Disclosure of nonincome tax contingencies under ASC 450 for not-for-profit entities.

• Author: Weber, Neal A.
• Position: Accounting Standards Codification

Since September 15, 2009, the financial statements of a not-for-profit (NFP) entity have been subject to Accounting Standards Codification (ASC) Topic 740, Income Taxes (formerly known as FIN 48). FIN 48 applies only to taxes based on income. An NFP's income is generally exempt from federal and state income taxes. As a result, FIN 48 reviews for NFPs typically focus on the entity's exempt status or its unrelated business income.

With the FIN 48 requirements now in place for NFPs, primary emphasis is often given to income tax considerations when reviewing financial statements for NFPs. Exposure related to nonincome taxes, especially sales and use taxes, is often overlooked. This item focuses on the importance of properly accounting for and considering the impact of nonincome taxes as they apply to NFPs. To address these issues, an understanding of ASC Topic 450 is required.

Overview of ASC 450

The Financial Accounting Standards Board's (FASB) ASC Topic 450, Contingencies (formerly known as Statement of Financial Accounting Standards (FAS) 5), addresses the proper accounting treatment of nonincome tax contingencies. ASC 450 defines a contingency as a situation involving uncertainty as to possible gain or loss that will ultimately be resolved when one or more future events occur or fail to occur. ASC 450 thus applies to any nonincome taxes for which an NFP may be liable.

ASC 450 requires an estimated loss from a loss contingency to be accrued by a charge to income if it is probable that a liability was incurred at the date of the financial statements and the loss can be reasonably estimated. "Probable" means that a future event or events are likely to occur. The risk of audit detection should not be considered in reporting loss contingencies under ASC 450.

A disclosure of a contingency, not an accrual, is required even if the above conditions have not been met. Disclosure is required when there is at least a reasonable possibility that the loss may have been incurred. This disclosure must indicate the nature of the contingency and an estimate of the possible loss.

ASC 450 Applied to NFPs

What does all this mean for an NFP? For starters, nonincome taxes must be analyzed to determine whether a loss contingency should be accrued or disclosed. Recognized nonincome tax liabilities are just that: They are liabilities, not contingencies. Neither accrual nor disclosure is required for recognized liabilities under ASC 450. However, unrecognized...