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EducationAdvisorBusiness Insights for Higher Education Administrators Summer 2017 - Volume 15

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In this IssueNFP FASB Changes

IRS Data Retrieval Tool

Securing Student Information

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EducationAdvisor

It’s been over twenty years since Financial Account-ing Standard (“FASB”) 117, Financial Statements of Not-for-Profit Organizations was adopted. At the time, FASB redefined the manner in which not-for-profit en-tities produced their financial statements in order to re-main in compliance with generally accepted accounting principles. Although the FASB thought the current finan-cial presentation model was sound, the FASB felt that improvements were necessary to provide more use-ful information to donors, grantors, creditors and other users of the financial statements. As a result, Accounting Standards Update 2016-4, Not-for-Profit En-tities, Topic 958 was issued in August 2016. This partic-ular update represents phase one; with the FASB antici-pating to issue a phase two update that will incorporate additional changes in the near future.

A few of the key provisions of the update require a not-for-profit entity to:

• Change the presentation of net assets on the state-ment of financial position from three categories to the following two categories: net assets with donor restrictions and net assets without donor restrictions.• Change the presentation on the face of the state-ment of activities from reporting the changes in three classes of net assets to two classes of net assets.• Net external and direct internal investment expens-es against investment return and no longer require the disclosure of those netted expenses.• Use the placed-in-service treatment for reporting expiration of restrictions on gifts, in the absence of explicit donor restrictions, to acquire or construct a long-lived asset rather than releasing the restric-tions over the life of the specific asset. Additionally, reclassify those amounts at the beginning of the pe-riod of adoption from net assets with donor restric-tions to net assets without restrictions.• The amounts of the expenses by their natural and functional classification need to be disclosed in one single location: either on the face of the statement of activities, as a separate statement, or in the notes to the financial statements.• Disclose the methodology utilized to allocate ex-penses between program and support functions.• Classify underwater endowments as a reduction of net assets with donor restrictions. Additional dis-closures that are required include: the aggregate amounts underwater, the aggregate original gift amounts, the fair value of such funds and the organi-zational policy to spend from such funds are required.• Disclose qualitative information that communicates how the respective not-for-profit entity manages its

liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date.• Disclose all quantitative information either on the face of the balance sheet or in the footnote disclo-sures. The availability of financial assets at the bal-ance sheet date must meet cash needs for general ex-penditures within one year of the balance sheet date. Availability of resources may be affected by their nature including: external limits imposed by donors, grantors, laws, and contracts as well as internal limits imposed by governing board decisions.

The FASB believes that the update will improve the usefulness of information provided to donors, grant-ors and other users of the NFP’s financial statements as well as reduce the complexities or costs for prepar-ers or users of the statements. FASB’s second phase of the NFP model is underway and plans to review the requirements of a measure of operations, how to define a measure of operations and a potential realignment within the statement of cash flows.

The implementation date of the update is effective for annual financial statements issued for fiscal years beginning after December 15, 2017 and early implementation of the amendments within the update is permitted. Additionally, the amendments within the update should be applied on a retrospective basis in the year it is first implemented. If comparative financial statements are issued, the NFP has the option to omit information such as expenses by natural and functional classification as well as disclosures about liquidity and availability of resources.

FASB Changes the Reporting Model for NFP Entities

David DiIulis, CPA, CGFM is a Principal at O’Connor & Drew. He can be reached at ddiiulis@ocd.com.

By David DiIulis, CPA, CGFM

EducationAdvisor

The IRS Data Retrieval Tool (“DRT”) allows applicants who have already completed their federal income tax returns to prefill answers to some of the questions on the Free Application for Federal Student Aid (“FAFSA”) form by transferring data from their federal income tax returns. Starting with the 2012-2013 award year, the DRT saved families time, reduced the likelihood of being selected for verification and, most important-ly, significantly increased the number of completed FASFAs.

As of March 2017, however, this tool is unavailable for award years 2016-2017 and 2017-2018 as the IRS makes enhancements to encrypt or mask sensitive student data. What prompted the action was not a breach of data or a hack, but a function of how DRT interacts directly with the student. Identity thieves posed as students to begin the FASFA process and used the DRT, which automatically populated the FAS-FA with critical and identifying information, to obtain a student’s adjusted gross income (“AGI”). This information allowed the thieves to file fraudulent tax re-turns.

According to IRS Commissioner John Koskinen, about 100,000 taxpayers were flagged for beginning the FAS-FA process, using the DRT, but not completing their application. He also told members of the Senate Finance Committee that about 8,000 fraudulent refunds were issued; totaling $30 million, but that the IRS did pre-vent another 14,000 illegal refunds from going out the door and halted action on 52,000 other returns.

In the meantime, the FASFA application system is operational but has slowed since the DRT’s removal. To get tax return information for the FAFSA application, which this year requires information from 2015 tax re-turns, students and families who do not have copies of those returns must try to get a copy of their return by ac-cessing the tax software they used to prepare it, or, if they used a tax professional, they must contact the preparer and ask for the information. The IRS and FASFA.gov have published guides for students and their families to assist with the completion of the FAFSA.

The IRS also suggested the following options for retrieving the necessary 2015 tax information:

1. Access the tax software product you used to pre-pare and file your 2015 return. You may be able to access your account to download/print a copy.

2. Contact the tax preparer/provider who filed your

2015 return if you used a tax professional. 3. Download your tax transcript (a summary) at https://www.irs.gov/individuals/get-transcript. Review the rigorous identity authentication requirements for Secure Access before attempting to register.

4. Get a Transcript by Mail and a transcript will be mailed to the address on your return within five to ten days.

5. Call our automated line at 800-908-9946 to order a transcript by mail.

In response to the impact the DRT suspension will have on institutions, the Department of Education released Dear Colleague Letter GEN-17-04 providing increased flexibilities relating to verification procedures. An example of these flexibilities includes consideration of a signed paper copy of the 2015 IRS tax return that was used by the tax filer for submission to the IRS as acceptable documentation to verify FAFSA/ISIR tax re-turn information. In addition, the verification tracking group V3 and V6 have been eliminated for award years 2016-2017 and 2017-2018, respectively.

Some additional changes to FAFSA that will assist institutions while DRT is being fortified are: 1) The FAF-SA will be available earlier (October 1 of the previous year instead of January 1 of the upcoming school year) and 2) FAFSA will collect income information from an earlier tax year (2015 tax information for award years 2016-2017 and 2017-2018). This provides students, families and institutions some additional time to complete the FASFA as well as complete their tax returns. The hope is that this new process will align the FASFA with the college application process, reduce the need for students or families to estimate income information, allow more time for students to explore and understand financial aid options and to provide them with the opportunity to apply for aid before state and school deadlines.

The ultimate goal during this time of change for all institutions is to ensure that all students have the opportunity to apply for student financial aid safely and securely.

Nelia Kruger, CPA is a Manager at O’Connor & Drew. She can be reached at nkruger@ocd.com.

IRS Data Retrieval Tool and FAFSA Changes

By Nelia Kruger, CPA

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The 2017 Compliance Supplement Vett Draft has been issued to certain key stakeholders and is currently being edited before it is officially finalized. One of the most interesting additions for the education community is the Special Test 14 for Securing Student Information. This new test has resulted in the following audit objective:

To determine whether the Institution of Higher Ed-ucation (“IHE”) has developed, implemented, and maintained a comprehensive information securi-ty program in accordance with the Safeguards Rule.

Although many audit firms already perform various tests examining the IT environment, this is the first time that the Office of Management and Budget (“OMB”) has explicitly made reference to it.

It is important to recognize that the language used for the audit procedure is fairly ambiguous and the definition of what a “comprehensive information security program” actually is may differ among firms. Also, there may not be enough objective criteria that can be specifically included during testing to ensure that all IHE’s are being audited against the same criteria.

IHEs would be required to provide audit evidence that the program was in place and maintained throughout the year and then an independent 3rd party would need to provide verification. If IHEs are not expecting this requirement to be a part of the audit because it has nev-er been included in the past, then this could result in

IHEs not being able to provide audit evidence of the pro-gram being in place for the prior year. This may lead to IHEs receiving a disclaimer of opinions from their auditors.

Based on the preliminary information that is available, it appears that this test would likely need to be performed by an IT audit specialist. This could be troublesome for some smaller firms without such capabilities who would then be forced to hire an outside agency to perform these tests. Locating the appropriate individual with the right skill set to perform the necessary testing would also require additional time, which would also drive up the audit costs. Although there are some important issues still being worked out, IHEs can take some actions now to ensure that they meet future compliance objectives. Each institution should meet with current management and assess its current com-pliance with cybersecurity and ensure that there is a written information security plan in place. Review the Department of Education recommendation of using the National Insti-tute of Standards and Technology (“NIST”) for best practic-es. These policies, procedures and controls can be extremely cumbersome, thereby requiring some IHEs to seek help from outside entities, but they are critical to maintaining an IHE.

Securing Student InformationBy Michael Cosgrove, CPA, MSM

Michael Cosgrove, CPA, MSM is a Manager at O’Connor & Drew. He can be reached at mcosgrove@ocd.com.