Two new accounting technical updates will have significant impact on the financial statements of not-for-profit entities.
Impairment of long-lived intangible assets
The Financial Accounting Standards Board issued Accounting Standards Update 2012-02 in July 2012, entitled Testing Indefinite-Lived Intangible Assets for Impairment.
The guidance serves to amend requirements in FASB Accounting Standards Codification (FASB ASC) Topic 350, entitled Intangibles – Goodwill and Other.
The goal in issuing the guidance is to simplify requirements for testing the decline in realizable value of indefinite-lived intangible assets other than goodwill.
Some examples of intangible assets that will be subject to the ASU 2012-02 “optional” qualitative impairment testing guidance include indefinite-lived trademarks, licenses and distribution rights. The guidance is applicable to all reporting entities, whether they are public, private or not-for-profit.
Before being amended by ASU 2012-02, the guidance in FASB ASC 350 required reporting entities to test indefinite-lived intangible assets for impairment on at least an annual basis by comparing the fair value of the assets with their carrying amounts.
The 2012-02 amendments allow financial statement preparers to make a qualitative evaluation about the likelihood of impairment of indefinite-lived intangible assets to determine whether it is necessary to apply the quantitative evaluation and calculate the fair value of the indefinite-lived intangible assets.
The amendments in ASU 2012-02 are effective for annual and interim impairment tests performed in fiscal years beginning after Sept. 15, 2012. Earlier implementation is permitted.
Statement of cash flows presentation issue
ASU 2012-05, Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows, was issued by the FASB in October 2012. The guidance in ASU 2012-05 amends the guidance in the FASB Accounting Standards Codification (FASB ASC) Topic 230, entitled Statement of Cash Flows.
It is not uncommon for not-for-profit entities to receive donations to help fund their operations and programs. Often, the donations are made in the form of cash but, in some situations, donations are made in the form of financial assets.
While not-for-profits typically accept donations in the form of financial assets, it is not uncommon for those entities to have institutional policies to immediately sell the donated assets to convert the financial assets into cash to be available for immediate use. In this regard, some not-for-profit entities having this type of policy consider the donation of financial assets to be essentially equivalent to cash donations.
Through the ASU 2012-05 amendments, the guidance in FASB ASC 230 now is clear as to how receipts from the sale of donated financial assets should be reflected in statements of cash flows. The fundamental requirement in the amendments is that not-for-profit entities, in preparing statements of cash flows, are required to classify cash receipts from the sale of the donated financial assets consistently with cash donations received. To that end, classifications within the statements of cash flows would be as follows:
- Cash receipts from the sale of the donated financial assets should be classified as cash flows from operating activities unless donors have restricted the use of the contributions for long-term purposes.
- If the contributions have been restricted for use for long-term purposes, cash receipts from disposing of the financial assets would need to be classified as financing activities.
- In situations where donated financial assets are sold that do not meet the criteria to be classified as operating or financing activities, the cash flows would be considered investing activities.
The ASU 2012-05 amendments to FASB ASC 230 become effective prospectively in fiscal years, and interim periods within those years, beginning after June 15, 2013. Retrospective application to all prior periods presented for comparative purposes is permitted.
Early implementation from the beginning of the fiscal year that the guidance is adopted also is permitted.