New Accounting Standards Affecting Foundations AGENDA

Transcription

1 New Accounting Standards Affecting Foundations Renée S. Graves, CPA, CGFM Community College Internal Auditors Spring Conference May 4, 2017 AGENDA Introduction Who is affected How NFP accounting is improved Overview of changes Net Asset Classes Underwater Endowments Investment Return Expense Reporting Liquidity and availability of resources Cash flow 1

2 INTRODUCTION Update to the current model not an overhaul Improve understanding of net asset classes Improve information in financial statements and notes: Financial performance Cash flows Liquidity Better enable NFPs to tell their financial story WHO IS AFFECTED BY THE NEW GUIDANCE Not-for-profit organizations that will be affected include: Charities Foundations Colleges Universities Health care providers Religious organizations Trade association Cultural institutions 2

3 HOW THE NEW GUIDANCE IMPROVES NFP ACCOUNTING Improves communication of financial performance and condition to stakeholders Reduces cost and complexities in preparing financial statements. Simplifies the face of the financial statements Enhances footnote disclosures Provides more relevant information about resources and the changes in those resources HOW THE NEW GUIDANCE IMPROVES NFP ACCOUNTING Helpful to users, such as donors, grantors, creditors, and others in assessing a not-for-profits: Availability of resources to meet cash needs for general expenditures Liquidity and financial flexibility Financial performance Service efforts and ability to continue providing services Execution of stewardship responsibility and other aspects of its management's performance 3

4 CHANGES TO NOT-FOR PROFIT FINANCIAL REPORTING On August 18 th, 2016 the FASB issued a standard to improve: How not-for-profit organizations classify net assets How financial statements are presented How liquidity, financial performance & cash flows are disclosed The new FASB Standards represent the most significant changes to NFP reporting rules since 1993 CHANGES TO NOT-FOR PROFIT FINANCIAL REPORTING After 20 years, stakeholders have voiced concerns: Complexities in the use of the required three classes of net assets Deficiencies in information needed to assess liquidity Inconsistencies in information provided about expenses Limited usefulness of the statement of cash flows 4

5 KEY PROVISIONS OF THE NEW STANDARD Net Asset Classes Revised net asset classes into two classes net assets with donor restrictions net assets without donor restrictions Improved disclosures for internal limits on the use of resources without donor restrictions Improved disclosures of net assets with donor restrictions Updated accounting and disclosure requirements for underwater endowment funds KEY PROVISIONS OF THE NEW STANDARD Investment Return Net presentation of investment expenses against investment return on the statement of activities No longer required to disclose investment expenses that have been netted Expenses Required to present expenses by nature as well as function Analysis showing the relationship between functional and natural classification for all expenses 5

6 KEY PROVISIONS OF THE NEW STANDARD Liquidity and Availability of Resources Qualitative disclosure - how a not-for-profit manages its available liquid resources Quantitative disclosure - the availability of financial assets to meet cash needs for general expenditures within one year Statement of Cash Flow Free choice between direct and indirect methods Presentation of the indirect reconciliation no longer required if using the direct method NET ASSET CLASSES Unrestricted net assets was misunderstood Can have internal limitations on use Uniform Prudent Management of Institutional Funds Act (UPMIFA) blurred lines between temporarily restricted and permanently restricted Underwater endowment information can help assess liquidity and availability of resources Especially in depressed markets 6

7 NET ASSETS CLASSES Current GAAP Unrestricted Temp. Restricted Perm. Restricted Revised Without Donors Restrictions* With Donors Restrictions Disclosure Amount, Purpose, and type of board designations** Nature and amount of donors restrictions * Can disaggregate further ** New disclosure requirement NET ASSET CLASSES Can disaggregate net assets classes on balance sheet With donors restrictions Perpetual in nature $XXX Purpose restricted XXX Time restricted only for periods after 20X1 XXX XXX Without donors restrictions: Designated by the Board [for purpose] $XXX Undesignated XXX XX Net assets $XXX Streamlines the Statement of Activities Allows for comparative reporting 7

8 NET ASSET CLASSES BOARD-DESIGNATED The amount and purpose of board-designated net assets are disclosed either on the face of the financial statements in the footnotes Requires an assessment of the financial implications before creating board designated funds. Ensures the Board of Directors understands the financial reporting requirements NET ASSET CLASSES UNDERWATER ENDOWMENTS Revised net asset classification To be reflected in net assets with donors restrictions rather than in net assets without donor restrictions Enhanced disclosures Aggregate amounts by which funds are under water (current GAAP) Aggregate amount of original gift amount (or level require by donor or law) Fair value Governing board policies, or actions taken, concerning appropriation from such funds 8

9 INVESTMENT RETURN Presentation Net presentation of investment expenses against investment return on the face of the statement of activities Netting limited to external and direct internal expenses May report net return in multiple, appropriately labeled lines From different portfolios In different net assets classes In operating versus non-operating Disclosure Disclosure of investment expenses no longer required If reported, carefully label and don t include in expense analysis No longer require disclosure of investment return components EXPENSE REPORTING Analysis by both nature and function provides information about Stewardship of resources Fixed and variable costs Report expenses on the face of the financial statements or in the footnotes by: Function Natural Classification Analysis (disaggregate function by nature) Requires disclosure of all expenses in one location (except netted investment costs) 9

10 EXPENSE REPORTING Requires qualitative disclosures about methods used to allocate costs among program and support functions Provides enhanced guidance on allocations from Management & General expenses: Direct Conduct of programs or other supporting activities requires allocation from M&G Direct Supervision of programs or other supporting activities requires allocation from M&G EXPENSE REPORTING Required to provide enhanced disclosures about the method(s) used to allocate costs among program and support functions Improved definition of management and general activities Provides guidance on the types of costs that can be allocated among program and/or support functions and those that should not be allocated 10

11 EXPENSE REPORTING Program Activities Supporting Activities A B C Program Subtotal Mgmt and General Fund Raising Supporting Subtotal Total Expense Salaries and benefits $7,400 $3,900 $1,725 $13,025 $1,130 $960 $2,090 $15,115 Grants to other 2, ,925 4,750 4,750 organizations Supplies and Travel 890 1, , ,155 Services and professional 160 1, , ,840 fees Office and occupancy 1, , ,528 Depreciation 1, , ,200 Interest Total expense $13,296 $8,649 $5,837 $27,782 $2,038 $2,150 $4,188 $31,970 LIQUIDITY AND AVAILABILITY OF RESOURCES Current disclosures provide limited information Feedback received on Exposure Draft was mixed: Support for qualitative disclosures Concern about implementation and audit costs Separated liquidity and availability into two separate objectives: Liquidity qualitative disclosure of liquidity risk and management Availability quantitative disclosure using information on the balance sheet 11

12 LIQUIDITY AND AVAILABILITY OF RESOURCES The FASB approved the following two objectives: Qualitative information - how an NFP manages its liquid available resources and its liquidity risk (in the notes) Quantitative information - communicates the availability of financial assets at the balance sheet date to meet cash needs for general expenditures within one year (on the face and/or in the notes) LIQUIDITY AND AVAILABILITY OF RESOURCES Requires enhanced disclosures to improve the usefulness of information to assess: Limits on the use of resources (liquidity, financial flexibility and allocation of resources) imposed by: The governing board Donors Methods to manage liquidity to meet near-term demands for cash Types of resources used to carry out operating activities Accounting policies and methods to allocate costs between program and supporting activities The effects of underwater endowment funds on spending policies and financial flexibility 12

13 LIQUIDITY AND AVAILABILITY OF RESOURCES Classified balance sheet provides quantitative disclosures on availability: Label current and non-current assets and liabilities Segregation of assets whose use is limited However, the balance sheet may contain nonfinancial assets Availability is affected by: The nature of the item External limits imposed by donors, grantors, law and contracts Internal limits imposed by Board decisions LIQUIDITY AND AVAILABILITY OF RESOURCES Quantitative disclosures could be provided in chart form: Financial assets, at year-end $234,410 Less: Contractual or donor-imposed restrictions making financial assets unavailable for general expenditure within one year: Restricted by donor with time or purpose restrictions (11,940) Subject to appropriation 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) Less amount set aside for liquidity reserve: (1,300) Financial assets available within one year to meet cash needs for general expenditures with one year $5,370 13

14 CASH FLOW STATEMENT Free choice between Direct and Indirect method as a good first step Hope it will incentivize more NFPs to choose the direct method for operating cash flows More useful Easier to understand Public universities and a fairly small number of NFPs that use the direct method, found it useful and not too costly CASH FLOW STATEMENT FASB contemplated requiring all NFP s to use the direct method Allows either the Direct Method or the Indirect Method in presenting operating cash flows Indirect reconciliation no longer required for Direct Method 14

15 Phase I Effective for Fiscal Year Phase II Net Asset Classes: Classification scheme Disclosure of board designated net assets Underwater endowments Expirations of capital restrictions Investment Return/Expenses: Expense by nature; analysis of expenses by function and nature Netting of investment expenses against investment return Disclosure of netted investment expenses Enhanced disclosures about cost allocations Operating Measures all other elements of proposal, including: Whether to require intermediate measure (s) Whether and how to define such measure(s), and what items should or should not be included in the measure(s) Alternative disaggregation approaches suggested by stakeholders Statement of Cash Flows: Realignment of certain items Operating measures: Modest improvements to disclosures about availability Liquidity/Availability: Quantitative disclosures about availability Qualitative disclosures about liquidity Consideration of alternatives suggested by stakeholders (e.g., classified balance sheet) Statement of cash flow: Methods of presenting operating cash flows (direct/indirect) EFFECTIVE DATE, EARLY ADOPTION, AND TRANSITION Effective Date: Calendar Year 2018, Fiscal Year Early Adoption: Permitted Transition: For year of adoption: apply all provisions. For comparative years presented: apply all provisions; can choose not to present: 1. Analysis of expenses by nature and function and/or 2. Disclosure about liquidity and availability of resources 15

16 Q&A Renée S. Graves, CPA, CGFM Partner Vicenti, Lloyd & Stutzman 2210 E. Route 66, Glendora, CA (626) x260 16

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