The Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-13 seems like it would be old news. However, the provision for accounting for current expected credit loss (CECL) went into effect for not-for-profits in calendar years ending in 2023 and fiscal years ending in 2024. Also, it doesn’t apply to all organizations — only those that follow Generally Accepted Accounting Principles (GAAP). So, if you only recently switched to GAAP accounting, it may not be on your radar.

However, if your nonprofit is subject to these rules, you must be familiar with what they say about credit impairment and ensure you comply. Let’s take a look.

What’s involved?
ASU 2016-13 applies to certain types of financial instruments. These include trade receivables (such as amounts billed for merchandise, tuition, fees and special events); held-to-maturity debt securities in an investment portfolio; notes receivables and other loan obligations; and lease receivables. That said, accounts and loans receivable are the most common nonprofit items subject to the CECL standard.

There are also notable financial instrument asset exclusions. This group includes amounts made to defined contribution plans; promises to give (pledges or contributions receivable); notes or receivables between entities under common control; and operating leases.

Then and now
Before ASU 2016-13 became effective, credit losses were reported under a backward-looking “incurred loss” standard that recognized a credit loss only after a loss event had occurred or was probable. Organizations would record an allowance for doubtful accounts based on historical events — for example, an allowance for receivables they were unlikely to receive.

The new standard measures and reports expected losses over an asset’s contractual life, beginning with the initial recognition of the asset. Expected credit losses are measured based on backward-looking information about past events, current conditions, and “reasonable and supportable” forecasts that affect the net amount expected to be collected throughout the contract. The allowance for credit losses is updated for each reporting period.

What does this mean in practice? You must recognize an allowance even if the chance of a loss is only remote. That means receivables that didn’t require an allowance under the prior rule may now require it, even if they’re current or not yet due.

No specific method
The ASU doesn’t impose a specific method for estimating your credit losses. You can select the most appropriate method, such as:

•    Loss rate,
•    Discounted cash flow,
•    Aging schedule,
•    Probability of default, or
•    Roll rate.

Inputs for the method you choose must incorporate the full amount of expected credit losses and reasonable and supportable forecasts. Consistency is vital: You must use the same estimation methods from one financial reporting period to the next.

Also, be sure to retain documents related to internal controls, inputs and data, and actual calculations, as well as explanations of changes from previous periods. Some of this information also will be provided in your disclosures.

Get advice
Of course, you may decide to leave such complex financial reporting to outside accounting professionals. We can perform credit loss estimates for you or help ensure you have the necessary processes and procedures to do them yourself. Contact us.