All posts by Danielle Martin

CHANGES IN ACCOUNTING FOR LEASES

Whether you are a small startup organization just getting off the ground or are well-established with years under your belt, chances are you have leased a piece of equipment, office space or property. These leases have been treated as either operating or capital leases on your books. All that is about to change.

On February 25, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). The ASU on leases will take effect for public companies for fiscal years beginning after December 15, 2018 (calendar year 2019) and for all other organizations, including not-for-profit organizations, for fiscal years beginning after December 15, 2019 (calendar year 2020).

A few of the improvements that the FASB is seeking through the new lease standards are:

• More faithful representation of a lessee’s rights and obligations arising from leases
• Fewer opportunities for organizations to structure leasing transactions to achieve a particular outcome on the balance sheet
• Improvements in the understanding and comparability of a lessee’s financial statements
• Additional information about lessors’ leasing activities and exposure to credit and asset risk as a result of leasing

There are many key requirements to the standard that will need to be addressed, but the biggest changes for your organization are as follows:

• If you are the lessee, you will recognize most leases on your balances sheet (statement of financial position for not-for-profit organizations). If your lease term is greater than 12 months you will be recording both a right of use (ROU) asset and a lease liability. This differs from current treatment of operating leases as currently you are expensing your lease cost on a monthly basis, thus only effecting your “bottom line” and not assets or liabilities.
• There will be expanded quantitative and qualitative disclosures by both lessees and lessors.
• Organizations will need to review each lease and other arrangements to determine if still meet the criteria under the new definition.

Beyond financial reporting, the standard impacts other aspects of operations:

• Moving operating leases onto the organization’s balance sheet could make a significant difference in the numbers the organization is reporting (to creditors, board members, etc.), affecting loan covenants for example.
• Larger organizations with multiple leases may need to spend additional time and resources to identify all leases and gather the data needed to apply the new standard.

We encourage you to start the process early, meet with your management, board, lenders, donors, other users of your financial statements and your accountant to discuss the standard and the impact on your organization.

About the Author: Danielle D. Martin, CPA is a Senior Audit Manager at Perry, Fitts Boulette & Fitton CPAs with 24 years of experience in the accounting world. She can be reached at danielle@pfbf.com or 873-1603.

Tax Season is for Nonprofits, Too

“Tax season” is a term that most of us are familiar with and things are certainly getting into full swing at tax firms across the country. Typically, people think of Forms 1040, 1120 and 1065 at this time of year. There is however, another very important form that non-profit organizations (NPO) need to file, which is IRS Form 990 – Return of Organization Exempt from Income Tax. Unlike individuals, NPO’s have varying year ends which keep CPA firms busy year-round.

Form 990 presents the organization’s financial picture for the year. In addition, it provides information on governance, compliance with other tax filings, specific information on programs and overall general operations. In short, it is a one-stop shop for users to learn about an organization. Consequently, it’s important for the NPO to complete the return accurately and of course timely.

There are 16 schedules to the 990 that a nonprofit organization needs to be aware of. Management, along with assistance from the auditor/accountant, should go through the “Checklists of Required Schedules” on pages 3 and 4 of the 990 to determine which schedules pertain to them and that will in fact need to be filed. The following are some of the more common schedules required: Schedule A – Public Charity Status and Public Support, Schedule B – Schedule of Contributors, Schedule D – Supplemental Financial Statements, Schedule G – Supplemental Information Regarding Fundraising or Gaming Activities, Schedule J – Compensation Information, Schedule L – Transactions with Interested Persons and Schedule O – Supplemental Information to Form 990.

For nonprofits with gross receipts of less than $200,000 and total assets at the end of the year of less than $500,000, the Form 990-EZ should be filed. Smaller tax-exempt organizations who’s annual gross receipts are normally $50,000 or less can comply with their annual reporting requirement by electronically submitting Form 990-N (e-Postcard). The due date for the Form 990 series is the 15th day of the 5th month following the year-end. For NPOs with a December 2016 year-end, the initial due date is May 15th.

Form 990 is not only an IRS compliance requirement, but more importantly it is a way for the NPO to educate potential donors and board members, tell their story, explain their mission and market their organization and programs. It can be a key tool in an organization’s fundraising and marketing efforts.

About the Author: Danielle D. Martin, CPA is a Senior Audit Manager at PFBF CPAs with 24 years of experience in the accounting world. She can be reached at danielle@pfbf.com or 873-1603.