Since the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-12, Definition of a Public Business Entity (ASU) 2013-12, Definition of a Public Business Entity (ASU 2013-12), it has been clear that a not-for-profit entity (NFP) is not to be treated the same as a public business entity (PBE). What organizations might not have realized, however, is that further within that standard the FASB specifically states that given the unique nature and characteristics of NFPs and the users of their financial statements, a public or nonpublic distinction should not be made for financial reporting purposes. Instead, considerations would be made on a standard-by-standard basis.
Why is this important? Typically a new standard issued by the FASB has an effective date based on whether an entity is considered a public or nonpublic business entity. NFPs should pay particularly close attention, because a NFP’s classification can change depending on the standard. For example, currently ASU 2016-02, Leases and ASU 2014-14, Revenue from Contracts with Customers, states that an NFP that has issued, or is a conduit bond obligor for, securities that are traded, listed or quoted on an exchange or an over-the-counter market follow the same effective date as the PBEs per the standard. This effective date is earlier than all other entities. Typically, NFPs that borrow against municipal bonds fall under this classification.
In July 2017, the American Institute of Certified Public Accountants (AICPA) issued updated technical questions and answers to help further clarify the process of determining the status of an organization.
Understanding how a standard classifies organizations is imperative in determining when the standard is effective. As the first round of entities are required to adopt the new revenue recognition standard (ASU 2014-09) for fiscal years beginning after December 15, 2017, NFPs should take a closer look at the criteria provided and ensure timely and appropriate adoption. NFPs should also inquire of their accountants, auditors and other professionals for further guidance or clarification. For more information on the FASB issued Accounting Standards Update, contact us.