There’s no doubt that not-for-profits have been thrown into a “new normal”. For the past few months, board members and executive directors have worked to understand the aspects of the CARES Act and PPP loan forgiveness while trying to rework budgets, cash flow projections and other important forecasts to help weather this crisis. In conjunction with the financial work being done, there are several important accounting and reporting rules under Generally Accepted Accounting Principles (GAAP) that should be considered.
Subsequent Events
GAAP often requires disclosure of events or circumstances occurring after the balance sheet date, but before the financial statements are issued. Events that provide evidence about conditions that did not exist at the balance sheet date but arose subsequent to that date are called “Type 2” events. For many organizations in the US with a December 31 year end, the COVID-19 crisis was considered a Type 2 event. Generally, Type 2 events are not recognized in the financial statements but are disclosed in the footnotes to keep the financial statements from being misleading.
On the other hand, subsequent events caused by conditions that existed prior to year-end are considered “Type 1” events, and the impact of the subsequent event is recognized in the fiscal year. For example, a not-for-profit association has an April 30, 2020 year end. The annual trade show is scheduled for November 2020. In May 2020, the Association is forced to cancel due to travel and attendance restrictions caused by COVID-19. Even though the cancellation did not take place until after year end, it was caused by conditions that existed at April 30, and therefore this is a Type 1 event, recognized in the April 30 financial statements.
Risks and Uncertainties
GAAP financial statements normally include disclosures related to the nature of an entity’s operations or activities, significant estimates, and current vulnerability due to certain concentrations to provide users with information on risks and uncertainties impacting financial performance. The COVID-19 crisis has created new risks and uncertainties for many organizations. Those experiencing operational shutdowns, work stoppages, supply chain constraints, etc. should considered the relevant disclosures required under GAAP.
Decline in Market Values of Investments
The COVID-19 crisis has had a tremendous impact on the capital markets, and entities holding investment assets, including businesses, not-for-profits and employee benefit plans, should consider disclosure in the financial statements regarding declines in fair values of these assets.
Going Concern
GAAP requires that management evaluate whether conditions and events, in the aggregate, exist that raise substantial doubt about an entity’s ability to continue as a going concern for a period of one year from the date the financial statements are available to be issued. Existing literature cites external factors, such as catastrophic events, as issues that may raise substantial doubt. For some not-for-profits, the COVID-19 crisis may have raised new threats and doubts that severely impact operations. Going concern evaluations must consider both quantitative and qualitative factors, and the analysis can be very complicated. Nevertheless, if substantial doubt is raised, the entity must consider the need for additional disclosures in the financial statements.
There are many other areas of financial reporting that could be impacted by the COVID-19 crisis. Management should consider the effect, if any, on the collectability of receivables, inventory valuation, and when deferred revenue may be earned – just to name a few. Each situation is different, and significant judgment will be needed in determining the appropriateness of the above considerations on specific organizations.
The Anders Not-for-Profit Group is here to help you navigate GAAP considerations. Contact an Anders advisor below to discuss your specific situation.
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