Posted by Christina K. Bell, CPA
My two young sons who live, eat, and breathe baseball often say the best baseball teams have two distinguishing characteristics — consistency and chemistry. The Financial Accounting Standards Board (FASB) believes the best financial statements have the same characteristics as well.
In April 2013, the FASB issued Accounting Standards Update (ASU) 2013-06, Not-for-Profit Entities: (Topic 958): Services Received from Personnel of an Affiliate. ASU 2013-06, effective for fiscal years beginning after June 15, 2014, clarifies how nonprofit entities recognize and measure services received from personnel of an affiliate to ensure consistency amongst financial statement presentations.
An affiliated entity is defined as a party that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with an entity. Many nonprofit entities are recipients of services performed on their behalf by personnel of an affiliated nonprofit. In some cases, the affiliated nonprofit will charge the receiving nonprofit for the services being performed. In these instances, the nonprofit receiving the services will recognize an expense based upon the amount they were charged; however, in other cases, the affiliated nonprofit will not charge the recipient for the services performed.
In these cases, the question was whether the recipient should recognize the value of the contributed services performed. Some nonprofits concluded that all services provided by an affiliate should be recognized within their financial statements, whether paid for or not, while others followed generally accepted accounting principles for recognizing contributed services. By following generally accepted accounting principles, contributed services were only recognized for those services that created or enhanced nonfinancial assets or required specialized skills, were provided by individuals possessing those skills, and would have been purchased if not provided by donation. As such, some nonprofits were not recognizing any services provided by an affiliate within their financial statements. ASU 2013-06 was enacted to resolve this diversity and ensure all services received by affiliated entities are being recorded consistently by receiving nonprofits.
ASU 2013-06 requires a recipient nonprofit to recognize all services received from personnel of an affiliate that directly benefit the recipient nonprofit. Those services should be measured at the cost recognized by the affiliate for the personnel providing those services (compensation and payroll-related fringe benefits). However, if measuring a service received from personnel of an affiliate at cost will significantly overstate or understate the value of the service received, the recipient nonprofit may elect to recognize that service received at either (1) the cost recognized by the affiliate for the personnel providing that service or (2) the fair value of that service.
ASU 2013-06 does not prescribe presentation guidance for the increase in net assets associated with services received from personnel of an affiliate other than prohibiting reporting it as a contra expense or a contra-asset. Therefore, it is reasonable to conclude that recipient nonprofits will record the increase in net assets associated with the services received as contribution revenue and report the corresponding decrease in net assets similar to how other such expenses are reported.
If you believe ASU 2013-06 applies to your nonprofit, consider coordinating with your affiliate’s management now to obtain the necessary accounting data in order to properly record the value of the services performed, because a little chemistry and consistency go a long way in preparing fair and accurate financial statements.
For additional information on Reporting of Services Rendered from Personnel of an Affiliate, or our nonprofit services, please contact Belfint Lyons & Shuman at 302-225-0600, or click here to contact us.