CBIZ & MHM Executive Education Series™ Not-For-Profit Update: Internal Controls,
Accounting Standards & Federal Grant Reform Presented by: Tracey McDonald
Morgan Padgett & Michelle Spriggs
April 29, 2015
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Before We Get Started…
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This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar.
External participants will receive their CPE certificate via email immediately following the webinar.
CPE Credit
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The information in this Executive Education Series course is a brief summary and may not include all
the details relevant to your situation.
Please contact your service provider to further discuss the impact on your business.
Disclaimer
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Today’s Presenters
Tracey McDonald, CPA Shareholder, MHM 813.316.4051 | [email protected] Tracey has extensive audit experience with clients in a number of industries including not-for-profit organizations, manufacturing, distribution, employee leasing, food service, professional employee organizations and healthcare. In addition, she has substantial knowledge of the reporting requirements for employee benefit plans, OMB A-133 and HUD audits.
Morgan Padgett, CPA Shareholder, MHM 785.272.3176 | [email protected] Morgan has several years of experience working with a variety of clients including not-for-profit organizations, governmental entities and construction contractors. She has extensive experience in providing accounting services to not-for-profit clients and in managing financial statement audits of not-for-profit organizations.
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Today’s Presenters
Michelle Spriggs, CPA Shareholder, MHM 774.206.8336 | [email protected] Michelle is a Shareholder in the Firm’s Not-For-Profit and Higher Education Audit Practice. Michelle is the not-for-profit subject matter expert in the Firm’s National Professional Standards Group. She has over 20 years of audit experience and is solely dedicated to serving not-for-profit organizations. Her experience includes managing financial statement and OMB Circular A-133 audits; assisting in bond offerings; providing recommendations on internal controls; and training other accounting and auditing professionals to provide support to not-for-profit clients.
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Today’s Agenda
1
2
Changes to Accounting Standards – What to Expect This Year
New Uniform Grant Guidance for Federal Awards
The New COSO Internal Control Model 3
4
Changes to Accounting Standards – What to Expect Going Forward 5
6
The New NFP Reporting Model
Questions & Answers
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Services Received from Personnel of an Affiliate - FASB ASU No. 2013-06
Clarifies the guidance that not-for-profit entities apply for recognizing and measuring services received from personnel of an affiliate Services provided by personnel of an affiliate under direct
supervision of the recipient not-for-profit Shared services of an affiliate group
that the recipient would have to purchase if they were not provided
Affiliated Services
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How services from affiliates should be measured: At the cost recognized by the affiliate for the personnel
providing the services If recognizing at cost will significantly overstate the value of
the services received, then recipient NFP may elect to recognize at either: Cost recognized by affiliate for the
personnel providing the service, or Fair value of the service
Affiliated Services
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Financial statement presentation If Health Care Entity, report the services as an equity
transfer from the affiliate and increase in net assets. All others:
Increase in contribution revenue Corresponding decrease in net assets (expense or asset)
Effective for fiscal years beginning after June 15, 2014 (i.e. June 30, 2015 and after)
Affiliated Services
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OMB Grant Reform – Chronology
Presidential Direction
(Executive Order; Memorandum to
Agencies)
2/28/12 –
Advance Notice of Proposed Guidance
2/1/13 –
Notice of Proposed Guidance
(Rulemaking)
12/26/13 –
Issue of Final
Guidance (2 CFR Part
200)
6/26/14 –
Federal Agency Draft
Regulations to OMB
12/26/14 –
Uniform Adoption by All Federal Agencies
Fiscal years
beginning after
12/26/14 –
Single Audit Requirement (Subpart F)
Applies
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OMB Grant Reform – Intent
Consolidate
Simplicity
Streamline
Consistency
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• Must implement policies and procedures by promulgating regulations
• Effective December 26, 2014
Federal Agencies
• Will need to implement the new Administrative Requirements and Cost Principles
• All NEW Federal awards and ADDITIONAL funding to existing awards made after December 26, 2014
Non-Federal Entities
• Effective for fiscal years beginning on or after December 26, 2014
• 12/31/15, 6/30/16
Audit Requirements
Key Effective Dates
Early implementation is NOT permitted!
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OMB Grant Reform – Changes
Hello • Uniform Administrative Requirements, Cost Principles,
and Audit Requirements for Federal Awards • UARCPARFA • Super Circular • Omni Circular • Uniform Grant Guidance (OMB preference)
Goodbye • Administrative requirements: • A-102 State & Local Government • A-110 Colleges, Universities and Not-for-profits • A-89 Catalog of Federal Domestic Assistance
• Cost circulars: • A-21 Colleges & Universities • A-87 State & Local Government • A-122 Not-for-profits
• A-133
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OMB Grant Reform – Structure
Contents Reference Origin
A – Acronyms and Definitions 200.0 – 200.99 All Circulars
B – General Provisions 200.100 – 200.113 All Circulars
C – Pre-Federal Award Requirements and Contents of Federal Awards
200.200 – 200.211 A-110 and A-89
D – Post-Federal Award Requirements
200.300 – 200.345 A-110 and A-102
E – Cost Principles 200.400 – 200.475 A-21, A-87 and A-122
F – Audit Requirements 200.500 – 200.521 A-133
Appendices
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OMB Grant Reform – Changes to Subpart F
Final Changes to A-133 Audits – Effective for December 31, 2015 Year-Ends Impact
Single audit threshold to increase from $500,000 to $750,000
Allows for relief for entities doing modest business from federally derived funds.
Type A/B program minimum threshold increase from $300,000 to $750,000
May reduce the number of programs considered major in an audit and therefore fewer programs audited.
Major program determination focus on areas with internal control deficiencies that have been identified as material weaknesses
Entities with strong internal controls and few audit findings could have fewer high-risk Type A programs and fewer programs audited.
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Final Changes to A-133 Audits – Effective for December 31, 2015 Year-Ends Impact
Percentage of audit coverage decrease from 25% to 20% for low-risk auditee and 50% to 40% for high-risk auditee
Could reduce the number of programs considered major in an audit.
Threshold for reporting questioned costs to increase from $10,000 to $25,000
Could reduce the number of reported findings but more detail would be required for reported findings.
Further changes to the compliance requirements required for audit are being considered by OMB
We will keep you updated on developments; expecting guidance in summer/fall of 2015.
OMB Grant Reform – Changes to Subpart F
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2 CFR 200 – Subpart E
2 CFR 200.400 – 475 Applicable to States, Local Governments, Tribal
Governments, Colleges and Universities and Nonprofit Organizations
Not applicable to Commercial Organizations and Hospitals Maybe later
The New Cost Principles “Package”
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421 Advertising and public relations
423 Alcoholic beverages 424 Alumni(ae) activities 425 Audit services 426 Bad debts 429 Commencement and
convocation costs 445 Goods and services for
personal use
Cost Principles with Little or No Change
450 Lobbying 455 Organization costs 457 Plant and homeland
security costs 458 Pre-award costs 459 Professional service
costs 467 Selling and marketing
costs 469 Student activity costs
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427 Bonding costs 430 Compensation –
personal services 431 Compensation – fringe
benefits 433 Contingency provisions 434 Contributions and
donations 436 Depreciation 437 Employee morale,
health and welfare costs
Cost Principles with Changes
439 Equipment and other capital expenditures
441 Fines, penalties, damages and other settlements
447 Insurance and indemnification
449 Interest 453 Materials and supplies
costs, including costs of computing devices
454 Memberships, subscriptions, and professional activity costs
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460 Proposal costs 461 Publication and printing
costs 462 Rearrangement and
reconversion costs 463 Recruiting costs 464 Relocation of
employees 465 Rental costs of real
property and equipment
Cost Principles with Changes
468 Specialized service facilities
470 Taxes (including Value Added Taxes)
471 Termination costs 472 Training and education 474 Travel
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Purpose was to reduce the administrative burden of documenting time and effort
More principles-based (e.g., removed A-21 examples) Less prescriptive on documentation and places more
emphasis on internal controls over personnel-related costs
Compensation – Personal Services (200.430)
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Four standards for documentation of personnel expenses Charges for salaries must be based on records that
accurately reflect the work performed Must be supported by a system of internal controls which
provides reasonable assurance the amounts charged are accurate, allowable and properly allocated
Be incorporated into official records Reasonably reflect total activity for which employee is
compensated
Compensation – Personal Services (200.430)
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Use allowance no longer allowed
No depreciation on assets that are fully depreciated
New: depreciation over life of the asset
Depreciation (200.436)
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Computing devices do not meet the threshold requirement so are considered supplies Tablets
Laptops
Smartphones
Lesser of $5,000 or entity capitalization threshold Revisit policy if below this amount
Equipment and Other Capital Expenditures (200.439)
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Allowable as an indirect cost Preparing proposals for both Federal and non-Federal Successful and not successful bids Allocated to all activities of the organization
This was in college and university and government cost circulars, but not NFP.
Thank you OMB!
Proposal Costs (200.460)
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Salaries of administrative and clerical staff are normally treated as indirect unless all of the following are met (200.413(c)):
1. Such services are integral to the activity 2. Individuals can be specifically identified with the activity 3. Such costs are explicitly included in the budget or have prior
written approval 4. Costs not also recovered as indirect
Key Changes to Indirect Costs – Subpart E
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More changes in Section 200.414:
Mandating (or encouraging) indirect charging of certain allowable costs Administrative support
Proposal costs
Audit services
Required recognition by federal agencies of federally negotiated rates Enforcement of long standing policy
No more side deals
Key Changes to Indirect Costs – Subpart E
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More changes in Section 200.414 – Continued:
Introduction of de minimis 10% rate in lieu of negotiation Good if don’t want to deal with rate negotiation
Authorization to continue use of a negotiated rate for up to four years Don’t have to go through rate finalization every year
Key Changes to Indirect Costs – Subpart E
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More changes in Section 200.414 – Continued:
Procedures for recognition of subrecipient indirect costs Recognize Federally negotiated rates
Permit use of 10% de minimis rate
Small organizations without negotiated indirect cost rates now have mechanism to get indirect costs reimbursed
Must be addressed in subgrant agreement
Key Changes to Indirect Costs – Subpart E
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Similar in A-87 but not A-21 or A-122 Certification on annual and final fiscal reports or
vouchers requesting payment Assurance that expenditures are proper and in accordance with the
terms and conditions of the federal award and approved budget
Required on EVERY voucher requesting payment? Does this apply to drawdowns also?
Required Certifications – Subpart E (200.415)
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Signed by an official who is authorized to legally bind the entity Who will be designated at the organization?
CFO? CEO?
Organizations should start thinking about this
Subject to criminal, civil or administrative penalties for fraud, false statements or false claims
Required Certifications – Subpart E (200.415
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Mandatory disclosures An entity must disclose in writing in a timely manner to a
federal agency or pass-through: All violations of federal criminal law involving fraud, bribery
or gratuity violations potentially affecting the Federal award What constitutes in writing? What is timely manner? What if organization doesn’t have gratuity policy? No mention of materiality
Changes to Subpart B General Provisions (200.113)
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The Entity MUST establish and maintain effective internal control over Federal awards.
The internal controls SHOULD be in compliance with guidance in:
“Standards for Internal Control in the Federal Government” issued by the Comptroller General of the US - Green Book
“Internal Control Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission - COSO
Internal Controls – Subpart D Post-Award Requirements (200.303)
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Now five procurement methods 1. Micro-purchases Acquisition of supplies or services value not to exceed
$3,000 Awarded without soliciting competitive quotations if price
is considered reasonable 2. Small purchase procedures Subject to simplified acquisition threshold ($150,000) Price or rate quotations must be obtained from an
adequate number of qualified sources Adequate number not defined
Procurement – Subpart D Post-Award Requirements (200.320)
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Now five procurement methods - continued 3. Procurement by sealed bids Publicly solicited Fixed price contract awarded to lowest bidder Preferred for procuring construction
Procurement – Subpart D (200.320)
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Now five procurement methods - continued 4. Competitive proposals Must follow these requirements: RFP must be publicized Proposals solicited from adequate number of
qualified sources Organization must have written method for
conducting evaluation of proposals received Contract awarded to the firm with proposal most
advantageous to the program – price and other factors considered
Doesn’t need to be lowest price
Procurement – Subpart D (200.320)
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Now five procurement methods - continued 5. Noncompetitive proposals ONLY appropriate when: Goods or services only available from a single
source There is public emergency After soliciting number of sources competition is
deemed inadequate NEW: Awarding agency expressly authorized
noncompetitive proposals in response to written request from organization
Just naming a vendor in a grant or budget isn’t enough
Procurement – Subpart D (200.320)
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Subrecipient Relationship An assistance relationship Determines eligibility Performance measured against
federal program objectives Responsible for programmatic
decision-making Adheres to applicable federal
program requirements Uses federal funds to carry out a
program for a public purpose specified in statute, as opposed to providing goods or services for the benefit of the pass-through entities
Contractor (Vendor) Relationship A procurement relationship Provides goods and services within
normal business operations Provides similar goods and services
to many purchasers Normally operates in a competitive
environment Provides goods or services that are
ancillary to the federal program Not subject to compliance
requirements of the federal program
Subrecipient Monitoring – Subpart D Post-Award Requirements (200.330-332)
Distinguishing Between Subrecipient and Contractor
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Requirements of pre-award assessment of subrecipients: Subrecipients prior award experience Subrecipients prior audit experience Subrecipients staffing and systems Extent of any federal (or pass-through) entity monitoring
Subrecipient Monitoring – Subpart D (200.330-332)
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Post-award subrecipient monitoring mandatory steps: Review financial and performance reports Verify single-audit compliance (presumably using data gathered during
the pre-award stage) Ensure corrective action on any deficiencies, regardless of how they
are disclosed Issue management decisions on relevant subrecipient audit findings Consider whether audit results or other factors necessitate adjustment
to pass-through entity records Consider whether enforcement actions are necessary
Subrecipient Monitoring – Subpart D (200.330-332)
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All these documents can be found at http://www.whitehouse.gov/omb/grants_docs
Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards - 2 CFR 200 http://www.ecfr.gov/cgi-bin/text-idx?SID=d6d9a62155484b2fb6176d7d01a640cc&node=2:1.1.2.2.1&rgn=div5
Links to Helpful Documents
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Uniform Guidance Cost Principles Text Comparisons http://www.whitehouse.gov/sites/default/files/omb/fedreg/2013/uniform-guidance-cost-principles-requirements-text-comparison.pdf
Uniform Guidance Audit Requirements Text Comparisons http://www.whitehouse.gov/sites/default/files/omb/fedreg/2013/uniform-guidance-audit-requirements-text-comparison.pdf
Links to Helpful Documents
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Uniform Guidance Administrative Requirements Text Comparisons http://www.whitehouse.gov/sites/default/files/omb/fedreg/2013/uniform_guidance_administrative_requirements_text_comparison.pdf
COFAR’s FAQ for New Uniform Guidance on 2 CFR 200 https://cfo.gov/wp-content/uploads/2013/01/2-C.F.R.-200-FAQs-2-12-2014.pdf
E-mail COFAR at [email protected]
Links to Helpful Documents
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There is no substitute for a “deep dive”
Review 2 CFR 200 and COSO Monitor OMB and federal agency actions
Stay tuned for OMB’s plans for changes to the Compliance Supplement
Subscribe to our monthly e-newsletter
What To Do Now
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Create a team across all applicable divisions of the organization Inventory of current policies and procedures Review current Uniform Grant Guidance and COSO Assessment of changes to significant processes and internal
controls, or affirm no changes needed Make changes to policies, as necessary Implement procedures and controls Train personnel Get early buy-in from auditors Monitor compliance
What To Do Now
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The Committee of Sponsoring Organizations of the Treadway Commission (COSO) is a joint initiative of five sponsoring organizations formed in 1985
Provides thought leadership through the development of frameworks and guidance on: Internal control Enterprise risk management Fraud
Designed to improve organization performance and governance and to reduce the extent of fraud in organizations
Release original Internal Control-Integrated Framework in 1992 which has become one of the most widely used control frameworks
Revised in 2013 – consists of 17 principles and 81 points of focus
What is COSO 2013?
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Update expected to increase ease of use and broaden application
Updated COSO Framework
What is not changing... What is changing...
• Core definition of internal control
• Three categories of objectives and five components of internal control
• Each of the five components of internal control are required for effective internal control
• Important role of judgment in designing, implementing and conducting internal control, and in assessing its effectiveness
• Changes in business and operating
environments considered
• Operations and reporting objectives expanded
• Fundamental concepts underlying five components articulated as principles
• Additional approaches and examples relevant to operations, compliance, and non-financial reporting objectives added
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Update considers changes in business and operating environments
Environmental changes… Expectations for governance oversight Globalization of markets and
operations Changes and greater complexity in
business Demands and complexities in laws,
rules, regulations, and standards Expectations for competencies and
accountabilities Use of, and reliance on, evolving
technologies Expectations relating to preventing
and detecting fraud
…have driven Framework update
Updated COSO Framework
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Control Environment 1. Demonstrates commitment to integrity an ethical values 2. Exercises oversight responsibility 3. Establishes structure, authority and responsibility 4. Demonstrates commitment to competence 5. Enforces accountability
Risk Assessment 6. Specified suitable objectives 7. Identifies and analyzes risk 8. Assesses fraud risk 9. Identifies and analyzes significant change
Control Activities 10. Selects and develops control activities 11. Selects and develops general controls over technology 12. Deploys through policies and procedures
Information & Communication
13. Uses relevant information 14. Communicates internally 15. Communicates externally’
Monitoring Activities 16. Conducts ongoing and/or separate evaluations 17. Evaluates and communicates deficiencies.
Updated COSO Framework – 17 Principles
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Update describes important characteristics or principles, e.g.,
Control Environment 1. Organization demonstrates a commitment to integrity and ethical values Points of focus: • Sets the Tone at the Top • Establishes Standards of Conduct • Evaluates Adherence to Standards of Conduct • Addresses Deviations in a Timely Manner
Updated COSO Framework
• Points of focus may not be suitable or relevant, and others may be identified • Points of focus may facilitate designing, implementing and conducting internal
control • There is no requirement to separately assess whether points of focus are in
place
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Updated COSO Framework
Transition & Impact Users are encouraged to
transition applications and related documentation to the updated Framework as soon as feasible
Updated Framework will supersede original Framework at the end of the transition period (i.e., December 15, 2014)
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Use and reliance on evolving technologies was a main driver in the framework update
“COSO In the Cyber Age” – thought leadership piece published January 2015
2013 COSO framework provides an effective and efficient approach to evaluating and managing risks related by cyber security
COSO and Cyber Security
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Result – information asset inventory, gap analysis and prioritized controls to be implemented
COSO and Cyber Security
• Identify information categories based on business and Organization objectives using the following as a guide: ― Corporate Policies ― Industry Standards (e.g.,
ISO) ― Regulatory Requirements ― Business Objectives ― Intellectual Property ― Financials ― Customer or Employee
Data
• Identify how information is collected, used, transferred stored and archived
• Identify business, system and application owners for information assets
• Create data flows to understand how information moves within business process, systems and applications
• Analyze asset inventories and data flows to identify control risks
• Assess the likely perpetrators of cyber attacks and their likely attack methods
• Identify controls to address identified risks bases on risk profile of the process, system or application
Identify Critical information
Systems
Identify Risks Associated with
Information Systems
Understand Risks Associated with
Information Systems
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Don’t forget about third parties or other outsourced service providers! Service auditor reports, or Take steps to understand controls in place by third parties
COSO and Cyber Security
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Each principle is suitable for all entities; all principles are assumed relevant Would be rare that a principle is not relevant
Framework does not prescribe controls to be selected, developed and deployed for effective internal control Selection of controls for each principle is based on
management’s judgment based on the entity A deficiency in a component or principle can not be
overcome solely by controls covering other principles or components, however… Selecting, developing and deploying controls to effect
multiple principles may reduce the number of layered-on controls
Implementation of COSO Framework
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What you need to do… • Read, understand and train others • Match current controls to
principles • Fill in any gaps and ensure
controls are in writing • Identify key controls for each
principle • Discuss with audit firm
throughout the process
Implementation of COSO Framework
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Key questions to ask 1. Are we focused on the right things? 2. Are we proactive or reactive? 3. Are we adapting to change? 4. Do we have the right talent? 5. Are we incentivizing openness and collaboration? 6. Can executive management articulate its risks and
explain its approach and response to such risks?
Implementation of COSO Framework
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COSO Publications that might be helpful Internal Control-Integrated Framework (2013 Edition) Executive summary, tools for assessing effectiveness of a
system of internal control
Internal Control over External Financial Reporting: A Compendium of Approaches and Examples Approaches and examples of how principles are applied,
examples from a variety of entities – including not-for-profit organizations
COSO in the Cyber Age
Implementation of COSO Framework
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Not-for-Profit Advisory Committee
Sep 2011
NAC Recommendations
Nov 2011
Project Added to
FASB Agenda
2012
Project Planning/
Board Education/
Initial Outreach
2013/2014
Deliberations continue
Q2 2015
Exposure
Draft Expected
April 22-August 20, 2015
Comment
Period
TBD
Final ASU
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Primary Topics – NFP Reporting Model
Net Asset Classifications
Financial Performance
Reporting of Expenses
Cash Flow Statement Liquidity NFP
Disclosures
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Current GAAP
Proposed GAAP
Disclosures
+
* New disclosure requirement
Unrestricted Temp. Restricted Perm. Restricted
Without Donor Restrictions
Amount, purpose, and type of board
designations*
With Donor Restrictions
Nature and amount of donor restrictions
Net Assets
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Mission: Based on whether resources are from or directed at carrying out a NFP’s purpose for existence (excludes general investing and financing)
Availability: Based on whether resources are available for current period activities and reflect limits imposed by: - external donors - internal actions of a NFP’s governing board
Defined a required intermediate operating measure for all NFPs – based on two dimensions:
Financial Performance
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Operating Measures
Present on the face of the statement of activities two subtotals of operating activities associated with changes in net assets without donor restrictions:
Operating excess (deficiency) before
transfers
Amount, purpose, and type of board
designations* Operating excess (deficiency) after
transfers
Operating revenues, support, expenses, gains and losses (all without donor-imposed restrictions) plus releases
Operating excess (deficiency) before transfers plus designations, appropriations, and similar transfers
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Temp. Restricted Perm. Restricted
Operating excess before transfers
Amount, purpose, and type of board
designations*
With Donor Restrictions
Nature and amount of donor restrictions
Presentation of Transfers
Governing Board designations, appropriations and similar transfers, if used by the NFP, shall be reported in accordance with the following requirements: All transfers shall be reported in a discrete section on the statement of
activities The discrete section will be presented after operating excess (deficiency)
before transfers and immediately before operating excess (deficiency) after transfers. At a minimum, present aggregated line items for transfers out of operating
activities and transfers into operating activities Note disclosure of the amounts and types of transfers that are
presented in the aggregate is required unless all transfers are presented as discrete line items on the face of the statement
Qualitative disclosures required: Major purposes, amounts and types of board transfers One-time decisions vs. recurring or standing board policies
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Other Performance Measure Issues
Release of restriction for long-lived assets Current U.S. GAAP alternatives: When asset placed in service or Over time to match depreciation
Exposure draft: Only permits release of restriction when asset is placed
in service (significant impact for some NFPs).
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Financial Performance: Statement Approach
Ability to present total revenue and contributions
Effect of transfers easier to identify
Too much information in one statement
Labeling of totals difficult
Greater emphasis on the operating measure
Facilitates multi-year comparison
Some may ignore the second statement
Incorrectly equate the operating measure to net income
1 Statement
2 Statements Retain
Flexibility
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Sample Statement of Activities
Without Donor
RestrictionsWith Donor Restrictions Total
Support and revenues:Contributions and bequests 8,640$ 8,390 17,030 Fees 5,200 5,200 Gains 350 350
Total support and revenue 14,190 22,580
Net assets released from restrictions:Satisfaction of program restrictions 23,240 (23,240) - Satisfaction of equipment acquisition restriction 1,500 (1,500) - Appropriation from donor endowment 7,500 (7,500) -
Total net assets released from restrictions 32,240 Total revenues, gains and other support 46,430
Expenses and losses:Program expenses 27,400 27,400 Supporting services 4,188 4,188
Total expenses 31,588 31,588 Loss from fire damages 80 80
Total expenses and losses 31,668 31,668
Operating excess before transfers 14,762
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Sample Statement of Activities – Cont’d Without Donor
RestrictionsWith Donor Restrictions Total
Operating excess before transfers 14,762
Board designations, appropriations and other:Investment returns appropriated from quasi-endowment 2,000 2,000 Transfer of gifted equipment (140) (140) Transfer of equipment acquired with donor-restricted funds and placed in service (1,500) (1,500)
Operating excess after transfers 15,122
Nonoperating Changes:Investment return 4,678 20,272 24,950 Interest expense (382) (382) Actuarial loss on annuity obligations (30) (30)
Board designations, appropriations and other:Investment returns designated for current operations (2,000) (2,000) Transfer of gifted equiupment 140 140 Transfer of equipment acquired with donor-restricted funds and placed in service 1,500 1,500
Increase (decrease) in net assets 19,058 (3,608) 15,450
Net assets at beginning of year 73,619 197,021 270,640 Net assets at end of year 92,677$ 193,413 286,090
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Reporting of Expenses
NFP must report information about all expenses in one location (SOA, separate statement, or notes).
Operating expenses shall be presented by their function and by their natural classification.
Non-operating expenses are neither required nor precluded from being reported by function. External and direct internal investment expenses that have
been netted against investment return need not be included in functional expense analysis (disclose the amount of internal salaries and benefits)
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Reporting of Expenses
Nonfunctional
Function*Total
Program Services Supporting Services Operating Nonoperating TotalExpenses Program A Program B M&G Fundraising Expenses Expenses Expenses
Salaries and benefitsGrants to othersProfessional feesOccupancy costsEquipment rentalSuppliesTravelPrintingInterestOtherDepreciation
* Either (or both) on face of Statement of Activities
Nature*
Expense by nature and function – one place in the F/S
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Changes to Statement of Cash Flows
Direct method for operating cash flows is required Indirect method may be added as supplemental disclosure
Re-categorize certain items to better align with operating activities presented in statement of activities: Purchases of and proceeds on sale of PPE (operating) Cash contributions restricted for PPE (operating) Cash received from interest and dividends (investing) Cash paid for interest on debt (financing)
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Cash received from donors Cash received from service recipients
Cash paid to employees
Purchase of property and equipment Cash paid to vendors
Proceeds on sale of property and equipment Contributions restricted for property and equipment
Net cash from operating activities
Cash received from interest and dividends
Proceeds from sale of investments Net cash from investing activities
Net cash from financing activities
Payments of principal on long-term debt Interest paid on long-term debt Contributions restricted for endowment
Net increase in cash Cash at the beginning of year
Cash Flows from Operating Activities
Cash Flows from Investing Activities
Cash Flows from Financing Activities
Cash at end of year
Statement of Cash Flows Sample
Purchase of investment assets
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Asset type / debt
maturity
Donor / other external
restrictions and internal limits
Board decisions: Sequencing of items or use of a classified balance sheet Quantitative and qualitative information Additional disclosures (e.g. assets whose use is limited)
Liquidity & Availability
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Liquidity Disclosures
Quantitative information about: The total amount of financial assets Amounts that are not available to meet cash needs within the time
horizon because of (1) external limits and (2) internal actions of a governing board
The total amount of financial liabilities that are due within that time horizon.
Qualitative information about how the entity manages its liquidity. For example, an entity might disclose: Its strategy for addressing entity-wide risks that may affect liquidity,
including its use of lines of credit Its policy for establishing liquidity reserves Its basis for determining the time horizon used for managing liquidity.
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Revised net asset classification
Enhanced disclosures
To be reflected in net assets with donor restrictions rather than in net assets without donor restrictions
In addition to aggregate amounts by which funds are underwater (current GAAP), also disclose aggregate of original gift amounts (or level required by donor or law) for such funds, fair value, and any governing board policy or decision to reduce or not spend from such funds.
Underwater Endowments
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e.g., endowment/ investment/fair
value
e.g., accounting policies
e.g., cost allocation
approaches
Other Disclosure Enhancements
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Required to include a description of the method used to allocate costs among program and support functions
Disclose total program expenses and information about why total program expenses disclosed in the notes do not articulate with the statement of activities, if applicable.
Cost Allocation Disclosures
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How to present?
What to disclose?
Net presentation of investment expenses against investment return on the face of the statement of activities
Netting limited to external and direct internal expenses
Disclosure of investment expenses no longer required, except for the disclosure of the amount of internal salaries and benefits that have been netted (if any) against investment return
Reporting of Investment Expenses
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FASB Accounting Standard Update (ASU) 2014-09 – Revenue from Contracts with Customers (Topic 606)
Fundamental principle: An entity must recognize revenue in a manner that
represents the entity’s transfer of goods or services to customers, measured at the amount that reflects the consideration the entity expects to receive from the exchange.
Revenue Recognition
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Five-step model: 1. Identify contract(s) with customer 2. Identify separate performance obligations in the contract(s) 3. Determine the transaction price 4. Allocate the transaction price 5. Recognize revenue when the
performance obligation is satisfied
Revenue Recognition
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Definitions Customer: a party that has contracted with a company
(organization) to obtain a good or service that is an output of the company's ordinary activities in exchange for consideration
Revenue Recognition
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Potential Impact on Not-for-Profits Only applies to exchange transactions (not investment
income, etc.) Many transactions of NFPs do not involve a vendor-customer
relationship and are not within scope of the ASU – no transfer of good or service to a customer
Contributions are scoped out of ASU by definition – voluntary and nonreciprocal
Grants and collaborative arrangements – Assess on a case by case basis
Nature of the agreement Are goods and services part of the not-for-profit entities ordinary
activities
Revenue Recognition
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Potential Impact on Not-for-Profits Grants – typically arrangements under which funds are
provided to the organization to fulfill mutually agreeable goals that are in keeping with the organization’s mission Performance of research vs. creation of an output with commercial
value Collaborative arrangement – both parties share in the risks
and rewards associated with the commercial success of a venture Is there a contract to obtain the output of the entity's ordinary
activities? Sponsored arrangements – implementation is unclear
Not meet definition of contribution, grant or collaborative arrangement.
Revenue Recognition
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Potential Impact on Not-for-Profits Revenue streams that could be considered revenue from
contracts with customers: Minimal impact for those contracts entered into that have a short-term
Revenue Recognition
Memberships Conferences and seminars Subscriptions Tuition
Products and services Advertising Royalty agreements Licensing
Sponsorships Federal and state grants and contracts
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Potential Impact on Not-for-Profits Likely enhanced disclosures
Allow users to understand the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers
Practical expedients have been provided for some disclosure requirements (e.g. exclusion of certain disclosures of contracts with durations of one year or less)
Revenue Recognition
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Steps for implementation: 1) Inventory all current revenue streams and evaluate if
there are differences in recognition methods 2) Evaluate differences in current and new standards
regarding how contract modifications are addressed 3) Determine if changes are needed to systems,
processes and controls 4) Consider other areas of organization that could be
impacted (e.g. employee incentive based compensation, calculation of debt covenants)
Revenue Recognition
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Revenue Recognition
Effective dates (US GAAP) Public entities – first interim
period within annual period beginning on or after December 15, 2016 (2017 calendar year-ends or 2018 fiscal year-ends.
One-year deferral for non-public entities
April 1, 2015 FASB proposed one-year delay on effective date
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Stay tuned for additional implementation guidance to be issued FASB Not-for-Profit Advisory Committee and AICPA Not-for-
Profit Entities Revenue Recognition Task Force Accounting Guide on Revenue Recognition is being
developed by AICPA Implementation issues identified:
Tuition discounts Impact on contribution revenue (if any) Grants with deliverables Self-pay patient revenue Sponsored arrangements And others
Revenue Recognition
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Lease accounting continues to be a topic for discussion, with continued Exposure Drafts and deliberation
Current status: Exposure draft issued May 2013 and modifications and
clarifications have been made since then Final standard is being drafted to be issued in second half of
2015 Effective date unknown
Will be announced before final standard is issued
Leases
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Type A and Type B lease classification Virtually all leases – lessee would recognize a right-of-
use asset and a liability on its balance sheet. Type A (most leases other than real estate):
Asset and liability initially recognized at the present value of lease payments
Recognize and report the interest expense on the lease liability separately from the amortization of the right of use asset
Type B (most real estate leases): Asset and liability initially recognized at the present value of lease
payments Recognize a single lease cost – that combines the interest on the
lease liability with the amortization of the right of use asset – on a straight-line basis
Leases
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Implementation No leases will be grandfathered – all operating leases will
need to be considered Even if the lease has less than 12 months remaining at the initial
application date, unless it is a short-term lease No requirement to adjust carrying amounts of assets and liabilities
associated with existing finance or capital leases
Modified retrospective transition approach for leases existing at, or entered into after, the date of initial application Would not apply to leases expired before the date of initial
application
Leases
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Effect on Not-for-Profit Organizations Financial statement impact
Increase in total assets and total liabilities Lease payment expense replaced by amortization of right-to-use
asset and interest expense Overall change in net assets Cash flow – financing vs. operating cash out flows
Could have an impact on financial ratios
Slight changes to accounting for lessors as well
Leases
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Accounting Standards Update No 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items
No longer requires extraordinary events or transactions to be separately classified, presented and disclosed
FASB retained guidance on items that are unusual or infrequently occurring Presented as separate components of continuing operations, or Disclosed
Effective for 2016 calendar year-end and 2017 fiscal year-ends Can early adopt and apply presentation retroactively
Presentation of Extraordinary Items
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FASB proposed ASU Exposure Draft (Issued October 30, 2014 – Comment period ended January 15, 2015)
Removes the requirement to categorize within the fair value hierarchy investments for which fair values are measured at net asset value (NAV) using the practical expedient. Proposed ASU was issued to address diversity in practice in
categorizing investments redeemable at a future date. Criteria used to determine category within the fair value
hierarchy differ from the criteria used to categorize other fair value measurements.
Disclosures for Investment in Certain Entities That Calculate Net Asset Value per Share
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The reporting entity that uses NAV per share as a practical expedient shall disclose information that helps users of its financial statements to understand the nature and risks of the investments and whether the investments are probable of being sold at amounts different from NAV per share including: Fair value measurement of the investments in the class
including a description of the investment strategies For nonredeemable investments, the anticipated liquidation
period of the underlying assets of the investee
Disclosure Requirements
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The amount of unfunded commitments related to investments in the class
A general description of the terms and conditions upon which an investor may redeem investments in the class
A description of circumstances when investments may or may not be redeemable (when restrictions will lapse)
Plans to sell and any remaining actions needed to complete the sale
Any other significant restrictions
Disclosure Requirements
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Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
Current GAAP doesn’t include explicit guidance about a customer’s accounting for fees paid in a cloud computing arrangement such as: Software as a service Platform as a service Infrastructure as a service Other hosting arrangements
ASU 2015-05 Intangibles – Goodwill and Other – Internal Use Software
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Determine whether arrangement includes a software license: Account for the software license element consistent with the
acquisition of software licenses Account for the remainder of the arrangement as a service
contract Effective for annual periods beginning after December 15,
2015 (early adoption is permitted). May elect to adopt the amendments either prospectively or
retrospectively (required disclosures about the effect of the accounting change).
Fees Paid in a Cloud Computing Arrangement
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Join us for these upcoming courses: 6/9 & 6/18: Perspectives from the CFO of Charity Navigator 6/10 & 7/8: How DOL Enforcement and Recent Litigation is
Impacting Your Employee Benefit Plan 6/30 & 7/7: Second Quarter Accounting Update
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