NPO accounting rule




Charities Tread Lightly With New Statement

A new, stricter Statement of Position, Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund Raising , is already arousing the ire of not-for-profit organizations. Although the SOP, issued by the American Institute of CPAs accounting standards executive committee, hasnt taken effect yet, some are offering gloomy predictions on what the statement will do to charities financial statements. (For details, see "AcSEC Becomes Strict on Fundraising" and "New Role for NPO CPAs," JofA, May97.)

"Implementing this SOP will be like walking through a minefield," said Robert H. Frank, CPA. Franks firm, Frank & Co., P.C., in McLean, Virginia, has a lot of NPO clients that he handles personally. He also sits on the board of directors of the D.C.-based National Federation of Nonprofits (NFN), an advocacy organization in postal, regulatory, legislative and accountability issues for its 400 members. The NFN wrote a protest letter to Securities and Exchange Commission Chairman Arthur Levitt, Jr., shortly after the statement was approved, complaining about a number of issues in the statement.

"Any affected organization will require a lot of CPA help to navigate the new standard," Frank continued. "NPOs will not need just a CPA—theyll need one very knowledgeable in cost allocations and NPO fundraising and multipurpose costs—a real specialist." He said that, personally, he should be thrilled with the new standard because "it will generate consulting work. But I think the new statement is inconsistent with recent accounting theory, and I dont agree with its thrust." He said under the old standard, SOP 87-2, Accounting for Joint Costs of Informational Materials and Activities of Not-for-Profit Organizations That Include a Fund-Raising Appeal , some NPOs did take liberties with its fairly loose provisions but the new standard was too restrictive.

However, shortly after the statement was approved for issuance, members of the AICPA NPO committee defended it. Kenneth Williams, the committees past chairman, said it made the rules less vague. "It provides specific guidelines but there is still some room for judgment." He noted that representatives from regulatory and watchdog groups lobbied for more rigid standards. And the current committee chairman, Gregory B. Capin, said the new statement was much clearer than SOP 87-2 in applying the criteria of purpose, audience and content.

At Journal press time, AcSEC had not formally responded to issues raised in the letter and was not expected to do so.

Software Revenue Recognition Updated

Software vendors are facing more stringent accounting with the issuance of a new statement of position that supersedes SOP 91-1, Software Revenue Recognition . "During the exposure period, we received comments that certain criteria of the proposed standard were a lot tougher than 91-1—some thought this was a good idea, and some thought it was too conservative," Richard Stuart, American Institute of CPAs accounting standards technical manager, told the Journal . The revenue recognition criteria in SOP 91-1 differed depending on whether remaining vendor obligations were significant or insignificant . "But these terms were not defined, so companies were left to decide for themselves what was significant," said Stuart.

The final statement is similar to the exposure draft, with some clarifications and relatively few significant changes. (See "Software Revenue Recognition—Revisited," JofA, Aug.96.) The transition is now prospective: The SOP is applicable for transactions entered into in fiscal years beginning after December 15, 1997. Without changing the conclusions, new language clarifies the provisions relating to software contracts with extended payment terms. The final SOP also discusses electronic delivery of software in more detail, specifying when the company can recognize revenue in those cases.

Remaining in the final statement is a paragraph calling for vendor-specific objective evidence for the allocation of revenue to the various elements of the arrangement based on vendor-specific objective evidence of the fair value of the elements. If that evidence does not exist, revenue should be deferred until the earlier of the following:

  • Sufficient vendor-specific objective evidence does exist.

  • All elements of the arrangement have been delivered.

The ED contained three exceptions to this rule. The final statement adds a fourth: services that do not involve significant production modification or customization. For example, if a company is providing training, it can recognize revenue as it provides this service instead of waiting until the service is completed.


Discounts: clarifications and judgment

The ED said companies should not allocate any discounts to upgrades and this remains. "There was some concern on how discounts should be allocated, however. We added language saying it should be proportionate, with the exception that no portion of a discount is allocated to upgrade rights," said Stuart. The final SOP also requires judgment based on the size of the discount. If, in connection with the licensing of one product, a vendor offers a small discount on additional licenses of the licensed product or other products that exist at the time of the arrangement, thats just a marketing issue outside the SOPs scope. But if the discount is more than insignificant, it creates a presumption that an additional element is being offered. The SOP does not list a specific number; its a matter of judgment.

To order the new statement of position, call the AICPA order department at 800-862-4272.



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