asset yet, due to the absence of either performance or a cash receipt. The customer likewise has no asset or liability in the absence of their prepayment or seller performance. I have seen numerous real-life instances where entities have reported both assets and liabilities before any cash flows or performance have occurred, thereby overstating their GAAP balance sheets. (See FASB ASU 2014-09 Revenue from Contracts with Customers – Topic 606, paragraph BC 50.) When a seller bills a customer in advance of providing goods or services, no receivable is appropriate since no transaction has occurred (a billing is simply a demand for payment). Likewise, no deferred revenue liability is appropriate if no cash is received from the customer. The risk of this type of GAAP departure occurring increases if the entity’s billing system is integrated with their general ledger. I’ve seen this happen, too. My largest first-year NFP audit client presented their G/L to me that included a balance sheet account in the millions of dollars (cannot remember if it was a debit or a credit) entitled “accrued deferrals.” When I inquired as to the nature of this account and its substantial balance, I got no answer. This turned out to be one of several material prior-period adjustments I proposed, and the client made. Selected Other Terms “Pledges receivable.” I often see this term used by reporting entity management in their GAAP NFP financial statements. The word “pledge” is, of course, an English word with various meanings, such as: » The Pledge of Allegiance » A brand name of furniture polish But it is not a GAAP word. Neither the FASB ASC nor any FASB Concepts Statements I have found define it. In fact, the June 1993 Original FASB Statement No. 116 on Contributions says in paragraph 89: “This statement avoids the use of the term ‘pledge’ because it may be misinterpreted.” Current authoritative GAAP (FASB ASC 958-310-25-1 and the Glossaries) define the terms “contributions receivable” and “promises receivable—two terms that are essentially interchangeable. Use those, not “pledge.” A contribution is defined in FASB ASU 958-310-20 as “a transfer of cash or other assets to an entity or a settlement or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner.” A promise-to-give is a type of contribution. So remember, a contribution (received or made) can occur under GAAP even in the absence of a transfer of resources. Also, in GAAP, the words “contribution,” “gift,” and “donation” are synonymous substance terms and should not be confused with transaction forms such as “grant” or “award.” Accounting and financial reporting are based on transaction substance, not form! “Earn” or “earnings.” This term is not formally defined or discussed in SFAC No. 8, as it was previously in the now superseded SFAC No. 6, which associated that term with the excess of revenue over related expenses in exchange transactions, which conceptually involve a matching concept. More importantly, this term is neither defined nor used in the text of FASB ASU 2014-09, Revenue from Contracts with Customers. Exchange transaction revenues under GAAP are to be recognized upon satisfaction of performance obligations (not “earnings”). Conclusion Financial statement preparers and auditors should become thoroughly familiar with the GAAP terms defined not only in authoritative GAAP pronouncements, but also in Concepts Statements as well. After all, these principles (GAAP) are represented by reporting entity management to have been followed, and auditors use them as criteria in their audits of GAAP financial statements. Any imprecision in the use of key terms can result in confusion and inconsistencies in both financial statement preparation and auditing, thereby failing to serve the public interest. So, if you see or hear someone declare that, “for most people, their home is their biggest ‘investment,’” you perhaps may be prompted to think, “OK, fine … but that ain’t GAAP!” Paul H. Koehler, CPA, is a sole practitioner in Lincoln, Neb. He has more than 45 years of experience in auditing, training, and consulting, specializing in nonprofit organizations and state and local governments. You may contact him at (402) 488-1578. 29 www.nescpa.org
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