In our recent webinar hosted by CohnReznick’s Not-For-Profit and Education practice, Jeff Mechanick, Assistant Director and Chairman of the Not-for-Profit Advisory Committee at the Financial Accounting Standards Board (FASB); John Alfonso, Not-for-Profit and Education Industry Leader at CohnReznick; and Catherine Syslo, Not-for-Profit National Assurance Partner at CohnReznick, discussed key FASB accounting standards updates.
The webinar, 2023 FASB Update for Not-for-Profit and Educational Organizations, is part of our ongoing Not-For-Profit Governance & Financial Management Webinar Series.
This recap highlights key standards updates that all not-for-profit and educational organizations need to consider for 2023.
Accounting Standards Update (ASU) 2023-01 Leases – Common Control Arrangements
This ASU is effective for all entities for fiscal years beginning after Dec. 15, 2023, including interim periods within those fiscal periods. Early adoption is permitted. The transition method depends on whether the entity adopts the amendments concurrently with their adoption of Topic 842 or subsequent to their adoption of Topic 842. If adopted concurrently, entities should use the same transition method used to apply Topic 842. All other entities may choose a prospective or retrospective approach, as defined in the ASU.
Key provisions for the ASU:
The ASU provides guidance for private companies, and not-for-profit and educational organizations on whether a lease exists and how to amortize leasehold improvements under common control arrangements.
Entities may elect a practical expedient to use the written terms and conditions of a common control arrangement to determine whether a lease exists and the appropriate classification for accounting purposes. This practical expedient can be applied on a lease-by-lease basis. If no written terms or conditions exist, the entity cannot apply the practical expedient and must use the legally enforceable terms and conditions to determine if a lease exists. An entity is permitted to document any existing unwritten terms and conditions under this arrangement as part of the transition.
Leasehold improvements associated with common control leases are amortized over the useful life of the leasehold improvements instead of the lease term as long as the lessee controls the use of the underlying assets. If the useful life of the common control leasehold improvements does exceed the length of the lease term, the entity must disclose this information.
ASU 2022-06 Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848
This ASU extended the sunset date of Topic 848 to Dec. 31, 2024.
Key provisions for the ASU:
Interbank offered rates (IBORS) are variable interest rates, such as the U.S. Dollar Libor, used globally as reference rates for a large volume of financial products and contracts in order to determine interest-related cash flows. Reference rate reform calls for alternative reference rates to replace IBORS and a transition plan to support it. The standard is intended to simplify the accounting for contract modifications and hedge accounting.
Not-for-profit and educational organizations should review contracts and agreements affected by the reference rate reform and discuss timing with creditors and lenders.
ASU 2016-13 Current Expected Credit Loss Model
This ASU is effective for Not-for-Profit and Educational organizations for fiscal years beginning after Dec. 15, 2022.
Key provisions for the ASU:
This standard provides a methodology to determine the allowance for credit losses for loans and debt instruments not measured at fair value through the statement of activities. It applies to certain lease receivables, financial guarantee contracts and loan commitments, and trade receivables and contract assets. Examples of receivables affected by the new ASU for not-for-profit and educational organizations include student loans receivable, student accounts receivable, patient receivables, and programmatic loans from foundations to charities.
The new methodology considers current economic conditions and conditions in the foreseeable future (typically one to two years out). Additional disclosures will be required to help users understand how credit losses are estimated.
The FASB has developed a Q&A that provides guidance on using historical loss information and developing reasonable and supportable forecasts when applying the new credit loss model.
FASB technical and research projects
During our webinar, we also discussed some of FASB’s technical and research projects that are currently in progress.
Proposed Accounting Standards Update – Intangibles-Goodwill and Other – Crypto Assets (Subtopic 350-60), Accounting for and Disclosure of Crypto Assets
Under the proposed standard, crypto assets would be classified separately on the statement of financial position from other intangible assets. The assets would be measured at fair value replacing the historical cost impairment model. Gain and losses would be reported on the statement of activities separate from the amortization of other intangible assets in operating activities unless designated for an endowment or other long-term purposes. The proposed standard includes enhanced disclosure requirements including significant crypto asset holdings, restriction on the crypto assets, roll forward of the activity, and historical realized gains and losses.
To be considered a crypto asset under this proposed standard the following six criteria need to be met:
- The asset must meet the definition of an intangible asset.
- The asset does not provide the asset holder enforceable rights to, or claims on, underlying goods, services, or other assets.
- The asset resides on a distributed ledger or blockchain.
- The asset is secured through cryptography.
- The asset is fungible.
- The asset is not created by a reporting entity or related party.
Intersection of Environmental, Social, and Governance (ESG) with Financial Accounting Standards
The FASB staff developed an educational paper to provide investors and others interested with an overview of the intersection of ESG matters with financial accounting standards. This includes an overview of ESG reporting, FASB’s role in setting financial accounting standards, and an overview of the intersection of ESG matters with financial accounting standards.
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