Not For Profit Entities:

2019 Audit and Accounting

Issues

Visit the NFP webcast archive to watch the

corresponding presentation.

Today’s presenters and moderator

2

Jennifer Hoffman, CPA

• Partner, Not-for-Profit and Higher Education Practices

• Grant Thornton LLP

Sibi Thomas, CPA, CFE, CGMA

• Partner, Nonprofit, Government and Healthcare

• Marks Paneth LLP

Andrea Wright, CPA, MBA

• Partner, Not-for-Profit Practice

• Johnson Lambert, LLP

Learning Objectives

• Identify industry, regulatory, and economic developments affecting

not-for-profit organizations.

• Determine the audit issues impacting this year's engagements.

• Identify the latest not-for-profit accounting concerns and

developments.

• Identify the significant issues on the horizon impacting not-for-profit

organizations.

3

Economic & Industry Developments

4

Current Economy

• Important considerations affecting the NFP industry

– Interest rates

– Availability of credit

– Consumer confidence

– Overall economic expansion or contraction

– Inflation

– Real estate values

– Labor market conditions

5

Key Economic Indicators

• GDP - Increased at an annual rate of 3.4% in the 3rd Q 2018

• Annual average unemployment rate

– 3rd Q 2018 – 3.7%

– 2017 – 4.1% -- 2018 – 3.9%

– Unemployment rate of 3.9% = 6.3 million people

– 3rd Q lowest rate since 1969

• Federal minimum wage unchanged at $7.25 since 2009

• 21 States and Washington, D.C. increased minimum wage last year

• Federal funds rate raised 4 times in 2018 at level of 2.25% – 2.5% in December

• Inflation remains near 2% objective over medium term

• Tax reform lowered taxes for individuals and corporations

• Contraction in exports for first time in 2 years amid escalating trade disputes

6

State of NFPs

• NFPs continue to play a large role in the world economy

• Currently more than 1.5 million NFPs registered with the IRS

• Contributions to NFPs in 2017 exceeded $400 billion – 5.2% increase over 2016

• Giving to all but 1 of 9 sectors of recipient organizations (Giving USA)

• Individuals represent 70% of total giving

• Contributions to Donor Advised Funds grew to $29.23 billion in 2017 – 16.5% increase

over 2016

7

Job Market and Talent Pool Concerns

Persistence of low unemployment rates affecting staffing for key

finance functions.

Risks to NFP include:

• Lack of capacity to maintain basic financial systems

• Inadequate staff competency for the complexity of the organization

• Frequent turnover affecting organization-wide morale

• Vulnerability to poor segregation of duties and internal controls due

to under staffing

Possible strategies to mitigate:

• Increase investment in staff salaries and professional development

• Seek outsourced accounting resources to fill gaps

• Involve nonfinance staff in less technical processes for coverage

8

Election-Year Reporting Carries over to 2019

NFPs will be reporting on election related activities throughout 2019.

Proper disclosure is key to ensuring transparency and maintaining

exempt status:

• Distinguish between political campaign activities (not allowed for

EO) and legislative activities, lobbying, voter registration, and voter

engagement, all of which are permissible (with some limitations)

• Understand extent of engagement as defined for 501(c)(3) and

501(c)(4)

• Expenditure Test or Substantial Part Test and decision to take

501(h) election

9

Software as a Service (SaaS)

The cloud has become ubiquitous in business computing. What should

organizations consider before migrating to the cloud:

• Conduct service provider due diligence assessing performance,

services, incident and disaster response, customer support

• Ask industry regulators for guidance on cloud storage of personally

identifiable information

- E.g. HIPAA and FERPA regulations

• Obtain SOC 1 reports for annual review

10

Cybersecurity

• Cybersecurity adversaries (“Bad Actors”) are after data – NFPs

obtain and retain valuable data on donors, customers, and clients

• Most reported breaches are due to hacking, email phishing, or

malware – especially ransomware

• Dark web – anyone can access the dark web and buy sensitive

information

• Where do most successful hacking attempts originate? E-Mail

11

Cybersecurity (Continued)

• What can NFP’s do?

– Bad actors are a daily threat

– Be leery of emails

– Verify the sender

– Be very careful opening emails on a smart phone

– Have a password strategy

– Develop a culture of security

– Have a plan for employees to notify designated

personnel and react quickly when an attack is

discovered

– Take personal security seriously

12

Cybersecurity Resources

• Cybersecurity is an urgent matter as digital threats

continue to rise

• Visit the Cybersecurity Resource Center at

www.aicpa.org/cybersecurity to access

cybersecurity news and information

13

State of Higher Education

• Moody’s has indicated a second consecutive

negative outlook for higher ed in 2019 and 2020

• Public universities expected to have lowest median

net revenue growth in 10 years at 1.5%. Private at

2.8%

• Decline in net tuition revenue impacted by

increase in tuition discounts

– Average 2017-2018 institutional discount rate

expected to rise to 44.8% (NACUBO)

• HEPI Data reports 2.8% inflation for FY18 –

decline from 3.3% rate in FY17

14

State of Higher Education (continued)

• Investment returns favorably affect endowment

distributions (2018 NACUBO-TIAA Study)

– Average IRR 8.2% for 2018 v. 12.2% net

investment gain realized in 2017

– S&P 500 1-year total return 11% for May 31

FYE and 12% for June 30 FYE

• Changes in ASU No. 2014-09 Revenue from

Contracts with Customers affects revenue streams

• Updates to lease accounting standards:

– Adoption of ASU No. 2016-02 by Private

Institutions

– Application of GASB Statement No. 87 by Public

institutions effective 2020-2021

15

State of Higher Education (continued)

• Perks Loan Program expired September 30, 2017

with no new loans issued

– USDE provided wind-down guidance allowing

disbursement to enrolled borrowers through

June 30, 2018

– USDE will begin collection after issuance of

2019-2020 Fiscal Operations Report

– Application to participate for 2019-20 (FISAP)

due October 1, 2018

16

Operation Varsity Blues

• Many higher education institutions have been

faced with inquiries about risk management,

governance and compliance

• Alleged widespread corruption in admissions

process provides wake-up call to entire higher

education community

• Audit committees and senior management will

likely place greater focus and emphasis on

process, controls and compliance to respond to

increased attention

• Auditors may be asked to perform additional

procedures and provide input/perspective

17

Legislative and Regulatory Developments

18

IRS Issue Snapshots

• In 2018, IRS Tax Exempt & Government Entities

(TEGE) division issued 9 Issue Snapshots

including:

– “Exempt Organization Gaming and UBTI”

(4/5/18)

– “Understanding how Income Affects Qualification

for Exemption as a IRC Section 501(c)(2)

Corporation” (6/2/18)

19

2017 Tax Cuts and Jobs Act (TCJA) Impacts

• UBTI “Siloing” – Section 13702 of TCJA established IRC

§512(a)(6) provides for UBTI to be separately computed for each

activity

• Notice 2018-67 Interim Guidance:

– Guidance for “making good-faith identification of separate trades

or businesses, and related concepts”

– Proposes use of NAICS 6-digit codes

– Provides safe-harbor thresholds for aggregating income and debt-

finance income from partnerships

– Information on how to calculate NOL within IRC §512(a)(6)

– Addition to UBI under IRC §512(a)(7) not separate

20

2017 TCJA Impacts (continued)

• The “Parking Tax” – “disallowed fringes” under IRC §512(a)(7)

– Notice 2018-99 interim guidance states:

“taxpayer that owns or leases all or a portion of one or more

parking facilities must identify the number of spots…exclusively

reserved for employees”

– Four-step safe-harbor calculation model

– Changes to parking arrangements made by March 31, 2019

can be retroactively applied back to January 1, 2018

– Certain states (for example NY) have issued regulations to

eliminate impact for state purposes

– Notice 2018-100 – This relief is very limited and available to

certain EO’s that meet certain criteria

21

2017 TCJA Impacts (continued)

• Excise Tax on Excess Compensation

– 21% tax on wages and compensation exceeding $1 million of

covered employee – defined as current or former employee:

– 1 of 5 highest compensated employees during taxable year

– Covered employee of organization or predecessor for any

preceding taxable year after 12/31/16

– Q&A guidance for IRC §4960 in Notice 2019-9

22

2017 TCJA Impacts (continued)

• Changes to Form 990-T

– 2018 Form 990-T received the most significant changes in 67

years including:

– Part III, Total UBTI (page 2)

– Line 33, Total of UBTI computed from all unrelated trades or

businesses

– Line 34, Amounts paid for disallowed fringes

– Line 35, Deduction for NOL arising in tax years starting January

1, 2018

– Overall “flat” 21% tax rate on UBTI

– Form 990-T Schedule M

23

Form 990 Versus GAAP Accounting

• Differences generally accounted for on Form 990 Part XI or

Schedule D Part XI and Xii

• ASU No. 2016-14 changes net assets accounting from three net

asset classifications to two

– Former Classification: Unrestricted Net Assets, Temporarily

Restricted Net Assets, and Permanently Restricted Net Assets

• IRS communicated updates to Form 990 to accommodate changes

will take a few years

– Form 990 Part X, Lines 27-29 will continue to list former net asset

titles

– Organizations should consider Schedule O disclosure

24

Sales Tax after Wayfair Decision

• The Supreme Court overturned decades old Quill decision in South

Dakota v. Wayfair

– Physical presence test no longer required for sales tax nexus

– Numerous states have new rules established or coming online in

2019 based on South Dakota nexus thresholds:

– Gross revenue from sales of taxable goods and services

delivered into state exceeding $100,000

– Sold taxable goods and services for delivery into the state in

200 or more separate transactions

• Future implications of volume-of-sales approach could extend to

other types of taxes

25

Audit and Attestation Issues and Developments

26

Changes to the Auditor’s Report

• January 2019 ASB issued SAS Auditor Reporting and Amendments

– Addressing Disclosures in the Audit of Financial Statements

– Aimed at enhancing the relevance and usefulness of the auditor’s

report based on U.S. versus international reporting models

– Public comments called for:

– Greater transparency than “pass/fail” nature of audit opinion

– More information on areas with high risk of material

misstatement, and involving significant judgement and events

– Expansion on description of auditor and management

responsibilities with respect to financial statements

27

Changes to the Auditor’s Report (continued)

• Summary of standards key changes:

– Forming an Opinion and Reporting on Financial Statements (AU-C

Section 700)

– Communicating Key Audit Matters in the Independent Auditor’s

Report (New AU-C Section 701)

– Modifications to the Opinion in the Independent Auditor’s Report

(AU-C Section 705)

– Emphasis of Matter Paragraphs and Other Matter Paragraphs in

the Independent Auditor’s Report (AU-C Section 706)

– The Auditor’s Consideration of an Entity’s Ability to Continue as a

Going Concern (AU-C Section 570)

28

Changes to the Auditor’s Report (continued)

• Summary of standards key changes (continued):

– The Auditor’s Communication with Those Charged with

Governance (AU-C Section 260)

– Terms of Engagement (AU-C Section 210)

• The SAS and related amendments are effective for audits of financial

statements for periods ending on or after December 31, 2020.

– Early implementation is not permitted

29

Data Analytics in Audits

• Rapidly growing capacity for technology to “discover and analyze patterns, identify

anomalies, and extract other useful information in the data underlying an audit” (AICPA

Guide to Audit Data Analytics)

• ADAs can be applied through methods such as ratio analysis, statistical analysis,

journal entry analysis, three-way matching procedures, control testing, etc.

• ADA’s can be applied for risk assessment, test of controls, substantive procedures, etc.

30

Data Analytics in Audits (continued)

• Increased use of ADA can:

– Increase audit quality

– More effective/efficient audits

– Increased coverage

• Data Visualization

– Refers to the use of various graphics – charts, scatter diagrams,

trend lines, etc.

• Data Confidentiality & Security

– Critical when applying ADA

31

Auditing Cryptocurrency Donations

• Currently more than 1,000 types of cryptocurrency

exist; Bitcoin is the most popular

• NFPs that decide to accept cryptocurrency should

consider:

– Risks of accepting or transacting cryptocurrency

– Updates to gift acceptance and investment

policies

– Training opportunities for management and staff

– Internal controls to monitor and process

cryptocurrency

• NFP should review upcoming accounting policies

and valuation techniques to properly classify

cryptocurrencies in financial statements

32

Auditing Cryptocurrency Donations

(continued)

• NFP’s need to consider how the asset should be

reflected in the statement of financial position

• Representatives of the Assurance Services

Executive Committee, Financial Reporting

Executive Committee (FinREC), and the ASB

comprise a Digital Assets Working Group that is

currently developing guidance for the accounting

for and auditing of cryptocurrencies and other

digital assets. More information on this project will

be provided as it becomes available.

33

Auditing Alternative Investments

• The use and variety of alternative types of

investments in NFP portfolios has grown over past

decade

• Increasing number of entities following IFRS

• NFP should have thorough understanding of

valuation method and basis of accounting used by

the investment vehicle

• NFPs and auditors should understand any

differences from U.S. GAAP in valuation

34

Fraud Trends at NFPs

• Association of Certified Fraud Examiners (ACFE) reported in its 2018 Global Report

that NFPs suffered a median loss of $75,000 – Down from $100,000 in 2016

– Limited financial resources at NFPs often exacerbates the impact of fraud

• Most fraud schemes identified at religious, charitable or social service organizations:

– Billing schemes where employees submit fictitious or inflated invoices

– Corruption schemes including bribery and undisclosed conflicts of interest

– Expense reimbursement schemes involving claims for fake or inflated expenses

– Payroll schemes including claims for hours not worked or nonexistent employees

– Theft of cash on hand

– Check and payment tampering schemes

35

Fraud Trends at NFPs

• Financial Statement fraud accounted for 10% of fraud cases

• ACFE’s 2018 most common internal control weaknesses in fraud cases:

– Lack of internal controls

– Lack of management review

– Override of internal controls

– Poor tone at the top

– Lack of competent personnel in oversight roles

• Organizations should be on the lookout for common “behavioral red flags”, the most

common of which continues to be living beyond one’s means and financial difficulties

36

New Yellow Book Independence Rules

• Revision of Government Auditing Standards released July 2018

– For example, auditors conclude that preparing financial statements in their entirety

from a client-provided trial balance creates significant threats to independence

• Services revised standards identify as a threat to independence:

– Preparing line items or sections of the financial statements based on the trial balance

– Recording transactions for which management has approved classification

– Posting coded transactions to an audited entity’s general ledger

• Proposed safeguards to eliminate or reduce threats to independence:

– Exclude individuals who performed non-audit service from engagement team

– Engage another audit organization to review non-audit services performed

37

Accounting Issues and Developments

38

ASU 2016-14 - Presentation of

Financial Statements for Not-for-Profit

Entities

• Required changes to address the following:

– Complexities about the use of 3 classes of net

assets

– Deficiencies in the transparency and utility in

assessing liquidity especially as it pertains to

misunderstandings and confusion about the term

unrestricted net assets and the impact of limits

imposed by governing boards, grantors, laws,

etc.

– Inconsistencies in the type of information

provided about expenses (function vs. nature)

– Impediment of preparing the indirect method

reconciliation if an NFP chooses to use the direct

method of presenting operating cash flows

39

Changes to Restrictions on Net Assets

• Moving from 3 to 2 net asset classes

– net asset with donor restrictions

– net assets without donor restrictions

• Information about the nature and amounts of different types of

donor-imposed restrictions should be on the face of the statement

of financial position (SFP) or in the notes to the financial statements

• Information about the amounts & purposes of board designations of

net assets without donor restrictions should be provided in notes or

on face of FS

40

Changes to the Statement of Activities

• Statement of activities

– Present change in each of the two classes of net assets

– Aggregate items of revenue, expenses, gains, and losses into

reasonably homogenous groups

– Investment expenses netted against investment return (reported

in net asset category where net investment return is reported)

– No longer required to disclose netted investment expenses

– All NFPs required to report expenses by nature & function in one

location (on face of the statement of activities (SOA), separate

statement or in notes)

41

Changes to Disclosures

• Disclosures

– Amounts & purposes of governing board designations,

appropriations and similar actions that result in self-imposed limits

on the use of resources without donor-imposed restrictions

– Composition of net assets with donor restrictions & how the

restrictions affect the use of resources

– Qualitative information that communicates how an NFP manages

its liquid resources available to meet cash needs for general

expenditures within one year of the date of the SFP

– Quantitative information, either on the face of the SFP, or in the

notes, and additional qualitative information in the notes as

necessary, that communicates the availability of an NFP's financial

assets at the date of the SFP to meet cash needs for general

expenditures within one year.

42

Changes to Disclosures (continued)

• Disclosures (Continued)

– Availability of a financial asset may be affected by (1) it's nature, (2) external limits

imposed by donors, grantors, laws, and contracts with others, and (3) internal

limits imposed by governing board decisions.

– Method(s) used to allocate costs among program & support functions

– Underwater endowment funds, which include required disclosures of:

– NFP's policy and any actions taken during the period concerning appropriation

from underwater endowment funds

– The aggregate FV of such funds

– The aggregate of the original gift amounts

– The aggregate amount by which funds are underwater (deficiencies)

43

Changes to Accounting for Long-lived

Assets

• ASU No. 2016-14 eliminates first accounting

option: Release from restriction all alt once when

property/equipment in service

− Requires “placed-in-service” approach for long-

lived assets absent donor stipulations specifying

how long assets must be used

• NFPs previously using “implied time restriction”

need to change

44

Changes to Expenses

• ASU No. 2016-14 requiring more information on

nature and type of expenses incurred

− Provide an analysis of expenses by function and

nature in financial statements or notes

− Disaggregate functional expense by natural

expense classification

− Present in one location

− Include all expenses of the organization

− Disclose method used to allocate costs

45

Other Changes

• Investment Return and Related Expenses

– Report investment expenses net of the related

investment return for all external expenses

– No longer required to disclose components of

investment return

• Statement of Cash Flows

– Continue to present on the face of the statement

of cash flows (SCF) the net amount for operating

cash flows using EITHER the direct or indirect

method

– No longer required to provide the presentation or

disclosure of the indirect method (reconciliation)

if using the direct method

46

Implementation Considerations

• Implementation considerations for ASU No. 2016-14

– Preparer and auditor collaboration – This should commence as

early as possible. Detailed discussions regarding requirements,

applicability, and how best to comply, present, and communicate

required information in the financials statements

– Use of examples – Reference to existing samples to establish

baseline that can be refined

– Engage those charged with governance – Discuss with board

committees responsible for financial reporting oversight. Some

best practices include drafting disclosure in advance and

presenting to committee for approval.

47

Other Considerations

• Key considerations for certain requirements

– ASU No. 2016-14 requires the classification of underwater endowments within net

assets with donor restrictions

– This is a change in NFP accounting

– NFP should disclose nature of any reclassifications or restatements and their

effects for the period the amendments are first applied

• Comparative financial statements

– FASB ASC 958-10-65-1: An NFP has the option to omit the following for periods

presented before period of adoption

– Analysis of expenses by both functional and natural classification.

– NFPs previously required do not have this option but may present comparative

period information

– Disclosures about liquidity and availability of resources

48

ASU 2018-08 - Clarification of the Accounting for Grants and

Similar Contracts

• Applies to all entities including NFPs and business entities that receive or make

contributions (revenue and expense recognition)

– Exception – ASU does not apply to business entity for transfer of assets from

governmental entity to business entity

• Although guidance applies to the recipient and resource provider, FASB does not intend

for both parties to track each other’s accounting to achieve the same reporting result

• Effective dates for recipients of contributions:

– All non-public entities – Effective for annual periods beginning after December 15,

2018 and interim periods beginning after December 15, 2019

• Effective dates for resource providers of contributions:

– All non-public entities – Effective for annual periods beginning after December 15,

2019, and interim periods beginning after December 15, 2020

• Early adoption permitted

49

Issue 1: Differentiating Reciprocal from Nonreciprocal

Transactions

• Reciprocal (exchange) transactions follow guidance in FASB ASC 606 – Resources

provided are used by the NFP to provide direct commensurate value back to the

resource provider

• Non-reciprocal (contribution) transactions follow guidance in FASB ASC 958-605 –

Resources provided are used by the NFP to benefit a party other than the resource

provider, such as the general public

• In some instances, the resource provider may not receive direct commensurate

value; however the resources may benefit a specific third party. NFP must determine

if the resources provided represent a payment from a third party payer (the resource

provider) on behalf of an existing exchange between.

50

Issue 2: Differentiating Conditional Contributions From

Unconditional Contributions

• Key change in donor-imposed condition definition is concept that a condition includes

both (a) a barrier that must be overcome and (b) a right of return or right of release if

barrier is not overcome

– Contribution agreement must be sufficiently clear in concluding when the recipient

is entitled to the transfer of assets

• Indicators to help NFPs determine if an agreement contains a barrier:

– Measurable performance-related barriers or other measurable barriers

– Limited discretion by the recipient on the conduct of an activity

– Stipulations that are related to the purpose of the agreement

• Probability of overcoming the barrier or probability that the contributor would exercise a

right of return or release If the barrier is not overcome is NOT a factor

51

Accounting for Grants and Similar Contracts

• Simultaneous Release Option - NFP may elect a policy to report

donor-restricted contributions whose restrictions are met in the

same reporting period as revenue recognized within net assets

without donor restrictions

– ASU allows election of policy for donor restricted contributions

initially conditional without also electing policy for other donor

restricted contributions

• No change in existing disclosure requirements for contribution

transactions

– NFPs may need to add required disclosures for conditional

contributions previously accounted for as exchange transactions

52

Accounting for Grants and Similar Contracts

(continued)

• Transition under Modified Prospective Approach

– ASU requirements applied on go-forward basis in year of

adoption. No restatement of prior amounts recognized

• Transition under Retrospective Application Approach

– ASU requirements fully applied to all agreements for all periods

presented

• Include note disclosure in year of adoption to describe ASU

implementation

53

Revenue from Contracts with Customers

• ASU 2015-14 – Extended Effective Date

– Extended effective date for all entities by one year

– Most NFP’s will apply new standards for annual reporting periods

beginning after December 15, 2018, and interim periods within

annual periods beginning after December 15, 2019

– NFP’s with conduit debt will apply new standards for annual

reporting periods beginning after December 15, 2017

54

Revenue from Contracts with

Customers (continued)

• New revenue recognition model replaces virtually

all existing revenue guidance

• Impacts public, private and NFP entities

– Contributions are excluded from standard

because donor not considered customer as

defined in the ASU

– Certain transactions will require bifurcation

between exchange transaction and contribution

(i.e. membership dues or special events)

– Accounting for private and government grants –

addressed in the ASU 2018-08

– Evaluation of student-institution agreements

• New qualitative and quantitative disclosure

requirements

55

Revenue from Contracts with

Customers - Disclosures

• Detailed qualitative and quantitative disclosures

are required about

– the entity’s contracts with its customers

– significant judgments made in applying the

revenue recognition guidance to those contracts,

and

– information about any assets recognized for

contract costs

56

Revenue from Contracts with Customers

• Comprehensive framework for determining how much revenue to

recognize and when it should be recognized.

• 5 step approach to revenue recognition:

57

Revenue from Contracts with

Customers – Effective Dates and

Transition

• First option allows retrospective application of new

revenue recognition guidance to each prior

reporting period presented

• Second option allows retrospective adoption with

the cumulative effect recognized in opening

balance of net assets at the date of initial

application.

− Comparative periods do not have to be restated

• Third option to present single-year financial

statements rather than comparative

58

Revenue from Contracts with Customers –

Developing an Implementation Plan

• Read the standard and all relevant commentary from audit firms,

attend related CPE, and read the TRG materials

• Assign individual staff to become subject matter experts; include

relevant staff outside of accounting: internal audit, legal

• Compile a list of all organizational revenue streams

• Develop and document a position paper on each revenue stream

• Consider discussing issues with similar organizations within your

industry

59

Revenue from Contracts with Customers –

Developing an Implementation Plan (continued)

• If a change is required, is it material?

• If a change in recognition is required, consider the impact on the

following:

– Any needed verbiage changes for new related contracts

– Recognition processes within the accounting system

– Technical changes within the accounting or supporting systems

– Monthly and annual financial close process

– Internal financial reporting

– Audited financial statements

– Forecast and budget processes

– Dashboard goals

60

Revenue from Contracts with

Customers – Developing an

Implementation Plan (continued)

• Communicate changes to CFO, board, audit and

finance committee, senior staff, key programmatic

stakeholders, auditors, internal auditors, contract

signers, banks, bondholders

• Determine requirements to retrospectively adopt

the new standard

• Develop a plan for staff training

61

ASU 2016-02 – Leases

• Key requirements

– Contract conveys right to control use of identified asset for period

of time in exchange for consideration

– Judgment to determine whether customer has right to direct the

use of identified asset

– Lessee may recognize (short-term) lease payments on straight

line basis

– Recognize right-of-use asset and related liability on the SFP

– Do NOT include market value of donated use of facilities as there

is no consideration exchanged

62

Leases

• Key requirements (continued)

– At commencement, the value of the right-of-use (ROU) asset

should consist of initial measurement, lease payments made less

lease incentives, and indirect costs incurred

– Initial direct costs has narrowed to include incremental costs

incurred due to execution of lease. Origination costs historically

capitalized under existing guidance, including costs to negotiate

and arrange a lease will now be expensed when incurred

– Lessee must amortize ROU asset over the life of the lease and

recognize interest expense

– Term of lease will continue to include noncancelable lease term

plus renewal periods

– No remaining ROU asset or liability upon termination. Remaining

amounts recognized as gain or loss on SOA

63

Leases (continued)

• Key requirements (continued)

– Lessor accounting under ASC 842 remains

mostly unchanged

– NFPs benefit from an enhanced level of

transparency under new guidance; no longer

need to analyze footnotes to understand cash

flow implications of operating leases

64

Leases (continued)

• Implementation considerations

– Summarized as moving operating lease

obligations from the footnotes to the SFP

– Bringing operating leases onto the entity’s

statement of financial position could make a

significant difference in the numbers an

organization is reporting

– Although initial implementation will require some

level of effort, the ongoing costs of providing the

information are expected to be consistent with

the costs of complying with existing GAAP,

according to FASB.

65

Restricted Cash

• ASU No. 2016-18 issued in response to discovery of diversity in

practice due to lack of guidance

• Statement of Cash Flows must explain change during period in

total cash, cash equivalents, and restricted cash and cash

equivalents

• No definition of term “restricted cash”

• Required disclosure on nature of restrictions on cash and cash

equivalents

• Effective for financial statements issued for fiscal years beginning

after December 15, 2018

66

Credit Losses

• ASU No. 2016-13 applies to entities holding financial assets and net

investments in leases not accounted for at fair value through net

income, affecting:

− Loans, including programmatic

− Debt securities

− Trade receivables, student loans receivable, leases receivable,

and other receivable from earned revenues

− Net investments in leases

− Off-balance-sheet credit exposures such as loan commitments

− Any other financial assets not excluded from the scope that have

the contractual right to receive cash

• ASU replaced incurred loss methodology with one that reflects

expected credit losses

67

Credit Losses (continued)

• FASB issues narrow-scope improvements to credit

losses in ASU No. 2018-19, Codification

Improvements to Topic 326, Financial Instruments

– Credit Losses

− Mitigates transition complexity by requiring

nonpublic business entities to implement for

fiscal years beginning after December 15, 2021

− Clarifies that receivables arising from operating

leases are NOT within scope of credit losses

68

FASB versus GASB for NFPs

• To determine whether an NFP qualifies as a nongovernmental entity

that should follow FASB, it is necessary to understand who is

required to follow GASB

• Any organization with one or more of the following characteristics is

subject to GASB accounting and reporting rules:

− Popular election of officers or appointment (or approval) of

controlling majority of the members of the governing body by

officials of one or more state or local governments

− The potential for unilateral dissolution by a government with the

net assets reverting to a government

− The power to enact or enforce a tax levy

• The health care industry has seen an increase in governmental

bodies transferring health care system operations to a newly

established NFP

69

Recent Pronouncements

70

Recent Pronouncements

• Recent Accounting Standards Updates:

– ASU No.2018-09 – Codification Improvements to Topic 326, Financial Instruments – Credit Losses

– ASU No.2018-15 – Intangibles – Goodwill and Other – Internal-Use Software: Customer’s Accounting for

Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract

– ASU No.2018-14 – Compensation – Retirement Benefits – Defined Benefit Plans – General: Disclosure

Framework – Changes to the Disclosure Requirements for DBPs

– ASU No.2018-07 – Compensation – Stock Compensation: Improvements to Nonemployee Shared-Based

Payment Accounting

– ASU No.2019-01 – Leases (Topic 842): Codification Improvements

– ASU No.2018-20 – Leases (Topic 842): Narrow-Scope Improvements for Lessors

– ASU No.2018-18 – Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and

Topic 606

– ASU No. 2018-17 – Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable

Interest Entities

71

Recent Pronouncements (continued)

• Recent Accounting Standards Updates:

– ASU No.2018-16 – Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate

(SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes

– ASU No.2018-13 – Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure

Requirements for Fair Value Measurement

– ASU No. 2018-11 – Leases (Topic 842): Targeted Improvements

– ASU No. 2018-10 – Codification Improvements to Topic 842, Leases

– ASU No. 2019-02 – Entertainment – Films – Other Assets – Film Costs and Entertainment – Broadcasters –

Intangibles – Goodwill and Other

– ASU No. 2018-08 – Not-for-Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for

Contributions Received and Contributions Made Plans

– ASU No. 2018-06 – Codification Improvements to Topic 942, Financial Services – Depository and Lending

72

On the Horizon

73

Auditing Pipeline

• Proposed changes to the Auditor’s Report

– Clarification of documents within scope

– Requirement to determine through management

which documents make up the annual report

– Reading and reporting “other information”

– Consider material inconsistencies

– Respond appropriately

– Effective for periods ending on or after December

15, 2020. No early implementation

74

Auditing Pipeline (continued)

• Proposal to Revise SSAE No. 18

– No longer require practitioner to request written

assertion from responsible party when reporting

directly on subject matter or performing AUP

– Harmonize AT-C § 210 within limited assurance

provisions of ISAE 3000

– Engaging parties acknowledge appropriateness

of procedures of AUP

75

Auditing Pipeline (continued)

• Proposal to address Staff Augmentation under

“Independence Rule”

– Staff augmentation may create self-review or

management participation threats to

independence

– Suggested safeguards:

– Engagement lasts for short period of time

– Competent supervision of staff

– Staff do not perform management

responsibilities

– Appearance of firm’s independence is a primary

consideration

76

Auditing Pipeline (continued)

• Proposal to address Staff Augmentation under

“Independence Rule” (continued)

– Situations that impair independence

– Staff listed in employee directory or other client

publications

– Staff referred to by title, or otherwise, as being

“in charge”

– Staff identified as “employee” in email or other

internal communications

– Staff participates in client’s employee benefit

plans

77

Accounting Pipeline

• FASB proposes alternative to accounting for

Goodwill and Certain identifiable Intangible Assets

for NFPs

− Reduce cost and complexity of accounting

− Extend private company alternatives

78

NFP Section

About the AICPA’s NFP Section

• Get NFP tools and resources at your fingertips

• Receive exclusive discounts off the AICPA’s NFP

offerings, including events, publications, and

products

• Find us at: www.aicpa.org/nfp

• Questions? Email us at NFPsection@aicpa.org.

Not-for-Profit Section80

NFP Section Benefits

• Subscription to eAlerts to keep you informed

• Four complimentary webcasts

• Access to resources

in four key interest areas

• Financial accounting and reporting

• Assurance

• Tax compliance

• Governance and management

Not-for-Profit Section81

Government Audit Quality Center (GAQC)

AICPA Governmental Audit Quality Center (www.aicpa.org/GAQC)

• Firm-based membership center supporting the performance of quality “governmental

audits”

o Approximately 2,075 CPA firm members and 33 state audit organizations

• “Governmental audits” includes audits performed under Government Auditing

Standards such as single audits of NPOs

• Provide resources (e.g., alerts, web events, audit tools, etc.)

• Main areas of current emphasis/efforts

o OMB 2019 Compliance Supplement

o New Yellow Book, implementation

o New 2019 Data Collection Form83

AICPA Governmental Audit Quality

Center (www.aicpa.org/GAQC)

Access more information about

membership requirements or to join

Even if not a member, GAQC Web site

provides useful information for both

auditors and auditees

• For example, GAQC Auditee Resource

Center

84

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