The Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-13 may seem like old news, but its provision for accounting for current expected credit loss (CECL) only recently took effect for nonprofits. These credit loss accounting standards became mandatory for calendar years ending in 2023 and fiscal years ending in 2024. However, they apply only to organizations following Generally Accepted Accounting Principles (GAAP). If your nonprofit recently switched to GAAP accounting, you may not yet be familiar with these requirements.
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If your nonprofit is subject to these standards, understanding their implications for credit impairment and ensuring compliance is essential. Here’s what you need to know.
Understanding the Scope of ASU 2016-13
Financial Instruments Covered
The credit loss accounting standards under ASU 2016-13 apply to specific types of financial instruments, including:
- Trade receivables (e.g., amounts billed for merchandise, tuition, fees, and special events)
- Held-to-maturity debt securities in an investment portfolio
- Notes receivables and other loan obligations
- Lease receivables
For most nonprofits, accounts and loans receivable are the most common items affected by the CECL standard.
Exclusions to Note
Certain financial instrument assets are exempt from these standards, such as:
- Amounts made to defined contribution plans
- Promises to give (pledges or contributions receivable)
- Notes or receivables between entities under common control
- Operating leases
A Shift in Credit Loss Recognition
The Old Approach: Incurred Loss Standard
Before ASU 2016-13, nonprofits followed a backward-looking “incurred loss” standard. Credit losses were recognized only after a loss event had occurred or was deemed probable. For example, organizations recorded an allowance for doubtful accounts based on historical data, such as receivables they were unlikely to collect.
The New Approach: Expected Loss Standard
The new credit loss accounting standards shift to a forward-looking model, requiring nonprofits to measure and report expected losses over an asset’s contractual life, starting from the asset’s initial recognition. Expected credit losses are calculated using:
- Backward-looking information about past events
- Current conditions
- Reasonable and supportable forecasts affecting the net amount expected to be collected
The allowance for credit losses must be updated at each reporting period. In practice, this means recognizing an allowance even if the likelihood of a loss is remote. As a result, receivables that previously required no allowance—such as those that are current or not yet due—may now require one.
Flexible Methods for Estimating Credit Losses
No One-Size-Fits-All Approach
The credit loss accounting standards do not mandate a specific method for estimating credit losses, allowing flexibility to choose the most suitable approach for your nonprofit. Options include:
- Loss rate
- Discounted cash flow
- Aging schedule
- Probability of default
- Roll rate
Key Considerations
Regardless of the method chosen, inputs must account for the full amount of expected credit losses and incorporate reasonable and supportable forecasts. Consistency is critical — use the same estimation methods across financial reporting periods. Additionally, maintain thorough documentation, including:
- Internal controls
- Inputs and data
- Actual calculations
- Explanations of changes from previous periods
Some of this information will also be required in your financial disclosures.
Seek Expert Guidance
Navigating the complexities of credit loss accounting standards can be daunting, and many nonprofits opt to rely on outside accounting professionals. Whether you need us to perform credit loss estimates or to help establish the necessary processes and procedures for compliance, the nonprofit services team at GBQ Partners is here to assist. Contact us for expert support.
Check out these resources for more nonprofit accounting assistance:
Fundamental Differences Between Nonprofit And For-Profit Accounting
When Your Nonprofit’s Dept-Financed Income Is Subject To Tax
Year-End Audit Essentials: GAAP Checklist
