Accounting & Auditing Update for Not-for-Profit Entities

by Alexander K. Buchholz, CPA, MBA, CGMA, PKF O'Connor Davies – December 3, 2024

For the past few years, especially in the aftermath of the pandemic, there have not been many new accounting or auditing pronouncements issued. However, there are a few that anyone who works with or for a not-for-profit (NFP) entity should know about.

Uniform Guidance

For those NFPs that expend more than $750,000 of federal funds and are subject to the various requirements of the Uniform Guidance, there are some significant changes that are in effect for those awards issued on or after Oct. 1, 2024. Several of these changes are as follows:

The equipment threshold increases from $5,000 to $10,000.
The modified total direct costs subawards threshold increases from $25,000 to $50,000.
The supplies threshold increases from $5,000 to $10,000.
The requirements for establishment and maintenance of internal controls of federal awards for both the recipient and subrecipient are enhanced. As part of the internal control maintenance, NFPs must ensure that personally identifiable information is being safeguarded.
The de minis indirect cost rate will be raised from the current 10% provision to 15%.
The single audit and major program threshold increases from $750,000 to $1 million for those federal awards expended that equal or exceed $1 million but less than or equal to $34 million.

Crypto Assets

Accounting Standards Update No. 2023-08, Accounting for and Disclosure of Crypto Assets, becomes effective for fiscal years beginning after Dec. 31, 2024, and requires a cumulative effect adjustment to net assets as of the beginning of the period of adoption. To date, NFPs have been treating crypto assets as indefinite lived intangible assets, whereby no gains are being recognized until realized. Crypto assets are defined by the standard as follows:

Meet the definition of an intangible asset
Do not provide the asset holder with enforceable rights to or claims, underlying goods, services or other assets
Are created or reside on a distributed ledger based on blockchain or similar technology
Are secured through cryptography
Are fungible
Are not created or issued by the reporting entity or its related parties

The standard now replaces the historical cost/impairment model and requires that crypto assets be reported separately from other intangible assets (e.g., goodwill) and measured at fair value. Any related changes in the carrying value should be recognized in net income separately from other intangible assets. The notes to the financial statements should include significant crypto asset holdings; restrictions (if any); a reconciliation of period activity; and the method of determining the cost basis.

Credit Losses

Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments, became effective for fiscal years beginning after Dec. 15, 2022. While this standard was originally geared for financial institutions, it does apply to NFPs that are in the business of making loans. The scope of this standard encompasses loans receivable, financing receivables, trade receivables and contract assets recognized under Accounting Standards Update No. 2020-05, Revenue from Contracts with Customers.

The assessment of grants and contributions receivable are scoped out of this standard. Under this standard, impairment of receivables moves away from an incurred loss model to an expected loss model. The term allowance for doubtful accounts in connection with credit losses is now replaced with allowance for credit losses, which will be a valuation account deducted from the gross receivable amount. NFPs will now need to take into consideration not only historical experience with payors but forecasts of future expectations.

Leases

Accounting Standards Update 2023-01, Leases (Topic 842): Common Control Arrangements, issues a practical expedient that allows the evaluation of written terms and conditions of a common-control arrangement as well as clarifies the accounting for leasehold improvements in common-control arrangements. The effective date for this standard is for fiscal years beginning after Dec. 15, 2023. The first part of this standard provides an optional practical expedient under which NFPs — those that are not conduit bond obligors — can use written terms and conditions of an arrangement between entities under common control to assess whether a lease does indeed exist as well as the subsequent accounting/classification. The second part of this standard requires that any leasehold improvements under common control leases be amortized over the useful life of these leasehold improvements as long as the lessee controls the use of the leased asset. If there is no longer control, then the leasehold improvements should be accounted for as a transfer between entities via an equity adjustment.

Auditor’s Risk Assessment

Statement on Auditing Standards No. 145, Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement, became effective for fiscal years beginning on or after Dec. 15, 2023. It is important to note that this standard did not impact the core concepts of audit risk assessment. Instead, this now provides auditors with additional guidance to identify and assess risks of material misstatement in the financial statements. The standard also updates the concept of significant risk (and the introduction of the spectrum of inherent risk) and requires separate assessments of inherent risk and control risk for each relevant assertion. The definition of a significant risk is when the inherent risk is at the upper end of the spectrum. It is this assessment of inherent risk that determines if the risk of material misstatement will qualify as significant.

One other aspect of the standard is that when auditors do not test controls and assess control risk at maximum, the risk of material misstatement equals the inherent risk for that assertion. For example, if assessing the valuation assertion for cash at a value of “low” and there is no reliance on internal controls and control risk is assessed at “high,” the final risk of material misstatement would now be “low.”