The AICPA Peer Review team recently released examples of matters identified in peer reviews related to engagements performed on not-for-profit entities.
Disclosure of Open Tax Years
One area that not-for-profit (NFP) entities tend to overlook is the disclosure of open tax years. Because many NFP entities are typically exempt from income tax, perhaps management does not think these disclosures would apply.
FASB Accounting Standards Codification (FASB ASC) 740, Income Taxes, and more specifically FASB ASC 740-10-55-225, provides examples of tax positions to consider whether NFP entities enter into transactions that may be subject to income tax on unrelated business income. NFP entities’ tax-exempt status is always a tax position that could become an uncertain tax position.
FASB ASC 740-10-50-15 requires that all entities disclose the following:
- Amounts of income tax-related interest and penalties recognized in the statement of activities
- Total amounts of interest and penalties recognized in the statement of financial position
- Information about positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date
- Description of tax years that remain subject to examination by major tax jurisdictions
Although information returns are not within the scope of FASB ASC 740 because they are not income tax returns, the AICPA Financial Reporting Executive Committee encourages disclosure of relevant information required by FASB ASC 740-10-50-15, particularly for open tax years. NFP entities typically disclose that tax years are open for three years from the date of filing.
Donated Goods and Services
According to FASB ASC 958, Not-for-Profit Entities (specifically 958-605-25-2), contributions received should be recognized as revenues or gains in the period received and as assets, decreases of liabilities, or expenses, depending on the type of benefits received. The classification of contributions received as revenue or gains depends on whether the transactions are part of NFP entities’ ongoing major or central activities – revenues – or are peripheral or incidental to NFP entities – gains.
Cash pledges that are expected to be received in less than one year can be measured at net realizable value. However, donated goods and services are to be measured at fair value.
When measuring fair value, an entity should take into account characteristics of the asset, including restrictions on the sale or use of the asset, if market participants would take those characteristics into account when pricing the asset, according to FASB ASC 820, Fair Value Measurement, more specifically FASB ASC 820-10-35-2B. Donor restrictions that are specific to the donee are reflected in the classification of net assets, not in the measurement of fair value.
There is an exception. FASB ASC 958-605-25-4 states that a major uncertainty about the existence of value may indicate that an item received or given should not be recognized. For example, a gift of clothing or furniture has no value unless it can be:
- Used internally by NFP entities or for program purposes
- Sold by NFP entities
Some NFP entities make the mistake of not properly measuring donated goods and services. At times, they use the asset’s historical cost, the donor’s estimated value or perhaps another measure that is not consistent with the measurement principles of FASB ASC 820.