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The FASB has taken the next step in formally delaying the effective date of the Leases standard.  They are also delaying the effective date for two other new ASUs that impact credit loss accounting and the accounting for derivatives/hedges.

A recent FASB News Alert was issued, noting that the FASB has issued an ASU exposure draft to change the effective dates of these ASUs.  After the exposure period ends in mid-September the FASB plans to quickly issue a final standard, which would make the change to the effective dates official.

The proposed change to the effective date of the Leases standard is of particular interest as this new standard broadly effects almost all entities that use U.S. GAAP for their financial statements.  The proposed change to the effective date of the Leases standard is only for nonpublic entities (private companies and nonpublic not-for-profit organizations).  So, this proposed change would not be applicable to public companies and public not-for-profit organizations, and the effective dates for those public entities would not change.

The change to the effective date for nonpublic entities is to move it from the original date of calendar 2020 (fiscal years ending in 2021) to one year latercalendar 2021 (fiscal years ending in 2022).

Please contact your Clark Nuber service team for more information.

© Clark Nuber PS and Developing News, 2019. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Clark Nuber PS and Developing News with appropriate and specific direction to the original content.

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Articles and Publications

Three Key Tax Incentives for Manufacturers, Distributors, and Retailers under the Tax Cuts and Jobs Act

The three incentives the TCJA allows for these types of companies are:
  1. Using the cash method for tax purposes,
  2. Treating inventory costs as non-incidental materials, and
  3. Exempting them from the new interest expense limitation.

Using the Cash Method

Businesses may use the cash method for tax purposes, even though the business keeps its books and records on the accrual basis. Previously, businesses could not use the cash method if they had gross receipts over $10 million, maintained inventories, or were a C corporation or had a C corporation partner with gross receipts over $5 million. When using the cash method for tax purposes, income is recognized when the cash is received and expenses are deductible when they are paid.  The cash method provides a better matching of cash flow with taxes paid and more flexibility in tax planning. In the year the change is made, there is usually significant tax savings.  C corporations have the flat tax rate of 21%, so there may be some planning needed if the cash method creates a loss.  For S corporations, partnerships, and sole proprietorships, strategic planning can spread out the tax savings over two years by taking advantage of reducing taxes at higher tax rates.  As a business grows, the tax savings increase.  Changing to the cash method requires an Accounting Method Change (Form 3115).

Treating Inventories as Non-Incidental Materials

Businesses may treat inventories as non-incidental materials and supplies or conform to the method the business uses for financial statements or its books and records.  Under the previous law, businesses were required to capitalize materials, labor, overhead, and related general and administrative expenses (uniform capitalization) for tax purposes.  This change also requires an Accounting Method Change (Form 3115).

Exemption From the New Interest Expense Limitation

The TCJA added a new provision that limits the interest expense a business can deduct.  For 2018 through 2021, interest expense is deductible to the extent it is less than 30% of taxable income plus interest expense, depreciation, and amortization.  After 2021, interest expense is deductible to the extent it is less than 30% of taxable income plus interest expense only.  This interest expense limitation does not apply to small businesses. There are many other tax incentives available to manufacturers, distributors, and retailers, such as the Section 179 expense election up to $1 million and 100% bonus depreciation.  It is also important to consider what type of entity the business should use for tax purposes (C corporation, S corporation, LLC) with the different rate structures and limitations under the new tax law. Businesses should give careful consideration to planning with the TCJA.  There are many incentives that can result in significant tax savings.  Please contact your Clark Nuber professional or Rene Schaefer to understand how this new tax law can help you. Originally published June 2018. © Clark Nuber PS, 2019. All Rights Reserved

Updated Guidance for Private Schools Publishing Nondiscrimination Policies

Revenue Procedure 2019-22 provides private schools with a third method, their public website, to use in making nondiscrimination policies known to the school’s general community. To use the school’s website to publish the nondiscrimination policy, a few parameters must be considered:
  • The website must be publicly accessible, with no login, password, or other input of information necessary to access the site.
  • A link to another portion of the school’s site, a notice that appears in a carousel, or a notice that only appears by selecting from a dropdown box or mouse over/hover is not acceptable.
  • If the school does not have its own website, but rather has a page or series of pages on another website (for example, the school is closely affiliated with a church and the school’s webpage is within the church’s website), the policy must be published on the primary landing page for the school.
  • The policy must be placed in a location on the website reasonably expected to be noticed by visitors to the site.
The original 1970s guidance was published in response to a series of exempt status revocations of private schools with discrimination policies. Revenue Procedure 75-50 allows a private school to publish its nondiscrimination policy in newspapers or other publications that reach all racial segments of the community or communities the school serves. It also outlines criteria for the print size and font size of the notice. The second method identified in the original guidance is use of broadcast media to convey the school’s nondiscrimination policy to all racial segments of the communities served by the school. Similar to print media, the guidance outlines requirements for frequency, timing, and duration of the announcements made using this method. Revenue Procedure 2019-22 is a supplement to Revenue Procedure 75-50, not a replacement of it. If you have questions related to the distribution of nondiscrimination policies, contact a Clark Nuber advisor. © Clark Nuber PS, 2019. All Rights Reserved

Contributions Received and Contributions Made – Applying a New Lens

ASU 2018-08 is effective for many recipient organizations (grantees) in 2019 and applies to many resource providers (grantors) in 2020. What should you expect, whether you’re receiving contributions or making them? Following is a summary of the key aspects of ASU 2018-08, its implications, and tips on implementation. ASU 2018-08 uses three basic steps to determine how and when revenue (and expense) is recognized: 1. Is commensurate value received in exchange for the resources provided? If commensurate value is received by the resource provider, the transaction is typically an exchange transaction. In other words, the funder receives a direct benefit of roughly equal value to the resources it provides. In this case, the transaction is accounted for under ASU 2014-09, Revenue from Contracts with Customers. On the other hand, if the value the donor receives is incidental or indirect, and the true value of the funding is realized through benefit to others or society, the transaction is non-reciprocal, i.e., a grant or a contribution. Non-reciprocal transactions are accounted for under ASU 2018-08, Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made, and the evaluation continues in Step 2. 2. If the transaction is non-reciprocal, are conditions present? Grants and contributions can include conditions that must be met for the NFP to either retain the funds it has received or be entitled to collect funds from the donor. When conditions are present, revenue is recognized only when the conditions are satisfied. In the past when an agreement included conditions, the recipient could apply a probability assessment to determine the likelihood of whether it would satisfy the conditions. If the chance of not satisfying the conditions was remote, the NFP could recognize revenue at the time the contribution was made. ASU 2018-08 removes that subjectivity by defining conditions more clearly. A condition must have both aspects: a performance barrier that must be overcome for the recipient to be entitled to the funding; and either a right of return of assets transferred or a right of release of a promisor’s obligation to transfer assets. Barriers are typically program focused. Administrative requirements, such as grantees providing annual informational reports, and in many cases budgets, are not considered conditions. 3. If the transaction is non-reciprocal, (i.e., a grant or contribution) has the donor placed restrictions on the contribution? Once grant or contribution revenue is recognized, the recipient must determine whether the contribution is restricted based on how broad or narrow the purpose of the agreement is, and whether the resources are available for use only after a specified date. If the revenue is restricted, it is released from restriction when the funds are used for their intended purpose.

What are the Implications Observed to Date?

U.S. Federal Funding Much of the U.S. Federal funding received by NFPs is now considered conditional grants versus “earned revenue.” In the past, many organizations considered their Federal funding to be earned revenue and recognized revenue as qualifying expenses were incurred. However, the FASB has clarified that the Federal government does not generally receive a direct benefit from the funding it provides, rather society is the true beneficiary. Therefore, much Federal funding is non-reciprocal. Since recipient organizations must satisfy conditions by complying with a variety of Federally imposed requirements and incurring qualifying expenses before being entitled to the funds, the timing of revenue recognition may not change significantly from past practices. In addition, there are still certain types of Federal funding that constitute exchange transactions, such as the government procuring goods and services or making third-party payments on behalf of an individual. Therefore, organizations receiving U.S. Federal funding will need to examine, and perhaps update, their revenue recognition policies to reflect the criteria included in ASU 2018-08. Timing of Revenue Recognition The specificity of what constitutes a condition is resulting in changes to the timing of revenue recognition, depending on organizations’ past policies. Some organizations that applied the probability approach and recognized revenue immediately because it was likely the organization would satisfy the conditions no longer have that subjectivity. Therefore, if grants include conditions as defined above (both factors present), revenue recognition is delayed until the conditions have been satisfied. Alternatively, grant agreements that contain terms which were considered conditions in the past may not be conditional now if they don’t include both the performance barrier and the right of return; thus, revenue may be recognized sooner than it had in the past. Effects on Grantors ASU 2018-08 applies to both contributions received and made. Grantors must apply the same criteria in Steps 1 and 2 above to determine the appropriate timing of expense recognition for U.S. GAAP financial reporting. Therefore, if donors award grants containing conditions as defined in ASU 2018-08, they will recognize the expense only as the conditions are satisfied, regardless of whether the grant has been funded or not. The FASB clarified there is not an expectation for donors to coordinate with grantees to match revenue and expense recognition; however, both entities should apply the concepts of ASU 2018-08.

Tips on Implementation

ASU 2018-08 is already applicable to many organizations in 2019. If your organization hasn’t already established a well-defined approach for implementation, consider the following:
  • Read ASU 2018-08 whether you are a resource recipient or provider. It can be found here. The ASU incudes many helpful examples and clarifications.
  • Consider whether your revenue and expense policies need to be updated to reflect the updates and clarifications of ASU 2018-08.
  • Remember that if your organization both receives grants and contributions, and passes funds through to other organizations, it is both a resource recipient and resource provider. ASU 2018-08 applies to both revenue and expense recognition. Although the effective date for resource providers is one year later than for resource recipients, organizations may early adopt the ASU to coordinate expense recognition with revenue recognition.
  • Review current and new funding agreements and apply the three step process above. Search the terms of the agreements for conditions as measured by the clarified definition of ASU 2018-08.
  • If your organization receives funding from a variety of sources, categorize it by type, such as Federal, Private/Corporate, and Foundations. Determine the underlying characteristics of each category and the general appropriate revenue recognition for each. Establish a threshold over which every award will be reviewed in detail for variations from the norm. While classifications are helpful and expedient in applying revenue recognition, there are bound to be exceptions that need to be evaluated for appropriate treatment.
  • If you are a grantor, review the terms of your organization’s grant agreements to determine if the agreements include conditions that may delay recognizing grant expense under U.S. GAAP. Conversely, ensure intended conditions include both required elements described above.  Modify the language in your grant agreements, if necessary. Ensure that the language in your grant agreements reflects your organization’s actual intentions.
  • Attend one of the Clark Nuber seminars on ASU 2018-08.

Effective Dates

Recipients (grantees) Public business entities or NFPs that have issued, or are conduit bond obligors for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market: periods beginning after June 15, 2018. All other entities, periods beginning after December 31, 2018. Resource providers (grantors) Public business entities or NFPs that have issued, or are conduit bond obligors for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market: periods beginning after December 15, 2018. All other entities, periods beginning after December 31, 2019. The amendments in ASU 2018-08 should be applied on a modified prospective basis. Retrospective application is permitted but not required. If you have questions regarding the implementation of ASU 2014-09, contact your Clark Nuber advisor. © Clark Nuber PS, 2019. All Rights Reserved

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