Two of the most common revenue streams for private schools are tuition and contribution revenue. Unfortunately, tuition alone does not cover the cost for private schools to run their programs and maintain their campuses. Contributions are a great addition to tuition for private schools. However, do you know how to account for both revenue sources?
Tuition revenue is accounted for as an exchange transaction that is recognized ratably over the term of the school year net of financial aid. Any money received in advance of revenue recognition treatment being met, should be recorded as deferred revenue liability. See how to account for delinquent tuition payments here.
Contributions are recorded when received or pledged as unrestricted, temporarily restricted, or permanently restricted depending on donor restrictions. Some private schools have capital campaigns that raise funds to improve facilities, initiate new programs, or to build an endowment. Capital campaigns usually have explicit or implied restrictions; the stated objective of the capital campaign usually makes the donor’s restriction clear. Pledges must be carefully reviewed to determine if they are conditional or unconditional. Unconditional pledges should be recognized at fair value as revenue in the year the pledge is made. Conditional pledges are to be recognized as revenue when the conditions are substantially met.
The federal tax code allows taxpayers to deduct contributions or donations made to qualified private nonprofit schools that operate to educate students in the community or serve some other approved purpose. However, a donation made to a nonprofit private school may not qualify for the deduction if the school significantly engages in additional activities that do not relate to charitable, scientific, humanitarian, or religious causes.
A private school may offer a gift or other benefit, such as tuition discounts, in appreciation of a donor’s generosity. Schools that choose to offer discounts should advise donors that they must reduce the deductible value of their donation by the value of all gifts and benefits from the private nonprofit school. For example, providing a $500 gift certificate in appreciation of a $20,000 donation may seem minimal, but it still requires the donor to report a charitable deduction of $19,500 rather than $20,000.
The IRS has recently improved its audit selection process shifting from a subjective selection to a data-driven selection. Previously, subjective audit selection indicated that audits were driven by issue-specific determination. For example, following an IRS study on hospitals, more hospitals were selected to be audited compared to previous years. Similarly, following an IRS study on colleges and universities more audits of colleges and universities were performed.
The IRS has developed a data-driven approach that incorporates nearly 150 analytics based on nonprofit organizations’ Form 990 data in an effort to eliminate subjectivity. In doing so, the IRS intends to expand the number of organizations that could potentially be audited. If an organization “fails” too many analytical evaluations, it is more likely to be audited by the IRS. While no specific analytics have been published, industry experts anticipate the IRS to focus on the following sections of Form 990:
Although the IRS’s method of audit selection was updated, its budget has not increased for nonprofit organizations. Despite the budget stagnation, the new data-driven audit selection method has increased return change rates to over 90%, which represents a substantial increase in change rates compared to the 70% seen with subjective audit selection. Furthermore, there has been a 20 -day reduction in average audit completion since the implementation of data-driven audit selections – from 233 days in 2015,when subjective audit selections occurred to 213 days in 2016.
For more information on this new approach, click here.
On November 9, Aronson LLC, Arent Fox, and Morgan Stanley hosted an executive summit for exempt organizations that featured strategies for making and saving money, and tips on top governance issues. Missed the event? Here is a brief recap. The event kicked-off with keynotes delivered by former United Way CEO and Chair of the Alexandria Chamber of Commerce Joe Haggerty, and former US Senator and Congressman from North Dakota and current Senior Policy Advisor at Arent Fox Senator Byron Dorgan.
“Nonprofits should be providing the appropriate level of information to the public, this includes full disclosure, open conversations, innovate use of required reporting, and tying metrics to outcomes,” said Mr. Haggerty. “For example, instead of trying to hide salary info in an appendix, the United Way included its entire compensation plan in the 990 and added information on who they benchmark against and the overall philosophy of compensation.”
With a new administration and Congress set to take control in January, Senator Dorgan flagged several issues exempt organizations should be focused on. Including:
The first panel discussion featured Arent Fox Nonprofit Leader Richard Newman, Aronson LLC Nonprofit and Association Industry Services Group Partner Rob Eby, and Vice President and Financial Advisor for Morgan Stanley Matthew Teems. The group focused primarily on strategies for making and saving money. Those guidelines include:
Good governance was the central theme for the second panel, which included Mr. Teems, Aronson LLC Nonprofit and Association Industry Services Group Partner Gregory Plotts, Arent Fox Nonprofit Partner Sean Glynn, and Vice President of Commercial Insurance at Sahouri Insurance Allen Hudson. The group focused on investment committee responsibilities, audit committee responsibilities, and new accounting standards. Major takeaways include:
Additionally, three new Accounting Standards, which will take effect soon include: Financial Presentation for Exempt Organizations (Effective in 2018); Revenue Recognition (Effective in 2019); and Lease Accounting (Effective in 2020).
An accounting standard update from FASB known as Not-for-Profit Entities — Consolidation (Subtopic 958-810) Clarifying When a Not-for-Profit Entity That Is a General Partner Should Consolidate a For-Profit Limited Partnership or Similar Entity, is on the horizon.
The exposure draft of this standard has been through the comment period, which likely means the issuance is not far off. The update is intended to correct a prior update that left practitioners asking the question whether a nonprofit entity that is a general partner should consolidate a for-profit limited partnership, or a similar entity.
Typically, a nonprofit general partner would consolidate a for-profit limited partnership or similar entity unless a stated exception exists which would be:
A general partner or a limited partner that reports its partnership interest at fair value. Or, they are entities in industries, such as construction or extractive, in which it is appropriate for a general partner to use the pro-rata method of consolidation for its investment in a limited partnership.
A nonprofit general partner is presumed to control a limited partnership; regardless, of the extent of their ownership interests unless that presumption is overcome. The presumption would be overcome if the limited partners have substantive kick-out rights or substantive participating rights. Kick-out rights represent the rights underlying the limited partners or partners’ ability to dissolve (liquidate) the limited partnership or otherwise remove the general partners without cause. On the other hand, participating rights allow the limited partners or non-controlling shareholders to block or participate in certain significant financial and operating decisions of the limited partnership or corporation that are made in the ordinary course of business. Participating rights do not require the holders of such rights to have the ability to initiate action.
We will follow the progress of this update. If you have any questions in the meantime, please contact us at 301.231.6200.
On April 15, 2015, the FASB issued ASU 2015-05 focusing on customer’s accounting for internal-use software especially fees paid in a Cloud Computing Arrangement (CCA). From time to time, lack of explicit guidance about fees paid in a CCA has caused unnecessary costs to organizations in extra accounting fees.
The major changes in the update include eliminating the analogy to leasing guidance, adding a few more subtopics in defining software license and service contract, and some other amendments. If an organization obtains a software license for cloud computing service, it should account for that license consistently with the acquisition of any other license of an intangible asset. A software license will be accounted for differently based on its type and payment method. If it is a perpetual software license which the organization pays a one-time license fee then the costs should be capitalized. If the organization pays the software license as a subscription then the cost should be expensed. Otherwise, the organization should account for the cloud computing fees for service contract as either prepaid expenses or operating expenses. The new glossary added definitions for “hosting arrangement” and “without significant penalty”.
In summary, when dealing with accounting issues of cloud services, the organization should disclose them in a way similar to other licenses, under the scope of intangible asset instead of leases.