Potential benefits

U.S. Generally Accepted Accounting Principles (GAAP) are considered by many people to be the gold standard in financial reporting. However, the process is complicated, so accounting departments usually take two to six weeks to send out GAAP financials. It takes even longer if an outside accountant reviews or audits the financial statements. Plus, most organizations only publish financial statements monthly or quarterly.

By comparison, weekly flash reports typically provide a snapshot of key financial figures, such as cash balances, receivables aging, collections and payroll. Some metrics might even be tracked daily — including sales, shipments and deposits. This is especially critical during seasonal peaks or among distressed borrowers.

Effective flash reports are simple and comparative. Those that take longer than an hour to prepare or use more than one sheet of paper are too complex. Comparative flash reports identify patterns from week to week — or deviations from the budget that may need corrective action. Graphs and tables can help nonfinancial people who receive flash reports interpret them quickly.

Critical limitations

Flash reports can help management proactively identify and respond to problems and weaknesses. But they have limitations that management should recognize to avoid misuse.

Most important, flash reports provide a rough measure of performance and are seldom completely accurate. It’s also common for items such as cash balances and collections to ebb and flow throughout the month, depending on billing cycles.

Companies generally use flash reports internally. They’re rarely shared with creditors and franchisors, unless required in bankruptcy or by the franchise agreement. A lender also may ask for flash reports if a borrower fails to meet liquidity, profitability and leverage covenants.

If shared flash reports deviate from what’s subsequently reported on GAAP financial statements, stakeholders may wonder if management exaggerated results on flash reports or is simply untrained in financial reporting matters. If you need to share flash reports, consider adding a disclaimer that the results are preliminary, may contain errors or omissions, and haven’t been prepared in accordance with GAAP.

Tailoring the report

What information should be included on your organization’s flash report? This is a common question, but there isn’t a universal template that works for everyone. For instance, a consulting firm might focus on billable hours, a hospital might analyze the number of beds occupied and a manufacturer might want to know about machine utilization rates. We can help you figure out what items matter most in your industry and how to create effective flash reports for your needs.

On September 17, the Financial Accounting Standards Board (FASB) issued an accounting rule that will provide more detailed information about noncash contributions charities and other not-for-profit organizations receive known as “gifts in kind.” Here are the details.

Need for change

Gifts in kind can play an important role in ensuring a charity functions effectively. They may include various goods, services and time. Examples of contributed nonfinancial assets include:

• Fixed assets, such as land, buildings and equipment,
• The use of fixed assets or utilities,
• Materials and supplies, such as food, clothing or pharmaceuticals,
• Intangible assets, and
• Recognized contributed services.

Increased scrutiny by state charity officials and legislators over how charities use and report gifts in kind prompted the FASB to beef up the disclosure requirements. Specifically, some state legislators have been concerned about the potential for charities to overvalue gifts in kind and use the figures to prop up financial information to appear more efficient than they really are. Other worries include the potential for a nonprofit to hide wasteful use of its resources.

Enhanced transparency

Accounting Standards Update (ASU) 2020-07, Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets, aims to give donors better information without causing nonprofits too much cost to provide the information.

The updated standard will provide more prominent presentation of gifts in kind by requiring nonprofits to show contributed nonfinancial assets as a separate line item in the statement of activities, apart from contributions of cash and other financial assets. It also calls for enhanced disclosures about the valuation of those contributions and their use in programs and other activities.

Specifically, nonprofits will be required to split out the amount of contributed nonfinancial assets it receives by category and in footnotes to financial statements. For each category, the nonprofit will be required to disclose the following:

• Qualitative information about whether contributed nonfinancial assets were either monetized or used during the reporting period and, if used, a description of the programs or other activities in which those assets were used,
• The nonprofit’s policy (if any) for monetizing rather than using contributed nonfinancial assets,
• A description of any associated donor restrictions,
• A description of the valuation techniques and inputs used to arrive at a fair value measure, in accordance with the requirements in Topic 820, Fair Value Measurement, at initial recognition, and
• The principal market (or most advantageous market) used to arrive at a fair value measurement if it is a market in which the recipient nonprofit is prohibited by donor restrictions from selling or using the contributed nonfinancial asset.

The new rule won’t change the recognition and measurement requirements for those assets, however.

Coming soon

ASU 2020-07 takes effect for annual periods after June 15, 2021, and interim periods within fiscal years after June 15, 2022. Retrospective application is required, and early application is permitted. Contact us for more information.

Gino helps nonprofits — including public charities and private foundations throughout New England — handle complex accounting and business issues. He provides trusted guidance and helps implement start-up related functions, tax planning and federal and state tax preparation. He counsels private foundations and helps manage their minimum distribution requirements. In addition, he prepares individual tax return filings.

On his promotion, Borgonzi said, “I am excited to step into my new role as Principal. Here at Edelstein, I have worked with so many great teammates and I thank them for all of their support.”

Managing Partner, Scott Kaplowitch said, “We’re excited to have Gino join our leadership team as a principal. His contributions to our firm have been invaluable for 20 years and we appreciate the knowledge that he shares with his colleagues on a daily basis.”

Congratulations, Gino!

Did you know that the Financial Accounting Standards Board (FASB) recently extended the simplified private-company accounting alternatives to not-for-profit organizations? Many merging nonprofits, including educational institutions and hospitals, welcome these practical expedients. Here are the details.

Alternative for goodwill

The first alternative accounting method allows for the amortization of goodwill on a straight-line basis over 10 years (or less if a shorter useful life is more appropriate). It applies only to:

• Goodwill recognized in a business combination after initial recognition and measurement,
• Amounts recognized as goodwill in applying the equity method of accounting, and
• The excess reorganization value recognized by entities that adopt fresh-start reporting under U.S. Generally Accepted Accounting Principles (GAAP) for reorganizations.

Once an alternative has been elected, the organization must apply all the alternative’s subsequent measurement, derecognition, presentation and disclosure requirements to existing goodwill and all future additions to goodwill that fall within the scope of the accounting alternative.

Upon adoption of the accounting alternative, the organization must decide whether to test goodwill at either the entity level or the reporting unit level. However, annual impairment testing isn’t required under the alternative. Rather, testing for impairment is required only if a triggering event occurs that indicates that the fair value of the nonprofit entity (or the reporting unit) may be below its carrying amount.

Alternative for identifiable intangible assets

The second accounting alternative allows a nonprofit organization to bypass the separate recognition of noncompete agreements and customer-related intangible assets unless they can be sold or licensed independently from other assets of a business. In other words, such items would be considered part of goodwill. Nonprofits that elect this alternative would recognize fewer intangible assets in a business combination.

It applies to nonprofit organizations that are required to recognize or consider fair value of intangible assets when:

• Applying the acquisition method for a business combination,
• Evaluating the nature of a difference between an investment’s carrying amount and the underlying equity in the net asset of an investee when applying the equity method of accounting, or
• Adopting fresh start accounting for reorganizations.

If an organization decides to elect the accounting alternative for accounting for identifiable intangible assets, it also must adopt the accounting alternative for goodwill. However, a nonprofit that elects to adopt the accounting alternative for goodwill isn’t required to adopt the accounting alternative for accounting for identifiable intangible assets.

Effective date and transition

Nonprofits can immediately elect to use these alternative reporting methods. If elected, the goodwill accounting alternative should be applied prospectively to all existing goodwill and for all new goodwill generated in acquisitions. And the alternative for accounting for identifiable intangible assets should be applied prospectively upon the occurrence of the first transaction within the scope of the alternative. Contact us for more information. Our accounting professionals can help determine if these alternatives are right for your organization.