Believe it or not, the end of the year and audit season are right around the corner — bringing with them summer weather and, hopefully for most of you, summer vacations. But before you hang up your boots and recharge for next year, you will need to pay attention to some accounting updates and reminders that might have fallen to the bottom of your pile of to-dos.
Employee Retention Credits
For those independent schools that took advantage of the Employee Retention Credits (ERC) or plan to file an amended return to do so, there is still no specific GAAP accounting guidance for reporting the payroll tax credit. The general recommendation is to treat the credit the same as a government grant and follow the contribution accounting rules. If an independent school files an amended Form 941 to take advantage of the ERC for a previously audited period, it is important for the school to connect with their audit firm for guidance on when to report the grant revenue.
Shuttered Venue Operators Grant
For those independent schools that received the Shuttered Venue Operators Grant, the accounting considerations for reporting the income are the same as reporting ERC. There are no GAAP accounting rules specific to this grant. Independent schools should follow contribution accounting rules to record the income.
A single audit would consider whether the independent school followed the applicable federal statutes and regulations and terms and conditions of the federal awards.
It is possible that receiving the Shuttered Venue Operators Grant could trigger the need for a single audit. According to CliftonLarsonAllen LLP, a single audit is required when a state or local government, Indian tribe, institution of higher ed (IHE), or nonprofit organization is the recipient or subrecipient of a federal award and expends $750,000 or more of federal awards during their fiscal year. The $750,000 threshold includes assistance received in the form of loans. A single audit would consider whether the independent school followed the applicable federal statutes and regulations and terms and conditions of the federal awards. It would also consider appropriate internal controls, policies and procedures tied to the expenditure of the funds. If you believe your independent school falls into this category, it is recommended that you reach out to your audit firm as soon as possible.
Leases (ASU 201-02; Topic 842)
The wait is over. The lease accounting standard update went into effect on December 15, 2021. In other words, your next fiscal year. Some independent schools have started this work and are already utilizing the new standard in their current fiscal year. For those that require a quick refresher, here are the highlights:
Why did the lease accounting standard get an update?
To increase transparency and comparability among organizations.
A lessee should recognize the assets and liabilities that arise from leases.
No requirement for lease assets and liabilities to be recognized for most leases.
Exceptions to the new standard:
Leases for 12-months or less can make an election not to recognize lease assets and liabilities.
Where do leases exist at independent schools?
There are two different types of leases that could exist, finance and operating. Finance lease agreements exist when there is a potential transfer of ownership, for instance, with technology equipment or a vehicle. Operating leases exist when there is no transfer of ownership. Examples include leasing copiers or leasing swimming pool access.
How will independent schools measure and account for leases under this standard?
The core principle behind this update is to recognize leases as assets and liabilities. The two general ledger accounts to use for recording the present value of the lease payments are right-of-use asset and lease liability. Lease payments include payments for optional lease extensions if the school is reasonably certain it will exercise this option. It does not include variable lease payments.
How will our financial statements be impacted by the lease accounting standard update?
The charts below provide more information on the monthly journal entries and the impact to the financial statements
What if my school is a lessor?
The new standard does not largely affect the accounting for lessors. Leasing is fundamentally a revenue generating activity and should align with the school’s revenue recognition policies and procedures.
Reference Rate Reform (ASU 2020-04; Topic 848)
The objective of the reference rate report accounting standard update is to provide relief in accounting for contract modifications related to transitioning from the London Interbank Offered Rate (LIBOR) and other reference rates for a limited time. LIBOR was once the benchmark interest rate at which major global banks used to lend to one another. It is being phased out because of the role it played in worsening the 2008 financial crisis as well as scandals involving LIBOR manipulation among the rate-setting banks. This update may be applied any time after March 12, 2020, but no later than Decem. Although this does not appear to be a big issue for independent schools, reviewing all contracts (receivables, debt, leases, etc.) for referenced discontinued rates is the first step to determining if the school qualifies for this update. If rate modifications are discovered, it is important to reach out to the school’s financial institutions and accounting firm.
Independent schools will be required to report gifts-in-kind as a separate line item on the statement of activities and provide a footnote disclosure, including a listing of the different types as well as qualitative information supporting your policies and procedures related to the gifts-in-kind.
Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets (ASU 2020-07)
Gifts-in-kind may be a significant component of operations for some not-for-profits, which is the reason for this update. Providing better presentation and disclosure for contributed goods and service will improve transparency. There is no change in the accounting. Independent schools will be required to report gifts-in-kind as a separate line item on the statement of activities and provide a footnote disclosure, including a listing of the different types as well as qualitative information supporting your policies and procedures related to the gifts-in-kind. This standard goes into effect this year. Presentation and disclosure examples can be found beginning on slide 8 of CliftonLarsonAllen’s Audit and Tax Updates for Nonprofits in 2022.
Auditor Reporting Standard Updates
Although these standards won’t affect independent school accounting directly, they might affect schools’ audit experience. The audit report itself will look different and refer to the term “going concern” in two different places. But do not fret — this language may not necessarily represent a true “going concern” for the school. An example of the new audit report can be found on this trifold provided by CliftonLarsonAllen.
According to the guidance, if your independent school produces an annual report each year that “contains, accompanies or incorporates by reference the financial statements and auditor’s report thereon,” additional audit procedures will be required on the annual report before the auditors can issue their opinion and finalize their audit. This update goes into effect beginning after December 15, 2021. If your school falls into this category, you should check in with your auditors to see if this standard will require further testing and coordination.
Unrelated Business Income
Although unrelated business income (UBI) isn’t a new concept, it may be new to some independent schools as they’ve learned to innovate over the past few years and therefore is important to mention as you work towards closing the year. Unrelated business income exists when three requirements are met:
- Is the revenue generated from a trade or business?
- Is this trade or business regularly carried on?
- Is this trade or business not substantially related to the exempt purpose of the independent school?
When these three criteria are met, UBI exists and triggers tax. The key to managing UBI is to identify that it exists, properly account for the activity including related expenses and create a budget for the tax consequences. In January, NBOA released “Tax Compliance Considerations for Not-for-Profit Independent Schools,” which dives deeper into the subject of unrelated business income tax as well as many other tax related topics at not-for-profit independent schools. Referencing this guide would be a great next step for any not-for-profit school that feels the UBI criteria might apply to them.