of terms such as subjective acceleration clauses on the classification of debt.
  • New guidance for reporting the expiration of donor-imposed restrictions.
  • New section on the administrative costs of restricted contributions.
  • New section on programmatic investments.
  • Greatly expanded discussion about the legal and regulatory environment in which not-for-profit entities operate.

While there is sure to be many topics for discussion regarding the new draft (and I’ll leave topics for my fellow bloggers), there was one change I noticed that stood out to me as being a significant change.

Contributed Advertising Airtime

Paragraph 5.159 states two things:

1. “…the use of property, utilities, or advertising time are considered to be forms of contributed assets, rather than contributed services.

2. Recognition of advertising time as a contribution received “is unaffected by (a) whether the NFP could afford to purchase them or (B) whether they would typically need to be purchased by the NFP if they had not been provided by the contribution.

In current practice, contributed airtime is considered to be a contributed service and therefore, subject to the more stringent rules regarding recognition, namely that the organization must have been able to otherwise purchase and would have purchased.  This means that millions of dollars of previously unrecognized revenue and fundraising expenses, would theoretically now be recognized if organizations were to follow this guidance.

To see the effect of this, lets use an extreme example, the United Way.  For the year ended 6/30/10, the United Way recognized the following:

Total Revenue: 92,385,000

Program services expense:  85,456,000

General and Administrative expenses: 7,448,000

Fund-raising expenses: 2,090,000

Total Expenses: 94,994,000

*All numbers taken from United Way’s Financial statements for June 30, 2010, available here

In footnote 23, they also list three types of donated advertising that they receive which totals ~$65 million.  However, they currently do not recognize this as revenue because of “UWW’s inability to purchase such advertising.”  If these donations are now to be considered contributed assets, then the criteria for ability to pay would no longer apply and all would be recorded as revenue.  An open question would be whether this airtime would subsequently be considered a fundraising expense or a program service; but to make a more dramatic example, lets was considered it to be fundraising expense.  Their financials would dramatically change and might look something like this:

Total Revenue: 157,385,000

Program services expense:  85,456,000

General and Administrative expenses: 7,448,000

Fund-raising expenses: 67,090,000

Total Expenses: 159,994,000

*Please note these numbers are used only to provide an example and do not imply that this is the way United Way would record their revenue in the future or that United Way is under any obligation to follow this guidance

Revenue for the United Way would increase 70% to over $150 million and the fundraising ratio could potentially increase from just 2% to 42%.  Granted, most organizations do not have nearly as much donated airtime as United Way, and all this air time could possibly be considered program services, but this shows the extreme that this guidance could be taken.  Many organizations do receive donated airtime and there could be increases in revenue for several organizations.

The 990 Effect

The question that then comes to mind is, how does this affect the 990?  On the 990 contributed services are excluded from revenue/expense but other non-cash gifts are included.  The instructions for the 2011 form, Part VIII Statement of Revenue state “Contributions do not include…donations of services (such as the value of donated advertising space or broadcast air time).”  So as of now, donated air time is still excluded from the 990, but it will be interesting to see if the IRS follows the new guidance or remains different.  If the 990 stays the same, then we’ll have to watch for organizations that possibly could show large differences between their financial statement revenue and their 990 revenue.

The 990 is additionally important as it is the document that is used by watchdog organizations for evaluating charities.  While organizations financial statements may show a significant change, their 990 would likely stay the same.

In conclusion, it appears that this update to the Audit and Accounting Guide should be reviewed closely by organizations to see how the changes could affect them.  For those organizations that receive non-cash gifts, both assets and services, chapter 5 especially should be reviewed.  I’ll eagerly await other’s articles as more changes are found and discussed.


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