Article by Tom Sneeringer, RSM US LLP
This article is an online-only supplement to Sneeringer's feature article, "Implementing the New Accounting Standards: Revenue Recognition and Financial Reporting" in the March/April 2018 Net Assets magazine.
Following the 2016 release of accounting standard updates to FASB's generally accepted accounting principles, independent schools have been preparing to address significant changes to financial reporting and revenue recognition. Schools should also be aware of two other changes that may impact them, regarding leases and restricted cash. The effective date for leases is either December 15, 2018, if a school is considered a public entity, or a year later if not. For restricted cash, the effective date is simply December 15, 2018. In both cases, early adoption is permitted.
ASU 2016-02, Leases (Topic 842) applies to all material lease obligations with a duration of a year or more. This standard may not have a material impact on schools that own their land and buildings. For schools that lease their facilities and/or lease material equipment, the new ASU will treat all leases as capital leases in that the lease obligations will be reported as a liability of the statement of financial position. In addition, this reporting will present a “right of use” asset. The expense pattern for leases should generally be the same as that under the previous lease accounting standard. Special care should be taken by schools that lease property from a related entity. The new ASU removes the practicality provisions for related party leases and requires the lease to be reported as if it were arms-length. This provision may impact the timing of the depreciation for any leasehold improvement assets on the school’s books.
ASU 2016-18, Statement of Cash Flows (Topic 230) will change how cash is reconciled on the statement of cash flows. Proceeds from debt transactions are often reported as “restricted cash” on the statement of financial position, apart from other cash and cash equivalents. When preparing the statement of cash flows, the cash total in these circumstances is the “regular” cash and cash equivalents, not including restricted cash. Under this new ASU, restricted cash should be in the cash totals that are reconciled to (both beginning and ending cash). This will not impact the statement of financial position in that restricted cash should still be reported separately from non-restricted cash. However, schools may want to reflect both cash lines together at the top of the asset section on the statement of financial position and arrive at a cash su-total before listing out the other assets. In that case, the reconciliation to both statements is more clear.
Implementing the New Accounting Standards: Revenue Recognition and Financial Reporting (March/April 2018)
A Major Overhaul for Independent School Financial Statements (Sept/Oct 2015)
Preparing for New FASB Regulations (Jan 2017, online only)
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