Gorfine, Schiller & Gardyn’s Director of Audit and Accounting Services, Alan Stein, discusses the necessary measures nonprofits need to take in order to successfully prepare their organization for a post-pandemic audit.
Q: From an accounting perspective, what options are there for nonprofits to take when handling a PPP loan?
A: The PPP loans were certainly a relief option that helped both nonprofit and for-profit businesses survive 2020.
From an accounting perspective, there are two options for managing the loan, and both are considered acceptable accounting alternatives:
- 1.Debt model - With this option, your organization will identify the relief as a loan, and put it on your statement of financial position or balance sheet until it's forgiven.
- 2.Grant –This is money that the government gives, and conditions are involved. Similar to other conditional grants for nonprofits, those conditions need to be met in order to recognize the income. Once those conditions have been met, it can be recognized that it's income, even if you haven't received the formal forgiveness from the bank.
When determining which option is best for your organization, it’s important to determine how you prefer your organization’s balance sheet to be viewed. Is a debt or liability something that you think will affect your balance sheet negatively when it’s reviewed? When considering the grant, does it make a difference for your organization which year the income is recognized on the income statement?
Looking back at 2020, you need to decide how you would like the additional income to show through this turbulent year. For instance, do you want to show how you kept operations in order, or do you want to show the impact without this additional special grant and for people to see the loss that occurred? Would you choose for people to see that you were able to break even, especially in these tough times, and recognize the income to a future year?
This decision should be based upon the users of the financial statements, and if there's a bank involved, whether there are covenants. If there are covenants, reach out to your bank, and find out how they prefer it presented. It’s key to know whether or not your bank considers it important to be consistent in the way that you're going to present it in your covenant calculations and in your financial statements.
Q: What should nonprofits know about allowance for doubtful accounts?
A: When an organization reviews their receivables, part of the annual process of closing your books is determining if there is anything that is not going to be collected, something that may require an allowance. In the context of the current year, that analysis is going to be slightly different than it has been in the past due to current circumstances. Organizations that haven't previously done this analysis, because their revenue sources are certain, should especially conduct this analysis. This is based upon both the perspective of reviewing if any of the foundations donating to the organization were negatively impacted, and if there’s going to be a delay, or possibly not full payment, received from them.
If you have program income, it’s important to determine how the companies or individuals you deal with have been impacted and if you will not be getting the expected funds. If funds are slow-moving, it’s important to note that you should not assume certain payers will continue their annual payments. If it's a material amount, checking in with the donor or the grantor may be appropriate to find out the cause of the delay so that you can gain comfort if an allowance isn't necessary.
Q: What do nonprofits need to know about implementing ASC 606?
A: ASC 606 is the new revenue recognition standard for all entities, including nonprofits. It was implemented for the year ending December 31, 2018 by public entities. It was anticipated that it would be implemented December 31, 2019 for private companies and nonprofits. However, for many of them, they made use of the deferral that was given in May 2020, waiting another year. For those organizations that have already adopted, hopefully, they have their processes and analysis in place. For those that have not yet adopted, it’s important to get an understanding of what this analysis is and what the five steps are before starting your audit and while closing your year.
While in many instances, if not most, there won't be any changes to how your revenue is actually going to be recorded. However, it's important to think about what your current process is, now that there is more of a process for determining how the revenue should be recognized. You should consider if there are any significant estimates or judgements in that process. Those need to be re-evaluated in the context of the five steps, you may come to different conclusions, and those are important conversations to have with your auditor.
It’s also important to consider if there are items that you deliver that have multiple performance obligations where there's more than one good or service that's provided that you might now be recognizing at the same time that should be recognized at different times. If there are goods or services that you're recognizing over time where there's judgments involved, it should be revisited. You should determine if this good or service is appropriate to recognize over time or at a point in time under the new standards.
Q: What auditing services does Gorfine, Schiller & Gardyn offer for nonprofits?
A: Gorfine, Schiller & Gardyn is a full-service accounting firm and has a niche on the nonprofit auditing industry. Nonprofits are very broad, and we take pride in understanding the different issues that impact these organizations and for treating each nonprofit uniquely and tailoring our procedures to make sure we have an efficient and a full audit.
AlanStein is a Director, Audit and Accounting Services, at Gorfine, Schiller & Gardyn with over 10 years of public accounting experience. He manages audit, review, and agreed upon procedures engagements for clients in a wide variety of industries, including nonprofits, real estate, healthcare, and manufacturing.
About Gorfine, Schiller & Gardyn:
Gorfine, Schiller & Gardyn is a Maryland-based full-service certified public accounting firm offering a wide range of accounting and consulting services to clients of all sizes. Gorfine, Schiller & Gardyn employs the traditional business practices of a small company, delivering solid advice and solutions, and providing unparalleled client service. One of the greatest assets Gorfine, Schiller & Gardyn brings to its clients is a team of experts trained to the highest industry standards. As problem solvers with an entrepreneurial drive, Gorfine, Schiller & Gardyn associates are committed to the success of their clients’ businesses. For more information, click here.