12/3/2015

1

UPDATE ON NEW AND PROPOSED

FASB AND GASB STANDARDS

Presented by Drew Speed, CPA

Partner, BKD, LLP

12/3/2015

2

NEW FASB REPORTING MODEL FOR

NON-PROFIT ORGANIZATIONS

BACKGROUND

FASB currently in redeliberations

Comments submitted by August 20, 2015

Exposure draft issued April 22, 2015

FASB NFP Advisory Committee formed in 2010

Current guidance (FAS 117) issued 20 years ago

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PERCEIVED WEAKNESSES IN NFP REPORTING

Difficulty in

assessing an

entity’s

liquidity

No clear

operating

measure

defined

Inconsistent

reporting of

expenses

Confusion

regarding

statement of

cash flows

Complexity

with three net

asset classes

Donors, creditors &

other users

SIX KEY TOPICS ADDRESSED

Net Asset Classification

Liquidity

Financial Performance/Operating Measures

Reporting of Expenses

Cash Flow Statement

Note Disclosures

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NET ASSET CLASSIFICATION

Current GAAP Proposed GAAP

Unrestricted Without donor restrictions

Temporarily restrictedWith donor restrictions

Permanently restricted

* Underwater endowments included in unrestricted net assets

* Underwater endowments netted with donor restricted net assets

8

20X5 20X4

Net Assets

Unrestricted 115,000$ 104,000$

Temporarily Restricted (Note B) 24,000 25,000

Permanently Restricted (Note C) 142,000 137,000

Total net assets 282,000 266,000

Not-for-Profit Entity A

Statements of Financial Position

Years Ended June 30, 20X5 and 20X4

(in thousands)

CURRENT STATEMENT OF FINANCIAL POSITION

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9

PROPOSED STATEMENT OF FINANCIAL POSITION

20X5 20X4

Net Assets

Without donor restrictions (Note DDD) 93,000$ 74,000$

With donor restrictions (Note B) 193,000 197,000

Total net assets 286,000 271,000

Not-for-Profit Entity A

Statements of Financial Position

Years Ended June 30, 20X5 and 20X4

(in thousands)

LIQUIDITY

Qualitative Disclosures

• Define time horizon used to manage liquidity (i.e., 30, 60, 90 days) & basis

• Strategy for addressing risks that may affect liquidity

• Policy for establishing liquidity reserves

Quantitative Information

• Financial assets available to meet cash needs within time horizon

• Financial liabilities due within that time horizon

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FINANCIAL PERFORMANCE/OPERATING

MEASURES—CURRENT PRACTICE

• Require operating indicator

• Operating activities based on two criteria

� Mission (charitable & business activity)

• Resources used to carry out an NFP’s purpose for existence

� Availability for current period activities

• Not limited by external/internal restrictions

FINANCIAL PERFORMANCE/OPERATING

MEASURES—PROPOSED GUIDANCE

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Section Description Examples

Operating

(w/o donor restrictions)

Charitable & Business Patient revenue, tuition,

unrestricted contributions,

depreciation expense

Non-operating

(w/o donor restrictions)

Investing & Finance Investment earnings,

interest expense

With donor restrictions Restricted contributions,

donor endowment

earnings

STATEMENT OF ACTIVITIES

STATEMENT OF ACTIVITIES

Board Reasoning for Transfers

1. Foster comparability across

NFPs

2. Allow NFPs to tell their

financial story

Board Reasoning for Transfers

1. Foster comparability across

NFPs

2. Allow NFPs to tell their

financial story

Operating measure BEFORE

transfers reflects legally available

amounts generated by or used in

operations including releases of

donor restrictions

Internal decisions to designate

available assets as unavailable (or

vice versa) shown below subtotal

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15

CURRENT STATEMENT OF OPERATIONS20X5 20X4

Unrestricted Revenues, Gains and Other Support

Patient service revenue (net of contractual allowances and discounts) 93,313,000$ 85,848,000$

Provision for uncollectible accounts (5,665,000) (5,212,000)

Net patient service revenue less provision for uncollectible accounts 87,648,000 80,636,000

Other 3,679,000 3,385,000

Total unrestricted revenues, gains and other support 91,328,000 84,022,000

Expenses and Losses

Salaries and benefits 48,613,000 50,417,000

Depreciation and amortization 4,273,000 3,931,000

Interest 415,000 382,000

Supplies and other 24,927,000 22,933,000

Total expenses and losses 78,228,000 77,663,000

Operating Income 13,100,000 6,359,000

Other Income (Expense)

Investment return 148,000 136,000

Other, net (30,000) (28,000)

Total other income 118,000 108,000

Excess of Revenues Over Expenses 13,218,000 6,467,000

Gain from discontinued operations 233,000 214,000

Increase in Unrestricted Net Assets 13,451,000$ 6,681,000$

16

CURRENT STATEMENT OF CHANGES IN NET ASSETS

20X5 20X4Unrestricted Net Assets

Excess (deficiency) of revenues over expenses 13,218,000$ 6,467,000$ Gain on discontinued operations 233,000 214,000

Increase in unrestricted net assets 13,451,000 6,681,000

Temporarily Restricted Net Assets

Contributions received 72,000 82,595 Investment return 834,000 2,028,393 Net assets released from restriction (173,000) (642,753)

Increase in temporarily restricted net assets 733,000 1,468,235

Change in Net Assets 14,184,000 8,149,235

Net Assets, Beginning of Year 90,915,360 82,766,125

Net Assets, End of Year 105,099,360$ 90,915,360$

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17

PROPOSED STATEMENT OF OPERATIONSFIRST NEW OPERATING MEASURE

20X5 20X4

Without Donor Restrictions:

Operating revenues and support:Patient revenue, net of contractual allowances and discounts 660,230$ 620,616$ Premium revenue 33,342 31,341 Other operating revenue 21,780 20,473 Contributions 1,216 1,143 Donated property, plant, and equipment 1,940 1,824 Expiration of restrictions 6,145 5,776

Total operating revenue and support 724,653 681,174

Operating expenses:Salaries and benefits 305,900 287,546 Purchased services 257,550 242,097 Supplies 84,820 79,731 Depreciation and amortization 32,040 30,118 Bad-debt expense 19,777 18,590 Other 2,500 2,350

Total operating expenses 702,587 660,432 Operating excess before transfers 22,066 20,742

Not-for-Profit Entity-Health Care Entity

Statements of Operations

Years Ended June 30, 20X5 and 20X4

(in thousands)

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PROPOSED STATEMENT OF OPERATIONSSECOND NEW OPERATING MEASURE

20X5 20X4

Without Donor Restrictions:

Operating excess, before transfers 22,066$ 20,742$

Transfers to/(from) operating activities:

Gifted property, plant, and equipment placed in service 3,290 2,800

Operating excess, after transfers 25,356$ 23,542$

Not-for-Profit Entity-Health Care Entity

Statements of Operations

Years Ended June 30 20X5 and 20X4

(in thousands)

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19

PROPOSED STATEMENT OF OPERATIONSNEW NON-OPERATING MEASURE

20X5 20X4Without Donor Restrictions:

Operating excess, after transfers 25,356$ 23,542$

Nonoperating activity:Investment return, net 9,302 8,744 Interest expense (7,350) (6,909) Pension-related changes other than net periodic pension costs 2,300 2,162

Increase from nonoperating activities 4,252 3,997

Increase in net assets without donor restrictions 29,608 27,539

Not-for-Profit Entity-Health Care Entity

Statements of Operations

Years Ended June 30 20X5 and 20X4

(in thousands)

20

PROPOSED STATEMENT OF OPERATIONSNEW DONOR-RESTRICTED MEASURE

20X5 20X4

Increase in net assets without donor restrictions 29,608$ 27,539$

With Donor Restrictions:

Contributions (6,145) (5,776)

Expiration of restrictions 5,152 4,843

Investment return, net 1,397 1,313

Increase in net assets with donor restrictions 404 380

Increase in net assets 30,012 27,919

Net assets at beginning of year 270,250 270,250

Net assets at end of year 300,262$ 298,169$

Not-for-Profit Entity-Health Care Entity

Statements of Operations

Years Ended June 30, 20X5 and 20X4

(in thousands)

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• All NFPs required to report operating expenses by nature &

function

� Options: include in SOA, separate statement or notes

• Require investment expenses to be netted with investment

return

� Netting limited to external & direct internal expenses

REPORTING OF EXPENSES

Example:

REPORTING OF EXPENSES

N

A

T

U

R

E

F U N C T I O N

* Example obtained from FASB

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• Require direct method for operating cash flows

• Reclassify certain items to better align with “new” SOA

STATEMENT OF CASHFLOWS

• All fixed asset activities

Operating

• Interest/dividends on investment portfolio

Investing

• Interest paid

Financing

Example:

STATEMENT OF CASH FLOWS – DIRECT METHOD

Cash Flows from Operating Activities

Cash received from program

services/patients/students

$

Cash received from donors

Cash received from donors restricted for long lived

assets

Cash paid to employees

Cash paid to suppliers

Purchase of equipment ________

Net cash provided by operating activities $________

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REACTIONS TO PROPOSED STANDARD

264 Comment Letters | 10 Workshops | 3 Roundtables

REACTIONS TO PROPOSED STANDARD

• Support for FASB’s overall objective to update current model

• Desire to maintain as much consistency as possible between NFPs and for-profit reporting

• Desire for proposal that better takes into consideration differences among NFPs

• Concern regarding cost to implement proposed changes

Overall Common Themes

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REACTIONS TO PROPOSED STANDARD

• Combining temp and perm net assets

• Disclosing policy for spending underwater funds

• Classifying underwater endowments with restricted net assets

• Reporting expenses by nature and function

• Concern regarding cost to implement proposed changes

Overall Support

REACTIONS TO PROPOSED STANDARD

• Presentation of internal transfers on face of SOA

• Classification of interest expense as non-operating

• Classification of capital gifts as operating

• Removal of HC entities to present classified balance sheet and current performance indicator

• Aligning operating items on SCF and SOA

Overall Disagreement

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REACTIONS TO PROPOSED STANDARD

• Qualitative and quantitative liquidity info

• Intermediate measures of operations

• Direct method cash flows

Mixed Feedback

Leases Project

Summary of Key Changes & Impact

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Timeline

• 1st Exposure Draft (ED) issued August 2010

• 2nd ED issued May 2013

– Re-deliberations are substantially complete; FASB currently

drafting final standard

• On November 11, 2015 FASB approved drafting of

final ASU for voting. Expected Q1 2016.

• Effective dates:

– Nonpublic entities – Years beginning after 12/15/19

– Public – One year earlier

31

Lessee Model

• All leases, except short-term leases, result in

recognition of lease asset & lease liability on lessee’s

balance sheet

– FASB voted for dual approach where leases would be

classified as either Type A or Type B leases

– IASB voted for single approach where all leases would be

classified as Type A leases (except short-term leases)

32

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Comparison of Lessee Accounting Models

Type A (Financing)

Balance Sheet

Right of Use (ROU) Asset

Lease Liability

Income Statement

Interest Expense (on lease liability)

Amortization Expense (on ROU asset)

Cash Flow

Cash paid for principal & interest payments

Type B (Straight-line)

Balance Sheet

Right of Use (ROU) Asset

Lease Liability

Income Statement

Lease/Rent Expense

Cash Flow

Cash paid for lease payments

33

Lease Classification Examples

Examples of finance leases (Type A leases) in IAS 17

• Ownership of Asset Transfers to lessee by end of lease term

• Lessee has option to purchase asset at price which is expected to be

sufficiently lower than FV at date option becomes exercisable such that it

is reasonably certain option will be exercised

• Lease term is for major part of the remaining economic life of asset

– Not considered if “at or near the end” of the economic life

– Within the last 25% of life may reasonably be “at or near the end”

• PV of minimum lease payments amounts to at least substantially all of

fair value of leased asset

34

12/3/2015

18

Discount Rate

Tentative Decisions from Re-deliberations

– Lessees use their incremental borrowing rate as discount rate unless rate

implicit in lease is reasonably determinable

– Lessor uses rate it charges lessee to discount lease assets

– Lessees not public business entities could make accounting policy election to

use risk-free rate for initial & subsequent measurement of lease liabilities

(Consistent with 2013 Board Proposal)

35

BKD Resources

• BKD’s Leases Webpage http://www.bkd.com/hot-topics/lease-accounting.htm

36

12/3/2015

19

NEW REVENUE RECOGNITION

STANDARD

Creating a One-Stop Shop for Revenue Literature

38

Current Guidance New Principle

General Recognition

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The transfer of a promised

good or service determines

when revenue is recognized

and occurs when (or as) the

customer obtains control of

the asset. Transfer can be

made either at a point in

time or over time.

Persuasive evidence of an arrangement exists

Delivery has occurred or services have been rendered

Price is fixed or determinable

Collectibility is reasonably assured

Construction and production type contracts(Subtopic 605-35)

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Scope

• Contracts with customers, except

– Lease contracts

– Insurance contracts

– Financial instruments

– Certain guarantees (other than product

warranties)

– Certain nonmonetary exchanges

39

Five-Step Model

Step 1• Identify contract(s) with customer

Step 2• Identify performance obligations

Step 3• Determine transaction price

Step 4• Allocate transaction price to performance obligations

Step 5• Recognize revenue when (or as) performance obligation is satisfied

40

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Some Entities will be Affected

MORE than Others

41

Industry Step 1

Identify

Contract

Step 2

Identify

Performance

Obligations

Step 3

Determine

Transaction

Price

Step 4

Allocate

Transaction

Price

Step 5

Recognize

Revenue

Contract

Costs

Health Care X X X X X X

Finance - Asset

Mgrs. X X X X X X

Real Estate &

ConstructionX X X X X

Manufacturing X X X X X

42

Step 1 – Identify Contract(s) with Customer

• Contract = “agreement between two or more

parties that creates enforceable rights &

obligations” & meets following criteria

– Commercial substance

– Approval & commitment by all parties

– Identifiable rights, obligations & payment terms

– Collectibility threshold

Step 1: Identify

Contract(s) with

Customer

Step 2: Identify

Performance

Obligations

Step 3:

Determine

Transaction Price

Step 4: Allocate

Transaction PriceStep 5: Recognize

Revenue

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43

Collectibility• Collectibility will be explicit threshold that

must be assessed before applying revenue

recognition model to contract. Entity must

evaluate customer credit risk & conclude that

it is “probable” that it will collect amount of

consideration due in exchange for goods or

services

• Assessment is based on both customer’s

ability & intent to pay as amounts become

due

44

Step 1 – Identify Contract(s) with Customer

• Contract = “agreement between two or more

parties that creates enforceable rights &

obligations” & meets following criteria

– Commercial substance

– Approval & commitment by all parties

– Identifiable rights, obligations & payment terms

– Collectibility threshold

Step 1: Identify

Contract(s) with

Customer

Step 2: Identify

Performance

Obligations

Step 3:

Determine

Transaction Price

Step 4: Allocate

Transaction Price

Step 5: Recognize

Revenue

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45

Step 2 – Identify Performance Obligations

• Separate performance obligations should be

identified if good or services meet both of

following

– Customer can benefit from good/service on its

own or with other readily available resources; &

– Distinct within context of contract, i.e., not highly

dependent on, or highly interrelated with, other

promised goods/services in contract

Step 1: Identify

Contract(s) with

Customer

Step 2: Identify

Performance

Obligations

Step 3:

Determine

Transaction

Price

Step 4:

Allocate

Transaction

Price

Step 5: Recognize

Revenue

46

Step 3 – Determine Transaction Price• Transaction price = amount of consideration entity

expects to be entitled to (after collectibility threshold is met)

– Contract terms

– Customary business practices

– Time value of money (if significant financing component)

– Variable consideration (including consideration of constraint)

– Cash & noncash consideration

Step 1: Identify

Contract(s) with

Customer

Step 2: Identify

Performance

Obligations

Step 3:

Determine

Transaction

Price

Step 4:

Allocate

Transaction

Price

Step 5: Recognize

Revenue

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Step 4 – Allocate Transaction Price to Separate

Performance Obligations

Step 1: Identify

Contract(s) with

Customer

Step 2: Identify

Performance

Obligations

Step 3:

Determine

Transaction

Price

Step 4:

Allocate

Transaction

Price

Step 5: Recognize

Revenue

Allocate based on relative standalone selling prices of separate

performance obligations

Observable price when sold separately (best evidence)

Otherwise, estimate based on

Adjusted market assessment

Cost plus margin

Residual value - Only if highly variable or uncertain

Other

47

Step 5 – Recognize Revenue When (or as)

Performance Obligations Are Satisfied• Revenue recognized when (or as) control of

good/service is transferred to customer

• Transfer of control occurs when customer has ability

to direct use of, & receive benefits from, good/service

• Can be recognized over time or at a point in time,

depending on how performance obligations are

satisfied

Step 1: Identify

Contract(s) with

Customer

Step 2: Identify

Performance

Obligations

Step 3:

Determine

Transaction

Price

Step 4:

Allocate

Transaction

Price

Step 5:

Recognize Revenue

48

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Health Care Entities Revenue Recognition Task Force

• Kimberly McKay, BKD, LLP (Chair)

• Jay Adkisson, Wipfli LLP

• Mike Breen, KPMG LLP

• Cline Comer, CliftonLarsonAllen LLP

(retired)

• Gordon Edwards, Marshfield Clinic

• Martha Garner,

PricewaterhouseCoopers LLP

• Nanda Gopal, BDO USA, LLP

• John Hawryluk, KPMG LLP

• Chuck Heimerdinger, Ernst & Young LLP

• Brian Murray, Crowe Horwath LLP

• Susan Paulsen, Paulsen, Megaard & Co.

• Barb Potts, Ascension Health Alliance

• Chris Pritchard, Moss Adams LLP

• Mark Ross, Baker Tilly Virchow Krause,

LLC

• Mike Sorelle, Grant Thornton LLP

• Deborah Stokes, Kaiser Foundation

Health Plan

• Don Street, HCA Holdings, Inc.

• Karen Van Compernolle, Deloitte LLP

• Dan Vandenberghe, McGladrey LLP

Health Care Implementation Issue Example

Issue # Description of Implementation IssueSta

tus

1 Consideration of the following regarding self-pay balances:

1a-b Application of step 1 (determine if there is a contract) and step 3

(determine the transaction price) for healthcare services provided

to self-pay patients, including uninsured patient balances and self-

pay patient balances arising from co-payments and deductibles. This

implementation issue will discuss evaluating whether a contract

exists and what the transaction price is to arrangements for health

care services provided to self-pay patients and balances arising from

co-payments and deductibles.

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Health Care Implementation Issue Example

1c Implicit price concessions - This

implementation issue, being submitted to

the TRG, provides two views over the

initial accounting for implicit price

concessions for services provided to

uninsured patients and two views for the

subsequent accounting for these types of

contracts and whether changes in the

estimates of variable consideration

represent changes in price concessions or

impairments.

Submitted to

AICPA RRWG

Revenue Recognition Standard

• Effective dates:

– Public: Annual periods beginning after 12/15/17,

including interim periods within that year

– Nonpublic: Periods beginning after 12/15/18 and

interim periods within annual periods beginning

after 12/15/19

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Other FASB Pronouncements and

Projects

Other FASB Pronouncements/Projects

• Standards expected by year end:

– Financial Instruments – Overall

• Public – YBA 12/15/17

• All others – YBA 12/15/18

– Financial Instruments – Credit Losses

• Public – YBA 12/15/18

• All others – YBA 12/15/19

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Financial Instruments- Overall

Financial Instruments-Overall

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ASU 2015-01 Income Statement – Extraordinary and Unusual

Items (Subtopic 225-20): Simplifying Income Statement

Presentation by Eliminating the Concept of Extraordinary Items

• Effective for interim & annual periods beginning after December 15, 2015

• Early adoption is permitted, but adoption must occur at beginning of year

• Items unusual or infrequent or unusual AND infrequent:

• Separate item in continuing operations

• Entities can elect to apply the guidance prospectively or retrospectively

Resources

BKD Thoughtware®: Extraordinary Items Eliminated

ASU 2015-03 Simplifying the Presentation of Debt

Issuance Costs

Summary

New guidance requires companies to present debt issuance costs as a direct deduction from the debt liability, consistent with debt discounts or premiums, rather than as a deferred asset

Effective for public business entities for fiscal years beginning after December 15, 2015, & interim periods within those fiscal years. For all other entities, effective for annual periods after December 15, 2015, & interim periods thereafter.

Early adoption is permitted. Amendments should be applied

retrospectively.BKD Thoughtware®: FASB Standard Simplifies Presentation

of Debt Issuance Costs

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ASU 2015-07 Fair Value Measurement (Topic 820): Disclosures for Investments in

Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)

• Remove requirement to categorize within fair value hierarchy all investments for which fair value is measured using net asset value per share practical expedient

• Remove requirement to make certain disclosures for all investments eligible to be measured at fair value using net asset value per share practical expedient (those disclosures are limited to investments for which entity has elected to measure fair value)

Effective Date & Transition

• Effective for public business entities for fiscal years beginning after December 15, 2015, & interim periods within those fiscal years

• For all other entities, effective for fiscal years beginning after December 15, 2016, & interim periods within those years

• Earlier application is permitted

• Amendments should be applied retrospectively

BKD Thoughtware®: FASB Simplifies Fair Value Disclosures

RECENT GASB PRONOUNCEMENTS

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STATEMENT No. 68 ACCOUNTING AND FINANCIAL REPORTING FOR PENSIONS—AN

AMENDMENT OF GASB STATEMENT NO. 27

Summary

• Employer financial reporting: Details accounting & financial reporting requirements for defined benefit

pensions & defined contribution pensions provided to employees of state & local governmental

employers. Addresses note disclosure & required supplementary information requirements about

pensions

• For defined benefit pensions, identifies methods & assumptions that should be used to project benefit

payments, discount projected benefit payments to their actuarial present value, & attribute that present

value to periods of employee service

• Impact to Employers ̶ Cost-sharing employer required to recognize a liability for its proportionate share

of net pension liability (of all employers for benefits provided through pension plan) ̶ collecWve net

pension liability

• Substantially different than current pension obligation calculation

• Deferred inflows and outflows for unrecognized actuarial gains and losses

• BKD Thoughtware®

• GASB 68 Webinar

• GASB's New Pension Standards

• Public Sector Pension Plans & OPEB Thoughtware

• Audit Implications of GASB 68

STATEMENT No. 72

FAIR VALUE MEASUREMENT AND APPLICATION

Summary

• Provides guidance for determining a fair value measurement for financial reporting

purposes, as well as for applying fair value to certain investments & disclosures

related to all fair value measurements

• Enhances comparability of financial statements among governments by requiring

measurement of certain assets & liabilities at fair value using a consistent & more

detailed definition of fair value & accepted valuation techniques

• Enhances information provided to financial statement users about the impact of

fair value measurements on a government’s financial position

Effective Date & Transition

• Effective for financial statements for reporting periods beginning after June 15,

2015. Earlier application is encouraged

Other Resources

• BKD Thoughtware®: GASB Statement No. 72 - Fair Value Measurement & Application

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GASB 74 FINANCIAL REPORTING FOR POSTEMPLOYMENT BENEFIT PLANS OTHER THAN

PENSION PLANS

Summary

• Addresses financial reports of defined benefit OPEB plans administered through trusts that

meet certain criteria

• It also details proposed note disclosure requirements for defined contribution OPEB plans

• Addresses how plans measure long-term liability & annual costs of OPEB for purpose of

reporting them in annual audited financial statements

• Along with Statement No. 75, Statement No. 74 significantly changes how governments

calculate annual costs & long-term obligations associated with OPEBs

Effective Date & Transition

• Effective for fiscal years beginning after June 15, 2016. Earlier application is

encouraged

GASB STATEMENT 75 ACCOUNTING AND FINANCIAL REPORTING FOR POSTEMPLOYMENT

BENEFITS OTHER THAN PENSIONS

Summary

• Addresses employer reporting for defined benefit OPEB plans

• It also details proposed note disclosure requirements for defined contribution OPEB plans

Changes in OPEB standards provide a more comprehensive measure of resources that will be

needed to make good on benefit promises that state & local governments have made

� Requires governments to report a liability on face of financial statements, representing their

financial obligation for defined benefit OPEB that they provide.

� Significantly changes to how a government should calculate OPEB liability & annual OPEB

expense

� Expected liabilities much greater than currently calculated OPEB obligation

Effective Date & Transition

• Effective for fiscal years beginning after June 15, 2017 (one year after Statement

No. 74 for OPEB Plans)

• Earlier application is encouraged

Other Resources

• BKD Thoughtware® Public Sector Pension Plans & Other Postemployment Benefits (OPEBs)

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QUESTIONS?