Impacts of financial decisions
Identify and Track the Value of Employees Shared With Affiliates
During a recent audit of a nonprofit client, we sat down with the controller to discuss the past year and get a feel for the upcoming one. As part of our conversation, we discussed how to report the sharing of employees with affiliates. It’s a subject that the Financial Accounting Standards Board (FASB) attempted to clarify more than two years ago when it issued the Accounting Standards Update 2013-06. Previously, there had not been specific guidance on how to account for services received from affiliates.
Differing approaches to recognizing contributed services
FASB originally proposed this Accounting Standards Update (ASU) because affiliated nonprofits accounted for shared employees in a wide variety of ways. Specifically, this ASU is intended to provide more specific guidance for affiliated entities. An affiliate is defined as “a party that, directly or indirectly through one of more intermediaries, controls, is controlled by, or is under common control with an entity” (Topic 958). As part of ongoing operations with affiliates, employees are often shared across borders in order to take advantage of skills, competencies, and availability. However, previously there had not been specific guidance on how the value of these allocations should be recorded amongst affiliates.
Revenue recognition guidance requires nonprofit entities to recognize contributed services at fair value if employees of separately governed affiliates regularly performed services for and under the direction of the recipient affiliate. It further states that those contributed services should be recognized only if they created or enhanced nonfinancial assets or if they required specialized skills possessed by those performing the service. These services would typically need to be purchased if they weren’t provided by donation.
Among nonprofits with affiliates, there have been differing views about whether the recipient organization should consider services from an affiliated entity as contributed services and apply this guidance. In some cases, affiliates charged for the services being provided, which resulted in an expense on the recipient organization. In instances in which they were not charged, the costs of the services were never captured by the recipient organization. This ASU was created to resolve the ambiguity surrounding these transactions.
Main provisions of ASU 2013-06
ASU 2013-06 requires recipient nonprofits “to recognize all services received from personnel of an affiliate that directly benefit the recipient nonprofit entity.” The services should be measured at the cost for the personnel providing the services and recognized by the recipient. The cost of personnel should not only include the costs of payroll, but also the payroll-related fringe benefits. However, if measuring a service at cost will significantly overstate or understate the value of the service received, the recipient may elect to recognize either the cost recognized by the affiliate or the fair value of the service. This provision helps mitigate the risk of overstating the costs associated with shared employees who may be performing tasks in which they are over-qualified for.
Tracking and allocating shared employees
ASU 2013-06 has a specific impact on nonprofit health care entities. For entities that receive services without charge, they should report the increase in net assets associated with services as an equity transfer. In cases in which affiliates charge the recipient for services, there is no change.
Effective dates of the amendments
The amendments from ASU 2013-06 are effective for fiscal years beginning after June 15, 2014, and interim and annual periods thereafter, with early adoption permitted. All prior periods presented upon the date of adoption should be adjusted for the effects of the amendments, but no adjustment should be made to the beginning balance of net assets for the earliest period presented. Nonprofit organizations should identify all employees that are shared amongst affiliates and consider methods to fairly track and allocate their time for each entity in order to accurately value their services.