Michelle Fowler Michelle Hodges - Amazon S3Reporting+Model.pdf · Not-for-Profit Financial...

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Michelle Hodges

[email protected]

248.614.6429

Christine Slade

[email protected]

419.842.2445

Michelle Fowler

[email protected]

517.841.4916

mailto:[email protected]




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With donor restrictions

Upon completion participants will be able to:

• Explain changes to the disclosure requirements for liquidity and net

asset classifications

• Understand and evaluate how the new Not-For-Profit Reporting

Model affects your not-for-profit organization

• Describe changes to key new financial statement disclosures

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• Intends to simplify how NFP’s classify net assets

• Intends to provide improved information about:

• Liquidity

• Financial performance

• Expenses

• Cash flows

6


• Two classes of net assets

• Board designations

• Underwater endowments

• Reporting expenses by function and nature

• Investment return requirements

• Operating cash flows

• Operations measures

• Liquidity and availability of resources disclosures

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• Calendar years ending 2018

• Fiscal years ending 2019

• Early adoption is permitted

• Applied on a retrospective basis in year

implemented

• Comparative financial statements “relief” in

year of adoption

• Reporting expenses by function and nature

in one location for prior year

• Liquidity and availability of resources

disclosures for prior year

S M T W T F S

1 2 3 4 5

6 7 8 9 10 11 12

13 14 15 16 17 18 19

20 21 22 23 24 25 26

27 28 29 30 31

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To date, how much have you have you heard about the Not-for-Profit Reporting Model:

A. I know a ton; I feel super prepared moving forward

B. I know a little

C. I don’t know as much as I would like to, looking forward to hearing more …

D. I am unsure

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Current Reporting New Reporting

Unrestricted Without donor restrictions*

Temporarily restricted Permanently restricted With donor restrictions*

* May choose to disaggregate further on face of statement of financial position

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Footnote Disclosure Subject to expenditure for specified purpose:

Program A activities:

Purchase of equipment

Research

Educational seminars and publications

Program B activities:

Disaster relief

Educational seminars and publications

Program C activities:

Building and equipment

Annuity trust agreements for research

$1,530

2,128

760

1,120

1,079

1,484

1,075

1,425

10,601

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Subject to the passage of time: For periods after June 30, 20X1 3,140

Subject to NFP spending policy and appropriation: Investment in perpetuity (including amounts above

original gift amount of $22,337), the income from

which is expendable to support:

Program A activities 27,524

Program B activities 27,403

Program C activities 13,662

Any activities of the organization 105,793

174,382

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Subject to appropriation and expenditure when a

specified event occurs: Endowment requiring income to be added to

original gift until fund's value is $2,500 2,210

Paid-up life insurance policy that will provide

proceeds upon death of insured for an endowment

to support general activities 80

2,290

Not subject to appropriation or expenditures Land required to be used as a recreation area 3,000

With Donor Restrictions 193,413

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Board designations

• Disclose on the face of the

financial statements or

footnotes• Amount

• Purpose

• Type

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Board designated:

Endowment funds 30,000$

Operating reserve 5,500

Capital asset acquisiton 5,000

Total board-designated 40,500

Net investment in plant 24,625

Undesignated 74,815

Total net assets without donor

restrictions $139,940

Net assets without donor restriction

comprised the following at June 30, 20X1:

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Underwater endowments

• Reclassify unrestricted deficit to net assets with donor restrictions

• Restatement consideration

• Additional disclosures required for such funds:

• Aggregate of original gift amounts and fair value amounts

• Board’s spending policy

• Continue spending

• Reduce spending

• Stop spending

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In 20X1, the organization adopted ASU No. 2016-14 — Not-for-Profit Entities (Topic 958):

Presentation of Financial Statements of Not-for-Profit Entities. The standard is intended to

improve net asset classification requirements and the information presented in the financial

statements and notes about an NFP’s liquidity, financial performance, and cash flows.

The standard requires the organization to reclassify its net assets from three categories (i.e.,

unrestricted, temporarily restricted, and permanently restricted) into two categories: net

assets without donor restrictions and net assets with donor restrictions. It also requires

recognition of underwater endowment funds as a reduction of net assets with donor

restrictions. In addition, the guidance requires enhanced disclosures about governing

board designations; composition of net assets with donor restrictions; the organization’s

liquidity; and expenses by both their natural and functional classification.

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Without donor

restrictions

With donor

restrictions Total net

As previously presented:

Unrestricted 133,915$ -$ 133,915$

Temporarily restricted - 102,040 102,040

Permenantly restricted - 100,900 100,900

Net assets as previously presented 133,915 202,940 336,855

Reclassifications to implement ASU

2016-14:

Underwater endowments 5,025 (5,025) -

Net assets, as reclassified $ 138,940 197,915$ 336,855$

The effect on the Organization's net asset balances at June 30, 20X1 as a result of

implementing ASU 2016-14 are as follows:

ASU 2016-14 Classifications

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Not-for-Profit Financial Statement PresentationIn 20X1, the organization adopted ASU No. 2016-14—Not-for-Profit Entities (Topic 958):

Presentation of Financial Statement of Not-for-Profit Entities. ASU 2016-14 provides for

additional disclosure requirements and modifies net asset reporting. The standard requires

the organization to reclassify its net assets (i.e., unrestricted, temporarily restricted, and

permanently restricted) into two categories: net assets without donor restrictions and net

assets with donor restrictions, among other requirements. As a result of adopting this

standard, certain prior year amounts including $5,025 of underwater endowment funds

were reclassified to conform to the presentation requirements.

21


Without donor

restrictions

With donor

restrictions Total

Donor-restricted endowment funds -$ 155,390$ 155,390$

Board-designated endowment funds 30,000 - 30,000

Underwater endowments - (5,025) (5,025)

Total 30,000$ 150,365$ 180,365$

Changes in endowment

Endowment, beginning of year 26,337$ 151,403$ 177,740$

Investment returns, net 380 5,132 5,512

Contributions - 2,400 2,400

Transfers 4,600 - 4,600

Appropiation for expenditures (1,317) (8,570) (9,887)

Endowment, end of year $ 30,000 $ 150,365 $ 180,365

Composition of endowmewnt by type of fund

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A donor-restricted endowment fund is considered to be underwater if the fair value of the

fund is less than either the original gift amount or the amount required to be maintained by

the donor or by law. At times, the organization may have individual donor-restricted

endowment funds that are underwater. The organization has a policy that permits spending

from underwater funds depending on the degree to which the fund is underwater, unless

specifically prohibited by the donor or relevant laws and regulations. At June 30, 20X1, the

amount by which funds were underwater was calculated as follows:

Aggregate original gift amount $ 5,500

Aggregate fair value 475

Aggregate deficiency $ (5,025)

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• Gifts of cash restricted for acquisition or construction of long-lived assets

• In the absence of explicit donor restrictions, NFPs will be required to

use the placed-in-service approach (or as constructed) when

releasing the restrictions.

• Eliminates the option to release the donor-imposed restriction over

the estimated useful life of the asset.

• Restatement considerations

• Reclassify from restricted net assets to net assets without donor

restrictions amounts of undepreciated capital assets placed in

service.

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None of our organization’s donor-restricted endowment funds are underwater, and we do not anticipate ever having underwater endowment funds in the future. Therefore, our organization does not need to worry about a spending policy for underwater funds.

A. True

B. False

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• Report in one location (on face of financial statements or in notes) by:

• Functional category

• Natural classification

• Most early adopters are choosing to present in the notes

• A supplemental schedule does not meet the requirements

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• Qualitative disclosures now required to describe the methods used to

allocate expenses among program and support categories

• Enhanced guidance on administrative expenses allocated to program

• Activity needs to be for direct conduct or direct supervision

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30


Excerpt from statements of an early implementer

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Expense Disclosures

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Consider allocating costs of operation and maintenance of buildings, depreciation, and

interest expense across all functional expense categories to reflect the full costs of those

activities. Costs may be allocated using the following methods:

• Expenses for the administration, supervision, operation, maintenance, preservation,

and protection of the organization's physical plant are allocated based on square

footage.

• Depreciation expense for buildings is allocated based on the square footage used to

support each function. Depreciation expense on equipment is allocated to other

functions based on the location of the equipment and the use of that space. These

allocations are based on information obtained through a periodic inventory of space

and equipment usage.

• Interest expense on capital debt, payments on capital leases classified as interest

expense, and interest expense on other borrowings is allocated based on usage of

debt-financed space.

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Excerpts from statements of early implementors

Functional Allocation of ExpensesThe consolidated statements of functional expenses present expenses by function and

natural classification. Expenses directly attributable to a specific functional area of an

organization are reported as expenses of those functional areas. A portion of General and

Administrative costs that benefit multiple functional areas (indirect costs) have been

allocated across Programs and Other Supporting Services based on the proportion of full-

time employee equivalents of a program or other supporting service versus the total

organizational full-time employee equivalents.

Functional Allocation of Expenses – The costs of providing the various program and supporting services have

been summarized on a functional basis in the consolidated statements of activities and the consolidation

statements of functional expenses. Accordingly, certain costs have been allocated among the programs and

supporting services benefited.

The consolidated financial statements report expenses that are attributed to one than one program or

supporting function. Therefore, expenses require allocation on a reasonable basis that is consistently applied.

All expenses, excluding depreciation and grant disbursements are allocated on the basis on estimates of time

and effort.

34

Upon adoption of FASB ASU 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, what type of Organizations will be required to present a Statement of Functional Expenses?

A. All not-for-profit organizations

B. Voluntary health and welfare entities

C. Private colleges

D. None

http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156316498#2016

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• Now required to be netted against investment income

• Netting limited to external expenses and direct internal expenses

• Direct expenses involve the direct conduct or direct supervision of the

strategic and tactical activities involved in generating investment return

• Compensation for accountant performing endowment allocations

doesn’t qualify

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• Examples of direct investment expenses include:

• CIO’s compensation

• CFO’s compensation

• Investment accountant’s compensation

• CIO’s travel expenses to visit fund managers

Potentially all of the expenses related to the CIO’s activities and potentially an

allocation of expenses related to the CFO’s and investment accountant’s activities.

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• No longer required to disclose the following:

• Investment expenses

• Investment return components

• Also applies to the endowment disclosures

40


• Reinforces existing requirement of transparency of components of any operating

measures presented

• Disclosures will be enhanced to provide additional information about the items included

or excluded from the operating measure

41


Excerpt from footnotes of an early implementor

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Which method is your organization currently presenting for the Statement of Cash Flows?

A. Direct

B. Indirect

C. Unsure

44


• Direct method strongly encouraged but not required

• If direct method elected, no longer required to present or disclose the

indirect reconciliation

• Direct method likely easier for users to understand (more meaningful)

45


Increase in net assets $20,000

Adjustments to reconcile increase in net assets to net

cash provided by operating activities

Realized and unrealized gains on

investments

(5,000)

Depreciation 10,000

Permanently restricted contributions (6,000)

Capital contributions (2,000)

Change in value of beneficial interests

in trusts

2,000

Increase in contributions receivable (3,000)

Decrease in accounts receivable 2,000

Decrease in inventories and prepaid

expenses

1,000

Decrease in accounts payable (3,000)

Decrease in refundable advance (5,000)

Net cash provided by operating

activities

$11,000

46


Program service fees received $121,000

Cash received for grants 10,000

Cash received from contributors 1,000

Cash collected on contributions

receivable for general expenditures

4,000

Interest and dividends received 3,000

Interest paid (1,000)

Cash paid to employees and

suppliers

(127,000)

Net cash provided by operating

activities

$11,000

Cash flows from operating activities:

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• Biggest change under new reporting requirements

• Qualitative information on how a NFP manages its liquid available

resources and liquidity risk

• Quantitative information that communicates the availability of a NFP’s

financial assets at the statement of financial position date to meet cash

needs for general expenditures within one year

• Appears most early adopters are combining into one footnote

49


Qualitative information in the notes that is useful in assessing a NFP’s liquidity

and communicates how an entity manages its liquid resources available to

meet cash needs for general expenditures within one year of the date of

the statement of financial position

50


Quantitative information on the face of the statements or in the notes that

communicates the availability of a NFP’s financial assets at the date of the

statement of financial position to meet cash needs for general

expenditures within one year of the date of the statement of financial

position

51


• Availability of a financial asset may be affected by:

• Its nature

• External limits imposed by donors, laws, and contracts with others

• Internal limits imposed by the Board

52


The Organization has $3,979,181 of financial assets available within one year of the

statement of financial position date to meet cash needs for general expenditures.

Contributions receivable are subject to implied time restrictions but are expected to be

collected within one year. The Organization manages its liquidity required to meet its

operating needs while also trying to maximize the investment of its available funds. The cash

balance in excess of the daily requirements is invested in short-term investments. The

endowment funds consist of donor-restricted endowments with donor restrictions on the use

of the related income and, therefore, it is not available for general expenditure.

The Organization also has a line of credit with an available balance of $1 million which it

could draw upon. Additionally, the Board has previously designated amounts to an

operating reserve with a balance of $4,300,000 as of June 30, 20XX.

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54


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Availability of a financial asset may be affected by:

A. Its nature

B. External limits imposed by donors, laws & contracts with others

C. Internal limits imposed by the Board

D. All of the above

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• Start early to ensure compliance, as well as agreement by those

charged with governance and by audit firm

• For areas where there is flexibility in how you meet the new requirements,

always try to keep in mind what would be important/meaningful to the

users of the financial statements

• Consider materiality

• Utilize example resources available; no point in “recreating the wheel”

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• Example financial statements and disclosures in ASU 2016-14

• Visit websites for early adopters:

• University of Chicago

• University of Southern California

• United Way Worldwide

• Foundation for the Carolinas

• Dallas Theological Seminary

• AICPA NFP Audit and Accounting Guide provides “before and after” context

• NACUBO Advisory Guidance, Implementing FASB ASU 2016-14, Not-for-Profit

Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit

Entities (private colleges & universities and nonprofit affiliates of public

colleges & universities)

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Following the presentation today, I would like to learn more about:

A. Net assets

B. Expenses by nature & function

C. Liquidity and availability of resources

D. Nothing, everything was covered, and I feel 100% prepared to move forward

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Michelle [email protected]

517.841.4916

Christine [email protected]

419.842.2445

Michelle [email protected]

248.614.6429

Debbie [email protected]

419.842.2408

Jennie [email protected]

419.865.8118

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