Be Prepared and Proactive to Manage Potential Banking Challenges

Date August 16, 2023
Categories
Article Authors

Financial stability and effective banking relationships are crucial for the success of any construction company. Cash flow can be a never-ending issue. For many contractors, their lines of credit allow them to continue to operate through long and delayed cash-flow cycles. Other construction companies simply need a line of credit available for bonding for larger projects. However, recently unanticipated banking constraints have been causing disruptions and financial strain—and now, more than ever, it is essential for construction companies to be prepared and proactive in order to manage banking challenges. It is time to take a step back and reevaluate your position with your current financial institution and begin to develop a backup plan—just in case. Here are a few key points that will help you remain stable and ready to handle a potential issue with your bank.

Diversify banking relationships

Relying on a single bank can expose a construction company to significant risks if that bank encounters financial difficulties or operational problems. When you diversify your banking relationship, you can spread your risk and ensure options in case of disruptions. Building relationships with multiple banks gives you access to a broader range of financial services and strengthens your company’s position during times of uncertainty. It is always a good business practice to have a second bank up to date on your needs and financial status, including addressing a scenario where you might find yourself out of favor with your current bank. Getting up and running with a new financial institution can take longer than you might expect. Being proactive and keeping another bank up to date shortens that time period.

Keep a close eye on your financial statements

To stay prepared for potential banking issues, construction companies should conduct regular financial health checks. This involves monitoring key financial indicators, such as cash flow, debt levels, and liquidity ratios. Proactive companies watch these indicators regularly and work hard to ensure they understand their position with their bank. Up-to-date financial statements allow open conversations with the bank to ensure they understand your situation and will not be surprised in the event of a downturn in your business.

Maintain Strong Communication Channels

Establishing continuous lines of communication with banking partners is essential for construction companies. Regular and open dialogue helps build trust and allows for early notification of any potential banking issues. It is crucial to keep your banks informed about your ongoing projects, financial projections, and any significant changes in your company. Being proactive with communication has always been looked upon favorably by banks and allows them to prepare alternative routes of financing when needed.

Have a Plan B

Constructing a well-thought-out contingency plan is vital for mitigating the impact of banking issues. Banks can quickly pivot away from certain industries when they feel their exposure is over-weighted in a specific industry. Sometimes, even relatively healthy companies can be asked to look elsewhere for financing. Options can be limited for construction companies that, for example, might require a line of credit to operate or even to be approved for bonding. Your Plan B might involve exploring alternative financing options, such as non-traditional lines of credit or working capital loans, as well as building emergency fund balances.

A strong banking relationship is a critical aspect of running a successful construction company. By being prepared and proactive, you can strengthen your resilience and mitigate the impact of banking challenges. Having a backup plan allows construction companies to focus on delivering projects efficiently and maintaining their financial stability even in the face of unexpected banking disruptions.

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GAAP Requires Nonprofits to Report In-Kind Donations on Financial Statements

Date February 15, 2022
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Article Authors

The GAAP requirement for the reporting of gifts in-kind has been in existence for a number of years. In June 2018, the Board issued Accounting Standards Update No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. This Standard focused predominately on the revenue recognition of donations in-kind and with a heightened focus on donated services rather than all nonfinancial assets. The presentation and disclosure of contributed nonfinancial assets differed greatly among nonprofit entities.

To help supplement its cash resources, many nonprofit entities rely heavily on donors for contributions, which can be classified as either financial or in-kind, i.e., nonfinancial assets. Financial contributions are commonly received in the form of grants, pledges, or donations and are received by the organization through a transfer of monetary funds from the donor. In-kind contributions are nonfinancial assets, including goods or services received at no cost or below market cost. Nonfinancial assets include tangible items such as food, clothing, medical or other supplies, furniture and intangible items such as services, voluntary labor, or facilities.

Some of the most frequently overlooked gifts in kind include contributions of advertising time, technical services, use of facilities, costs associated with fundraising events, collection items, car donations, and borrowings at below market interest rates.

In-kind services are only recorded on the organization’s financial statements if they meet specified criteria as determined by Generally Accepted Accounting Principles (GAAP), which requires services contributed in-kind must be performed by professionals and tradesmen with a specialized skill in the service. In-kind contributors are typically accountants, architects, carpenters, doctors, electricians, awyers, nurses, plumbers, teachers, and other professionals and tradesmen. When analyzing these types of services, the organization needs to focus on the notion of “specialized skills” GAAP also requires that contributed services create or enhance a nonfinancial asset belonging to the organization and that it would otherwise have to purchase the service. For example, an electrician donating his services during a construction project at a cost below market or for no cost. Under GAAP, the service would qualify as an in-kind contribution as the electrician has a specialized skill that the nonprofit would otherwise have to purchase. The organization would record the receipt of these services in the “statement of activities” with an offsetting expense or capital assets addition, as explained below.

There is a common misconception among nonprofits that because in-kind donations are provided at little or no cost, the organization doesn’t have to report them on its financial statements. Stakeholders and other readers of the financial statements might dispute that recording these items will merely gross-up revenue and expenses with no effect on the operating results. But conversely, not recording these items can distort an NFP’s financial statements, understating the organization’s revenue and expenses, and does not allow for true comparison between similar organizations. As such, nonprofits are required to report these contributions.

GAAP requires the organization to report the donated items or services meeting the criteria for in-kind donations as revenue in the operating section of the organization’s “statement of activities” on the date the contribution is made known to the organization, regardless of the date on which the item or service is received. As explained in FASB ASC 958-605, the donated nonfinancial assets must be reported at fair market value, defined by ASC topic 820 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” As well, GAAP requires an offsetting expense in the proper natural expense category on the organization’s “statement of functional expenses,” also reported at the determined fair market value as described in ASC topic 820. Suppose the item or service is an asset that exceeds the organization’s capitalization policy, like the electrician cited above. In that case, the asset is recorded in the proper fixed asset category on the “statement of financial position,” and revenue is recognized for the asset’s fair market value. Determining the fair value to be recorded is often the most challenging part of the accounting exercise.

FASB Accounting Update

Based on stakeholder feedback, the FASB issued this update to increase transparency through enhanced financial statement presentation and disclosure of nonfinancial assets. However, the revenue recognition and measurement requirements for these nonfinancial assets remain unchanged in ASC 958-605.

FASB Accounting Standards Update (ASU) No. 2020-07, Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets, are effective for nonprofits with annual periods beginning after June 15, 2021, and interim periods within annual periods beginning after June 15, 2022. Early adoption of the standard is permitted by nonprofits. Retrospective transition is required. So any periods reported upon must comply with the updated standard. The enhanced presentation and disclosure requirements are:

  • The contributed nonfinancial assets are stated separately from other contributions in the statement of activities.
  • A footnote disclosure must be made to disaggregate the contributed nonfinancial assets by type such as food, medical supplies, fixed assets, facility usage, services, to name a few.
  • The NFP’s policy (if any) on liquidating rather than using contributed nonfinancial assets for each type of nonfinancial asset identified.
  • Qualitative considerations to be disclosed include:

    -Whether the contributed nonfinancial assets were liquidated.

    -A description of any restrictions requested at the time of contribution by the donors.

    -A description of the technique the organization uses to arrive at the fair value measurement of the nonfinancial asset in accordance with paragraph 820-10-50- 2(bbb)(1), at the time the asset is initially recorded.

    -The principal market used to arrive at the fair value measurement (The principal market is the market with the greatest volume of activity that the organization is legally able to access in order to value the asset.)

Under the new standard, when an organization receives donated services it must disclose the services received during the financial statement period, including the revenue recorded on the statement of activities and the programs or activities the services were used for. The organization is required under the new standard to provide disclosure regarding services received in-kind regardless of whether they meet the revenue recognition criteria defined by GAAP; however, the organization is only required to record revenue on the statement of activities if it meets the GAAP criteria. The standard allows for the nature and extent of such services disclosed but not recorded to be described in the footnotes by nonmonetary information, which can include but is not limited to the number of hours received in services or outputs provided by board members or volunteers, such as contributions raised. Many organizations may have donated services that are recorded as contributions and others that are only disclosed in the footnotes.

As the effective date of FASB Accounting Standards Update (ASU) No. 2020-07, Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets draws near, it will be important for nonprofit organizations to closely monitor the receipt of nonfinancial assets and services received as well as their methods of valuing such contributions. HBK Nonprofit Solutions team members will be happy to assist you with these accounting challenges.

Read the full Winter issue of Insights, the HBK Nonprofit Solutions quarterly newsletter.

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Financial Statement Reporting Consequences of COVID-19 – Subsequent Events

Date March 30, 2020
Article Authors
HBK CPAs & Consultants

As the United States enters its third month of battling the uncertain times of COVID-19, businesses are faced with the challenges of operation interruptions, cash flow and revenue concerns and volatility in the stock market. Businesses must consider the financial reporting impact and the appropriate disclosure of the coronavirus disease’s effect.

Subsequent Events
Accounting standards define subsequent events as events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be. There are two types of subsequent events:

  1. The first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events).
  2. The second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose subsequent to that date (that is, non-recognized subsequent events).

  3. Based on the first reported positive cases of the disease in the United States beginning January 14, 2020 and the limited domestic economic impact prior year calendar year-end, it is likely that COVID-19-related subsequent events would be identified as non-recognized subsequent events. Disclosure of non-recognized events are intended to prevent financial statements from being misleading and require disclosure of the nature of the event and an estimate of the financial effect of the event (or a statement that an estimate cannot be made). The predominant subsequent events regarding this pandemic include a decline in the market value of debt and equity securities and the impact on business operations.

Market Value Declines
Significant declines in the stock market continue to mount amidst the worldwide struggle against COVID-19. Year-to-date the S&P 500 has declined with marginal signs of reduced volatility. That said, non-public entities generally do not explicitly disclose potential changes in the value of recognized assets due to foreseeable future risks. In its place, many entities include a standardized disclosure regarding the risk of market value declines of assets. Entities should evaluate whether an explicit disclosure regarding the decline in securities as a result of COVID-19 or a classic statement regarding risk of market value is necessary. Factors such as the significance of securities in relation to, and the liquidity of, remaining assets should be considered when making this determination.

Business Operations
Business operations have been considerably altered during this time of uncertainty. While a few industries have seen unprecedented highs, the majority of businesses have shuttered at the request or order of authorities. Although an estimated amount of the financial statement effect is likely not possible considering the uncertainty of the duration of this crisis, qualitative disclosure of such economic interruption should be contemplated as to not mislead financial statement users.

Conclusion
We will continue to follow developments and provide guidance and clarity surrounding COVID-19 reporting issues. We are only on the surface of the economic impact this devastating event has had on businesses. For business questions related to or to discuss COVID-19’s effect on your business, please contact your trusted HBK advisor.

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