Accounting Auditing Update for Nonprofits Final Klumpp ...
Transcript of Accounting Auditing Update for Nonprofits Final Klumpp ...
Accounting & Auditing Update For Nonprofits
11/3/2017
Lumsden McCormickExempt Organizations Conference 1
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
ACCOUNTING & AUDITING UPDATE FOR NONPROFITS
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Accounting and Auditing Update for NFPs
Presenter
Lee Klumpp, CPA, CGMANational Assurance Technical Partner, Nonprofit & Education (703) [email protected]
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NFP Accounting Trifecta
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The NFP TRIFECTA
NFP Presentation, ASU 2016-14 • Effective Date: For fiscal years beginning after 12/15/2017• Early Adoption: Permitted
Revenue Recognition from Contracts with a Customer, ASU 2014-09Effective Date: Nonpublic entities, Fiscal years beginning after December 15,2018(Conduit Debt Obligors will be one year earlier)Early Adoption: Permitted but not before years ended December 31, 2017
Leases, ASU 2016-2Effective Date: Nonpublic entities, Fiscal years beginning after December 15, 2019(Conduit Debt Obligors will be one year earlier)Early Adoption: Permitted
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Revenue From Contracts with a Customer
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NFP Revenue Recognition Task Force
Don Alcuino, AQD (NY)Carla Di Martin, AQD (NY)Amy Duffin, AQD (McLean)Sean Kilbane (Cleveland)Dick Larkin, National Assurance –NFP (McLean)Ashely Reynolds (McLean)Tammy Ricciardella, National Assurance – NFP (McLean)Andrea Taylor (Raleigh)
Everything done by this group will be run through National Accounting for final approval.
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Revenue Recognition (Topic 606)
• Objective: To develop a single, principle-based revenuestandard for
US GAAP and IFRS
The revenue standard aims to improve accounting for contracts with customers by:
• Providing a robust framework for addressing revenue issuesas they arise
• Increasing comparability across industries and capitalmarkets
• Requiring better disclosure
Substantially converged with IFRS on major provisions
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Scope
All contracts with customers, except• Lease contracts• Insurance contracts• Financial instruments• Guarantees• Non-monetary exchanges in the same line of business to facilitate
sales to customers
Contracts not with customers are excluded: • Contributions• Collaborative arrangements
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Final U.S. GAAP Model – Recognition
Core Principle:
Steps to apply the core principle:
1. Identifythe contract(s) with the customer
2. Identifythe performance obligations
3. Determinethe transaction price
5. Recognizerevenue when (or as) a performance obligation is satisfied
4. Allocate the transaction price
Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services
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Revenue from Contracts with CustomersNonprofit Specific Revenue Subject to this ASU
i. Membershipii. Subscriptioniii.Products and Servicesiv.Royalty Agreementsv. Sponsorship
vi.Conferences and Seminarsvii.Tuitionviii.Advertisingix.Licensingx. Federal and State Grants
and Contracts
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• Qualitative and quantitative* disaggregation ofrevenue into categories that depict how revenue andcash flows are affected by economic factors
Remaining performance obligations
Interim requirements
Information about contract balances
• Quantitative disclosures *
• Opening and closing balances *
• Amount of revenue recognized from contract liabilities *
• Explanation of significant changes in contract balances *
• Transaction price allocated to remainingperformance obligations *
• Quantitative or qualitative explanation of whenamounts will be recognized as revenue *
Disaggregation of revenue
Final U.S. GAAP Model – Disclosure
* for public entities only
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Transition, Effective Date and Early Application
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• Effective dates:
- Public entities: annual reporting periods after 12/15/2017 (including interim period)
- Nonpublic entities: one year later (annual reporting periods after 12/15/2018)—annual period in first year, interim periods thereafter
- Early application option—no earlier than original public company effective date (annual reporting periods after 12/15/2016)
PY2(2016)
PY1(2017)
CY(2018)
CY Footnotes
Retrospective(with optional practical expedients)
Cum
ulat
ive
catc
h-up
Rev rec under new standard
Cumulative effect at date of application
Rev rec under legacy standard
Cum
ulat
ive
catc
h-up
Existing* and new contracts
under new standard
Existing and new contracts disclosed
under legacy standard for CY (2018)
*contracts for which all (or substantially all) of the revenue has not been recognized under legacy revenue guidance
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Grants and Contracts (Currently in Exposure Draft)Unique NFP guidance on contributions, but long-standing diversity in practice in classifying grants and contracts, particularly from governmental entities
Terminology and Transition‐ “Contributions” encompasses both grants and donations‐ A change in classification in connection with
enhanced/clarified guidance would not be the correction of an accounting error
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Grants and Contracts (Currently in Exposure Draft)U.S. GAAP focuses on:
‐ Issue 1: Exchange vs. Non-exchange (contribution)‐ Issue 2: Conditions vs. Restrictions
ASU 2014-09, Topic 606 (Revenue from Contracts with Customers)‐ Heightened this issue; raised question as to whether grants and
contracts are in scope of that guidance‐ Removed limited exchange guidance and focuses on whether or not
the transaction is reciprocal
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Financial Statements of Not-for-Profit EntitiesASU 2016-14
Net Assets
Liquidity
Operating MeasureExpenses
Cash Flows
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Net Assets
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Net Assets
Unrestricted Temp. Restricted
Perm. Restricted
Without Donor Restrictions With Donor Restrictions
Amount, purpose, and type of board
designations *
Nature and amount of donor restrictions
CurrentGAAP
Proposed GAAP
Disclosures
+
* New disclosure requirement
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Example Effect on Statement of Financial Position
Note: Shaded lines are required to be presented.
Source: ASU 958
Not-for-Profit Entity A
Statements of Financial Position
June 30, 20X1 and 20X0
(in thousands)
20X1 20X0
Assets:
Cash and cash equivalents $ 4,575 $ 4,960
Accounts and interest receivable 2,130 1,670
Inventories and prepaid expenses 610 1,000
Contributions receivable 3,025 2,700
Short-term investments 1,400 1,000
Assets restricted to investment in land, buildings, and equipment 5,210 4,560
Land, buildings, and equipment 61,700 63,590
Long-term investments 218,070 203,500
Total assets $ 296,720 $ 282,980
Liabilities and net assets:
Accounts payable $ 2,570 $ 1,050
Refundable advance 650
Grants payable 875 1,300
Notes payable 1,140
Annuity trust obligations 1,685 1,700
Long-term debt 5,500 6,500
Total liabilities 10,630 12,340
Net assets:
Without donor restrictions (Note DD) 92,600 84,570
With donor restrictions (Note B) 193,490 186,070
Total net assets 286,090 270,640
Total liabilities and net assets $ 296,720 $ 282,980
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Note: Shaded lines are required to be presented.
Source: ASU 958-205-55-14
EXAMPLE OF EFFECT ON STATEMENT OF ACTIVITIES - COLUMNAR FORMAT
Example of Effect on Statement of Activities -Columnar Format
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Disclosures Related to Net Assets
Amounts and purposes of governing board designations, appropriations, and similaractions that result in self-imposed limits on the use of resources without donor-imposed restrictions as of the end of the period.
Composition of net assets with donor restrictions at the end of the period and howthe restrictions affect the use of resources.
Additional information related to underwater endowment funds.
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Disclosures Related to Net Assets (Cont’d)
Information about the nature and amounts of different types of donor-imposed restrictions should be reported either on the face of the statements or in the notes. Separate line items that distinguish between the different types of restrictions may be used such as:
• Assets, such as land or works of art, donated with stipulationsthat they be used for a specified purpose, be preserved, and notbe sold.
• Assets donated with stipulations that they be invested to providea permanent source of income.
• Support of particular operating activities.• Investment for a specified term.• Use in a specified future period.• Acquisition of long-lived assets.
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Net Asset Disclosure Example
Excerpt from ASC 958-210-55-3
Source: ASU 958
With donor restrictionsPerpetual in nature 200,000$ Purpose restricted 1,840,000 Time-restricted only, for periods after 20X1 150,000
2,190,000$ Without donor restrictions
Designated by the Board for [purpose] 1,000,000$ Undesignated 24,000,000 25,000,000
Net assets 27,190,000$
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Expiration of Capital Restrictions
Gifts of cash restricted for acquisition or construction of PP&E:
‐ NFPs would be required to use the placed-in-serviceapproach (no more implied time restrictions)
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Liquidity
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Liquidity and Availability
NFPs are required to provide the following information that will be useful for a reader to determine how the organization manages its liquid assets to meet cash needs for general expenditures within one year of the Statement of Financial Position (SOFP) date:
Qualitative information on how an NFP manages its liquid availableresources and its liquidity risk (in the notes)
Quantitative information that communicates the availability of an NFP’scurrent financial assets at the balance sheet date to meet cash needs forgeneral expenditures (on the face and/or in the notes)
Availability of financial assets may be affected by the nature of the asset, external limits imposed by donors, laws or contracts with others, or internal limits imposed by governing board decisions.
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Quantitative Disclosure of Financial Asset Availability
Financial assets, at year end* 234,410$
Less those unavailable for general expenditures within one year, due to: Contractual or donor-imposed restrictions:
Restricted by donor with time or purpose restrictions (11,940) Subject to apropriation and satisfaction of donor restrictions** (174,700) Investments held in annuity trust (4,500)
Board designations:Quasi-endowment fund, primarily for long-term investing** (36,600) Amounts set aside for liquidity reserve (1,300)
Financial assets available to meet cash needs for general expenditures within one year 5,370$
* Total assets, less nonfinancial assets (e.g., PP&E, inventory, prepaids)
** Excludes amounts that have been appropriated for next 12 months that do not have purpose restrictions
Source: ASU 958-205-55-21
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Quantitative and Qualitative Liquidity and Availability of Resources Disclosure Example
Source: ASU 958-210-55-8
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Operating Measure
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Operating Measure: Improved Disclosures
For those NFPs that utilize an operating measure and show governingboard designations, appropriations, and similar actions (internaltransfers) in the measure
These NFPs must report these types of internal transfers appropriatelydisaggregated and described by type (either on the face of thefinancial statements or in the notes)
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Example of Operating Measure Presentation
Source: ASU 958-225-55-17
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Expenses
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Expense Reporting
Report expenses, either on the face of financial statements or in thenotes, by:
• Function *• Natural classification• Analysis (disaggregate function by nature)
* currently required in GAAPNFPs are now required to provide qualitative disclosures about methods
used to allocate costs among program activities and supporting services
ASU 2016-14 also provides enhanced guidance on allocations frommanagement and general (M&G) expenses
• Key concept: direct conduct or direct supervision
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Expense Reporting
Additional Information
• If expenses are reported in other line items within thestatement of activities (e.g., salaries are included incosts of goods sold) they should be included in thefunctional reporting schedule by their naturalclassification.
• External and direct internal investment expenses that arenetted against investment return should not be includedin the functional expense analysis.
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For example: 958‐205‐55‐21 Note F (Page 66 of ASU)
Expenses By Both Nature and Function
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Cost Methodology Issues – Examples
Allocation Current Cost Allocation Method
Revised Allocation Method
Facilities Operation & Maintenance
Sq. Footage basis Service & effortestimate
Depreciation & amortization
Sq. Footage basis No change
Interest Usage of Space No change
IT related costs Do not allocate Service & effort estimate and costs of specific technology utilized
Media production & Communication
Do not allocate Service & effort estimate
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Example Disclosure for Expense Allocation DisclosureNOTE X. METHODS USED FOR ALLOCATION OF EXPENSES FROM MANAGEMENT AND GENERAL ACTIVITIES
The financial statements report certain categories of expenses that are attributable to one or more program or supporting functions of the Organization. Those expenses include depreciation and amortization, the president’s office, communications department, and information technology department. Depreciation is allocated based on square footage, the president’s office is allocated based on estimates of time and effort, certain costs of the communications department are allocated based on estimates of time and effort, and the information technology department is allocated based on estimates of time and costs of specific technology utilized.
Source: ASU 958
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INVESTMENT RETURN
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Reporting of Investment Returns
Net presentation of investment expenses againstinvestment return on the face of the statement ofactivities
‐ Netting limited to external and direct internal expenses
Disclosure of investment expenses no longerrequired, no longer require disclosure of investmentincome components
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Investment Return
Direct internal investment expenses involve the direct conductor direct supervision of the strategic and tactical activitiesinvolved in generating investment return including:• Salaries, benefits, travel, and other costs associated with the
officer and staff responsible for the development andexecution of investment strategy.
• Allocable costs associated with internal investmentmanagement and supervising, selecting, and monitoring ofexternal investment management firms.
Direct internal investment expenses do not include items thatare not associated with generating investment return. Forexample, the costs associated with unitization and other suchaspects of endowment management would not be allocated.
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Cash Flow Statement
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Cash Flow Statement
Continue to Allow free choice between the Direct Method and the Indirect Method
‐ However the Indirect reconciliation will no longer be required for Direct Method
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Implementation and Effective Date
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Effective Date, Early Adoption, and TransitionEffective Date: For fiscal years beginning after 12/15/2017 Interim financials the following year
Early Adoption: Permitted, but must apply the regular transition provisions.
Transition: • For year of adoption: apply all provisions.• For comparative years presented: apply all provisions, except can
choose not to present:• Analysis of expenses by nature and function, and/or• Disclosures around liquidity and availability of resources
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Important Notes
NFPs are already permitted to incorporate many of the changes in the ASUThe only changes that cannot be done without formally adopting the ASU are:
(1) Presenting one class of restricted net assets (consolidating temporarily and permanently restricted)
(2) Underwater endowment accounting(3) Eliminated disclosures of investment return components and netted
expenses(4) Eliminated requirement to provide indirect reconciliation if using
direct method for operating cash flows
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Leases
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Leases (Topic 842)
A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration
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Lessee Model
Current U.S. GAAP (IFRS)
IASB FASB
Capital (Finance)Leases
Type A Type A
Operating Leases Type A Type B
All leases are accounted for the
same.
Classification is based on existing U.S. GAAP/IFRS
All leases (more than 12 months) are recognized on the lessee’s balance sheet
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Lessee Accounting Overview
Financing
Operating
Right-of-use assetLease liability
Amortization expenseInterest expense
Cash paid for principal and
interest payments
Right-of-use assetLease liability
Single lease expense on a straight-line basis
Cash paid for lease payments
Income Statement Cash Flow StatementBalance Sheet
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Lessor Accounting Overview
Net investment inthe lease
Interest income and any profit on the lease
Cash received for lease payments
Continue to recognize underlying
asset
Lease income, typically on a straight-line basis
Cash received for lease payments
Sales-Type / Direct
Financing
Operating
Income Statement Cash Flow StatementBalance Sheet
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Leases – Effective Date
• Fiscal years beginning after December 15, 2018, including interimperiods within those fiscal years (CY 2019; FY 2019-20)
Public Companies*
• Fiscal years beginning after December 15, 2019 and interimperiods beginning after December 15, 2020 (CY 2020; FY 2020-21)
All Other Organizations
• Permitted for all organizations
Early Application
* “Public Companies” refers to the following: (1) public business entities, (2) a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an-over-the-counter market, and (3) an employee benefit plan that files or furnishes statements with or to the SEC (Same as the Revenue Recognition Standard)
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Questions?
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