Nonprofit Public Entities May Have More Time for FASB Implementation
Over the past couple of years, some nonprofit organizations (particularly health care and higher education institutions) have been expecting that their implementation dates for two new Financial Accounting Standards Board (FASB) accounting standards (ASU No. 2014-09, Revenue from Contracts with Customers and ASU No. 2016-02, Leases), is January 1, 2018, and January 1, 2019, respectively.
This guidance is based on the belief that, because these organizations have issued, or are conduit bond obligors for, securities that are traded, listed, or quoted on an exchange or an over-the-counter (OTC) market, they should be classified as a public business entity (PBE), as defined by FASB ASU No. 2013-12, Definition of a Public Business Entity — An Addition to the Master Glossary.
The implementation of these standards for PBEs is one year prior to organizations not considered PBEs, including nonprofits.
If you determine that your organization does not meet the definition of a PBE, then the implementation date for revenue recognition and lease standards is January 1, 2019.
A conduit bond obligor is an organization, such as a nonprofit hospital, that asks the city to issue revenue bonds to fund a portion of a capital project, such as a major expansion. Even though the hospital did not issue the bonds, it is obligated by a loan with the city to repay the debt from revenues.
In some cases, those securities may be bundled and traded in the public market. When this happens, the hospital might be classified as a PBE and be required by certain FASB standards to implement and include expanded disclosures a year earlier than other nonprofits or private entities.
However, that implementation deadline for nonprofit conduit bond obligors could be a year later (as it is for other nonprofits) based on specific key definitions that are addressed in the ASU 2013-12 and the FASB Master Glossary definition of a public entity.
Nonprofits that are conduit bond obligors have typically been considered to be public entities under the Master Glossary definition. But under certain circumstances, that definition may not apply.
How to determine if your nonprofit a public business entity
To help interpret the key terms in the Master Glossary definitions, the AICPA issued a series of technical question and answers (TQA Sections 7100.01 – 7100.16) intended to clarify the definition of a PBE in ASUs 2014-09 and 2016-02. Two of the main questions are discussed below. We have also developed a flow chart to help you visualize the process of making a determination.
Did your nonprofit organization issue a security?
The first step is determining whether your organization has issued a security. In the glossary, securities are also referred to as financing instruments. Whichever term is used, they can be evaluated under FASB Accounting Standards Codification 320 as defined in the FASB Codification Master Glossary (as summarized from TQA Section 7100.01):
FASB defines a security as a share, participation, or interest in a property, entity, or obligation of the issuer that has all of the following characteristics:
It is either represented by an instrument issued in bearer or registered form or, if not represented by an instrument, is registered in books maintained to record transfers by or on behalf of the issuer.
It is of a type commonly dealt in on securities exchanges or markets or, when represented by an instrument, is commonly recognized in any area in which it is issued or dealt in as a medium for investment.
It either is one of a class or series or by its terms is divisible into a class or series of shares, participations, interests, or obligations.
If it is determined that the nonprofit entity has not issued, or is not a conduit debt obligor for, a security (as defined here) it would not be considered a PBE.
Is the security traded, listed, or quoted on an exchange or an over-the-counter market?
If a security has been issued you will need to determine whether the security is traded, listed, or quoted on an exchange or OTC market. Municipal securities issued in public offerings trade thereafter in a public OTC market. However, there are circumstances, such as those reflected below, in which a security may not be considered to be traded, listed, or quoted on an exchange or an OTC market:
The sale of securities is limited to certain institutional or accredited investors and not available to the general public at the initial offering or in subsequent sales
Securities must be sold in large denominations, which limit them to certain investors
Management approval is required for resale
All securities are held by a parent entity, creating an implicit restriction on resale
Securities issued in a private placement offering in which they are sold directly to qualified investors are not considered available to the public as defined above.
Other circumstances to consider
In the absence of any factors such as those previously described, securities would generally be considered to meet the definition if they are accessible by the public to execute trades in an OTC market.
It is important to note that requirements to file with repositories, such as the Electronic Municipal Market Access Service provided by the Municipal Securities Rulemaking Board, or the Trade Reporting and Compliance Engine provided by the Financial Industry Regulatory Authority, do not generally result in classification as publicly traded or available on an OTC market. These repositories report historical data, but do not allow the execution of trades.
Judgement is key. Each security issued by an organization must be assessed. If you determine that your organization does not meet the definition of a PBE, then the implementation date for revenue recognition and lease standards is January 1, 2019.
How we can help
Nonprofit finance can be complex, and the PBE issue is no exception. Our accounting and assurance professionals are ready to help you understand how the all-important characterization of securities can inform other aspects of your accounting procedures, and the appropriate course of action after a determination is made.