accounting auditing update for nonprofits final klumpp

Accounting & Auditing Update For Nonprofits

11/3/2017

Lumsden McCormickExempt Organizations Conference 1

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

ACCOUNTING & AUDITING UPDATE FOR NONPROFITS

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Accounting and Auditing Update for NFPs

Presenter

Lee Klumpp, CPA, CGMANational Assurance Technical Partner, Nonprofit & Education (703) [email protected]


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Accounting and Auditing Update for NFPsPage 3

NFP Accounting Trifecta

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The NFP TRIFECTA

NFP Presentation, ASU 2016-14 • Effective Date: For fiscal years beginning after 12/15/2017• Early Adoption: Permitted

Revenue Recognition from Contracts with a Customer, ASU 2014-09Effective Date: Nonpublic entities, Fiscal years beginning after December 15,2018(Conduit Debt Obligors will be one year earlier)Early Adoption: Permitted but not before years ended December 31, 2017

Leases, ASU 2016-2Effective Date: Nonpublic entities, Fiscal years beginning after December 15, 2019(Conduit Debt Obligors will be one year earlier)Early Adoption: Permitted


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Revenue From Contracts with a Customer

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NFP Revenue Recognition Task Force

Don Alcuino, AQD (NY)Carla Di Martin, AQD (NY)Amy Duffin, AQD (McLean)Sean Kilbane (Cleveland)Dick Larkin, National Assurance –NFP (McLean)Ashely Reynolds (McLean)Tammy Ricciardella, National Assurance – NFP (McLean)Andrea Taylor (Raleigh)

Everything done by this group will be run through National Accounting for final approval.


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Revenue Recognition (Topic 606)

• Objective: To develop a single, principle-based revenuestandard for

US GAAP and IFRS

The revenue standard aims to improve accounting for contracts with customers by:

• Providing a robust framework for addressing revenue issuesas they arise

• Increasing comparability across industries and capitalmarkets

• Requiring better disclosure

Substantially converged with IFRS on major provisions

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Scope

All contracts with customers, except• Lease contracts• Insurance contracts• Financial instruments• Guarantees• Non-monetary exchanges in the same line of business to facilitate

sales to customers

Contracts not with customers are excluded: • Contributions• Collaborative arrangements


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Final U.S. GAAP Model – Recognition

Core Principle:

Steps to apply the core principle:

1. Identifythe contract(s) with the customer

2. Identifythe performance obligations

3. Determinethe transaction price

5. Recognizerevenue when (or as) a performance obligation is satisfied

4. Allocate the transaction price

Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services

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Revenue from Contracts with CustomersNonprofit Specific Revenue Subject to this ASU

i. Membershipii. Subscriptioniii.Products and Servicesiv.Royalty Agreementsv. Sponsorship

vi.Conferences and Seminarsvii.Tuitionviii.Advertisingix.Licensingx. Federal and State Grants

and Contracts


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• Qualitative and quantitative* disaggregation ofrevenue into categories that depict how revenue andcash flows are affected by economic factors

Remaining performance obligations

Interim requirements

Information about contract balances

• Quantitative disclosures *

• Opening and closing balances *

• Amount of revenue recognized from contract liabilities *

• Explanation of significant changes in contract balances *

• Transaction price allocated to remainingperformance obligations *

• Quantitative or qualitative explanation of whenamounts will be recognized as revenue *

Disaggregation of revenue

Final U.S. GAAP Model – Disclosure

* for public entities only

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Transition, Effective Date and Early Application

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• Effective dates:

- Public entities: annual reporting periods after 12/15/2017 (including interim period)

- Nonpublic entities: one year later (annual reporting periods after 12/15/2018)—annual period in first year, interim periods thereafter

- Early application option—no earlier than original public company effective date (annual reporting periods after 12/15/2016)

PY2(2016)

PY1(2017)

CY(2018)

CY Footnotes

Retrospective(with optional practical expedients)

Cum

ulat

ive

catc

h-up

Rev rec under new standard

Cumulative effect at date of application

Rev rec under legacy standard

Cum

ulat

ive

catc

h-up

Existing* and new contracts

under new standard

Existing and new contracts disclosed

under legacy standard for CY (2018)

*contracts for which all (or substantially all) of the revenue has not been recognized under legacy revenue guidance


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Grants and Contracts (Currently in Exposure Draft)Unique NFP guidance on contributions, but long-standing diversity in practice in classifying grants and contracts, particularly from governmental entities

Terminology and Transition‐ “Contributions” encompasses both grants and donations‐ A change in classification in connection with

enhanced/clarified guidance would not be the correction of an accounting error

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Grants and Contracts (Currently in Exposure Draft)U.S. GAAP focuses on:

‐ Issue 1: Exchange vs. Non-exchange (contribution)‐ Issue 2: Conditions vs. Restrictions

ASU 2014-09, Topic 606 (Revenue from Contracts with Customers)‐ Heightened this issue; raised question as to whether grants and

contracts are in scope of that guidance‐ Removed limited exchange guidance and focuses on whether or not

the transaction is reciprocal


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Financial Statements of Not-for-Profit EntitiesASU 2016-14

Net Assets

Liquidity

Operating MeasureExpenses

Cash Flows



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Net Assets

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Net Assets

Unrestricted Temp. Restricted

Perm. Restricted

Without Donor Restrictions With Donor Restrictions

Amount, purpose, and type of board

designations *

Nature and amount of donor restrictions

CurrentGAAP

Proposed GAAP

Disclosures

+

* New disclosure requirement


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Example Effect on Statement of Financial Position

Note: Shaded lines are required to be presented.

Source: ASU 958

Not-for-Profit Entity A

Statements of Financial Position

June 30, 20X1 and 20X0

(in thousands)

20X1 20X0

Assets:

Cash and cash equivalents $ 4,575 $ 4,960

Accounts and interest receivable 2,130 1,670

Inventories and prepaid expenses 610 1,000

Contributions receivable 3,025 2,700

Short-term investments 1,400 1,000

Assets restricted to investment in land, buildings, and equipment 5,210 4,560

Land, buildings, and equipment 61,700 63,590

Long-term investments 218,070 203,500

Total assets $ 296,720 $ 282,980

Liabilities and net assets:

Accounts payable $ 2,570 $ 1,050

Refundable advance 650

Grants payable 875 1,300

Notes payable 1,140

Annuity trust obligations 1,685 1,700

Long-term debt 5,500 6,500

Total liabilities 10,630 12,340

Net assets:

Without donor restrictions (Note DD) 92,600 84,570

With donor restrictions (Note B) 193,490 186,070

Total net assets 286,090 270,640

Total liabilities and net assets $ 296,720 $ 282,980

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Note: Shaded lines are required to be presented.

Source: ASU 958-205-55-14

EXAMPLE OF EFFECT ON STATEMENT OF ACTIVITIES - COLUMNAR FORMAT

Example of Effect on Statement of Activities -Columnar Format


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Disclosures Related to Net Assets

Amounts and purposes of governing board designations, appropriations, and similaractions that result in self-imposed limits on the use of resources without donor-imposed restrictions as of the end of the period.

Composition of net assets with donor restrictions at the end of the period and howthe restrictions affect the use of resources.

Additional information related to underwater endowment funds.

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Disclosures Related to Net Assets (Cont’d)

Information about the nature and amounts of different types of donor-imposed restrictions should be reported either on the face of the statements or in the notes. Separate line items that distinguish between the different types of restrictions may be used such as:

• Assets, such as land or works of art, donated with stipulationsthat they be used for a specified purpose, be preserved, and notbe sold.

• Assets donated with stipulations that they be invested to providea permanent source of income.

• Support of particular operating activities.• Investment for a specified term.• Use in a specified future period.• Acquisition of long-lived assets.


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Net Asset Disclosure Example

Excerpt from ASC 958-210-55-3

Source: ASU 958

With donor restrictionsPerpetual in nature 200,000$ Purpose restricted 1,840,000 Time-restricted only, for periods after 20X1 150,000

2,190,000$ Without donor restrictions

Designated by the Board for [purpose] 1,000,000$ Undesignated 24,000,000 25,000,000

Net assets 27,190,000$

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Expiration of Capital Restrictions

Gifts of cash restricted for acquisition or construction of PP&E:

‐ NFPs would be required to use the placed-in-serviceapproach (no more implied time restrictions)


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Liquidity

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Liquidity and Availability

NFPs are required to provide the following information that will be useful for a reader to determine how the organization manages its liquid assets to meet cash needs for general expenditures within one year of the Statement of Financial Position (SOFP) date:

Qualitative information on how an NFP manages its liquid availableresources and its liquidity risk (in the notes)

Quantitative information that communicates the availability of an NFP’scurrent financial assets at the balance sheet date to meet cash needs forgeneral expenditures (on the face and/or in the notes)

Availability of financial assets may be affected by the nature of the asset, external limits imposed by donors, laws or contracts with others, or internal limits imposed by governing board decisions.


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Quantitative Disclosure of Financial Asset Availability

Financial assets, at year end* 234,410$

Less those unavailable for general expenditures within one year, due to: Contractual or donor-imposed restrictions:

Restricted by donor with time or purpose restrictions (11,940) Subject to apropriation and satisfaction of donor restrictions** (174,700) Investments held in annuity trust (4,500)

Board designations:Quasi-endowment fund, primarily for long-term investing** (36,600) Amounts set aside for liquidity reserve (1,300)

Financial assets available to meet cash needs for general expenditures within one year 5,370$

* Total assets, less nonfinancial assets (e.g., PP&E, inventory, prepaids)

** Excludes amounts that have been appropriated for next 12 months that do not have purpose restrictions

Source: ASU 958-205-55-21

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Quantitative and Qualitative Liquidity and Availability of Resources Disclosure Example

Source: ASU 958-210-55-8


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Operating Measure

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Operating Measure: Improved Disclosures

For those NFPs that utilize an operating measure and show governingboard designations, appropriations, and similar actions (internaltransfers) in the measure

These NFPs must report these types of internal transfers appropriatelydisaggregated and described by type (either on the face of thefinancial statements or in the notes)


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Example of Operating Measure Presentation

Source: ASU 958-225-55-17

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Expenses


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Expense Reporting

Report expenses, either on the face of financial statements or in thenotes, by:

• Function *• Natural classification• Analysis (disaggregate function by nature)

* currently required in GAAPNFPs are now required to provide qualitative disclosures about methods

used to allocate costs among program activities and supporting services

ASU 2016-14 also provides enhanced guidance on allocations frommanagement and general (M&G) expenses

• Key concept: direct conduct or direct supervision

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Expense Reporting

Additional Information

• If expenses are reported in other line items within thestatement of activities (e.g., salaries are included incosts of goods sold) they should be included in thefunctional reporting schedule by their naturalclassification.

• External and direct internal investment expenses that arenetted against investment return should not be includedin the functional expense analysis.


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For example: 958‐205‐55‐21 Note F (Page 66 of ASU)

Expenses By Both Nature and Function

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Cost Methodology Issues – Examples

Allocation Current Cost Allocation Method

Revised Allocation Method

Facilities Operation & Maintenance

Sq. Footage basis Service & effortestimate

Depreciation & amortization

Sq. Footage basis No change

Interest Usage of Space No change

IT related costs Do not allocate Service & effort estimate and costs of specific technology utilized

Media production & Communication

Do not allocate Service & effort estimate


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Example Disclosure for Expense Allocation DisclosureNOTE X. METHODS USED FOR ALLOCATION OF EXPENSES FROM MANAGEMENT AND GENERAL ACTIVITIES

The financial statements report certain categories of expenses that are attributable to one or more program or supporting functions of the Organization. Those expenses include depreciation and amortization, the president’s office, communications department, and information technology department. Depreciation is allocated based on square footage, the president’s office is allocated based on estimates of time and effort, certain costs of the communications department are allocated based on estimates of time and effort, and the information technology department is allocated based on estimates of time and costs of specific technology utilized.

Source: ASU 958


INVESTMENT RETURN


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Reporting of Investment Returns

Net presentation of investment expenses againstinvestment return on the face of the statement ofactivities

‐ Netting limited to external and direct internal expenses

Disclosure of investment expenses no longerrequired, no longer require disclosure of investmentincome components

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Investment Return

Direct internal investment expenses involve the direct conductor direct supervision of the strategic and tactical activitiesinvolved in generating investment return including:• Salaries, benefits, travel, and other costs associated with the

officer and staff responsible for the development andexecution of investment strategy.

• Allocable costs associated with internal investmentmanagement and supervising, selecting, and monitoring ofexternal investment management firms.

Direct internal investment expenses do not include items thatare not associated with generating investment return. Forexample, the costs associated with unitization and other suchaspects of endowment management would not be allocated.


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Cash Flow Statement

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Cash Flow Statement

Continue to Allow free choice between the Direct Method and the Indirect Method

‐ However the Indirect reconciliation will no longer be required for Direct Method


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Implementation and Effective Date

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Effective Date, Early Adoption, and TransitionEffective Date: For fiscal years beginning after 12/15/2017 Interim financials the following year

Early Adoption: Permitted, but must apply the regular transition provisions.

Transition: • For year of adoption: apply all provisions.• For comparative years presented: apply all provisions, except can

choose not to present:• Analysis of expenses by nature and function, and/or• Disclosures around liquidity and availability of resources


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Important Notes

NFPs are already permitted to incorporate many of the changes in the ASUThe only changes that cannot be done without formally adopting the ASU are:

(1) Presenting one class of restricted net assets (consolidating temporarily and permanently restricted)

(2) Underwater endowment accounting(3) Eliminated disclosures of investment return components and netted

expenses(4) Eliminated requirement to provide indirect reconciliation if using

direct method for operating cash flows


Leases


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Leases (Topic 842)

A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration

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Lessee Model

Current U.S. GAAP (IFRS)

IASB FASB

Capital (Finance)Leases

Type A Type A

Operating Leases Type A Type B

All leases are accounted for the

same.

Classification is based on existing U.S. GAAP/IFRS

All leases (more than 12 months) are recognized on the lessee’s balance sheet


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Lessee Accounting Overview

Financing

Operating

Right-of-use assetLease liability

Amortization expenseInterest expense

Cash paid for principal and

interest payments

Right-of-use assetLease liability

Single lease expense on a straight-line basis

Cash paid for lease payments

Income Statement Cash Flow StatementBalance Sheet

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Lessor Accounting Overview

Net investment inthe lease

Interest income and any profit on the lease

Cash received for lease payments

Continue to recognize underlying

asset

Lease income, typically on a straight-line basis

Cash received for lease payments

Sales-Type / Direct

Financing

Operating

Income Statement Cash Flow StatementBalance Sheet


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Leases – Effective Date

• Fiscal years beginning after December 15, 2018, including interimperiods within those fiscal years (CY 2019; FY 2019-20)

Public Companies*

• Fiscal years beginning after December 15, 2019 and interimperiods beginning after December 15, 2020 (CY 2020; FY 2020-21)

All Other Organizations

• Permitted for all organizations

Early Application

* “Public Companies” refers to the following: (1) public business entities, (2) a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an-over-the-counter market, and (3) an employee benefit plan that files or furnishes statements with or to the SEC (Same as the Revenue Recognition Standard)


Questions?

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accounting auditing update for nonprofits final klumpp

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