Not-for-profit organizations and their auditors are now faced with the challenge of addressing the coronavirus pandemic (COVID-19) and its potentially harmful effects on the audited financial statements. There are several matters to consider, from reporting COVID-19 effects in the statement of activities to disclosures surrounding risks and uncertainties, commitments, going concern, and subsequent events. Not-for-profit (NFP) entities may deem it necessary to include such information in current reports beginning with calendar year 2019.
While other standards may also need to be considered, the effects of COVID-19 should be evaluated under the guidance of FASB ASC 855, Subsequent Events, and FASB ASC 275, Risks and Uncertainties. COVID-19 effects could also impact management’s and the auditor’s considerations of the entity’s ability to continue as a going concern under both accounting and assurance standards.
The following is a nonauthoritative example of a footnote that could be used in a situation in which continuity as a going concern is asserted:
Risks and Uncertainties (Note: This could also be under Subsequent Events)
In early March, the COVID-19 virus was declared a global pandemic, and it unfortunately continues to spread rapidly. Business continuity, including supply chains and consumer demand across a broad range of industries and countries, could be severely impacted for months or more, as governments and their citizens take significant and unprecedented measures to mitigate the consequences of the pandemic. Management is carefully monitoring the situation and evaluating its options during this time. [Indicate reasonably possible qualitative impact.] No adjustments have been made to these financial statements as a result of this uncertainty.
Disclosing Impacts of COVID-19
NFPs could use this example footnote as a starting point and modify it to fit their specific circumstances. For example, a social service organization might note that contributions have fallen at a time when the needs for services are greatly increasing. Where the example indicates “management is carefully monitoring the situation and evaluating its options,” the NFP might wish to include any material, reasonably possible impacts, and specific steps management has taken rather than just the general statement. For instance, if the NFP’s operations were ordered closed or curtailed for a period of time, the NFP could state that fact.
It is worth noting that, depending on the timing of the NFP’s year end and report issuance, adjustments to the financial statements may become necessary.
Practical Guidance for Not-for-profits
In addition to footnote disclosures, many NFPs are looking for practical guidance on reporting costs associated with COVID-19 that are considered to be unusual or infrequent items in the statement of activities. FASB ASC 220-20 requires a material event or transaction that an NFP considers to be of an unusual nature or of a type that indicates infrequency of occurrence, or both, to be reported as a separate component of change in net assets from continuing operations or, alternatively, disclosed in the notes to the financial statements. GAAP does not give detailed examples of what costs should be segregated as opposed to considered part of continuing operating costs. However, NFPs will likely consider costs specifically incurred to combat COVID-19 effects as unusual or infrequent items.
Examples of such costs may include the following:
- Costs associated with doing a “deep clean” of the NFP’s facility because a staff member tests positive for COVID-19
- Costs associated with paying staff for a period of time under “shelter in place” or “stay at home” orders when remote work is not possible
- Losses related to events that are cancelled due to COVID-19
- Refunds to the NFP’s lessees of facility rental fees due to COVID-19-related closures
- Write-downs or write-offs of receivables directly related to COVID-19 relief efforts
The Sikich Coronavirus Resource Center
The matters presented above are not intended to be all-inclusive but should be used as a starting point of discussion between NFPs and their auditors. Sikich has created a coronavirus resource center to help you navigate the challenges of this issue. Bookmark and monitor this page for the latest news in advocacy and tax relief, on-line learning opportunities, and resources addressing the wide-ranging effects of this global event.