Not-for-Profit Accounting Changes are Coming: Are You Ready?

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Gregory Lloyd
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1 Not-for-Profit Accounting Changes are Coming: Are You Ready?

2 Today s Presenters Laura Roos Partner Moss Adams LLP Danielle O Connor Senior Manager Moss Adams LLP

3 Learning Objectives Understand the new requirements under the not-for-profit reporting standard and how to apply the standard to your organization. Identify the most significant and complex challenges in adopting the new financial statement standard. Determine policies, procedures, and systems that should be in place as a result of the standard. Identify implementation techniques that could assist in converting a notfor-profit s financial statements and footnotes to the new standard.

Presentation of Financial Statements of Not-for-Profit Entities (Topic 958) Effective dates: FISCAL YEARS BEGINNING AFTER 12/15/2017 For year ending 12/31/18 or 6/30/19 For interim periods after

4 Presentation of Financial Statements of Not-for-Profit Entities (Topic 958) Effective dates: FISCAL YEARS BEGINNING AFTER 12/15/2017 For year ending 12/31/18 or 6/30/19 For interim periods after adoption Can early adopt Transition to new ASU: APPLY ALL PROVISIONS TO YEAR OF ADOPTION FOR COMPARATIVE YEARS PRESENTED: Apply all provisions except can choose not to apply: - Expenses by natural and functional analysis - Disclosures on liquidity and availability of resources

5 ASU Changes New liquidity and availability disclosures required Requirement to report expenses by nature and function in one place, and describe the methods used to allocate among functional categories Net asset classes reduced from three classes to two Additional disclosures for underwater endowments Requirement to record net investment return Elimination of reconciliation of change in net assets to cash flows from operating activities when using the direct method

6 LIQUIDITY

7 Liquidity & Availability Required Disclosures: QUALITATIVE INFORMATION: Should explain how liquid resources available within 1 year of the date of the statement of financial position are managed QUANTITATIVE INFORMATION: The total financial assets available to meet cash needs within 1 year (from statement of financial position date) for general expenditures Definition: FINANCIAL ASSET: CASH, EVIDENCE OF AN OWNERSHIP INTEREST IN AN ENTITY, OR A CONTRACT THAT CONVEYS TO ONE ENTITY A RIGHT TO DO EITHER OF THE FOLLOWING: a. Receive cash or another financial instrument from a second entity a. Exchange other financial instruments on potentially favorable terms with the second entity.

8 Implementation 1. Determine the format to present the required quantitative disclosure of liquidity information Gross amounts of financial assets, then adjustments to arrive at available for expenditure amounts, or Net amounts available for expenditure 2. Identify all financial assets 3. Identify any limitations on availability for expenditure in the next 12 months, due to nature of the asset, external limitations imposed by donors, contractual agreements, and internal limitations (board designations) 4. Identify other resources available to support operational needs

9 Implementation (continued) 5. Determine whether presenting a classified statement of financial position (SOFP) could enhance or simplify the quantitative disclosure requirements (considering other effects elsewhere in the FS and notes) 6. Develop a board-approved formal policy for managing the organization s liquidity needs, including how often it s monitored and who s responsible for doing so 7. Draft the footnote disclosure describing how the entity manages its liquid assets and liquidity needs, including conditions under which certain board-designated net assets may be undesignated, access to the lines of credit or other financing sources, and any other information useful in understanding the entity s liquidity

Endowment Calculation 2017, American Institute for

15 Other Examples Simple Paragraph Format NFP B has $395,000 of financial assets available within one year of the statement of financial position date consisting of cash of $75,000, contributions receivable of $20,000, and short-term investments of $300,000. None of the financial assets are subject to donor or other contractual restrictions that make them unavailable for general expenditure within one year of the statement of financial position date. The contributions receivable are subject to time restrictions, but will be collected within one year. NFP B has a goal to maintain financial assets, which consist of cash and short-term investments, on hand to meet 60 days of normal operating expenses, which are, on average, approximately $275,000. As part of its liquidity management, NFP B invests cash in excess of daily requirements in various short-term, investments including certificates of deposits and short term treasury instruments. As more fully described in Note X, NFP B also has committed lines of credit in the amount of $20,000, which it could draw upon in the event of an unanticipated liquidity need. 2017, American Institute for CPAS. All rights reserved. Reprinted by permission.

Other Examples Table with total financial assets available 2017,

Other Examples Table with financial assets, less unavailable amounts 2017,

18 FUNCTIONAL EXPENSES

19 Requirements for Reporting Expenses All NFPs, including Voluntary Health and Welfare Entities, must present an analysis of expenses by function and nature in one location Present a separate statement of functional expenses Present a table in the notes Incorporate into the statement of activities CANNOT be a supplementary statement Include a description of the method(s) used to allocate costs among program and support functions

20 Expense Reporting FASB ASC Master Glossary: Program Services The activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill the purposes or mission for which the not-for-profit entity (NFP) exists. Those services are the major purpose for and the major output of the NFP and often relate to several major programs. Supporting Activities Supporting activities are all activities of a not-forprofit entity (NFP) other than program services. Generally, they include the following: Management general activities Fundraising activities Membership development activities

21 Expense Reporting Management and General Activities Activities that represent direct conduct or direct supervision of program or other supporting activities require allocation from management and general activities. Certain costs benefit more than one function and, therefore, shall be allocated. Examples: IT CEO/Executive director CFO Grant accounting & reporting

22 Implementation Expenses 1. Determine how to present all expenses by nature and function in one place statement of functional expenses OR statement of activities OR note to the financial statements 2. Develop (or refine) and document formal allocation methodologies to be used to allocate expenses among programs and supporting services 3. Draft the footnote disclosure of the methods utilized in the allocation process

26 NET ASSETS AND ENDOWMENTS

27 Net Assets Current GAAP Unrestricted Temp. Restricted Perm. Restricted Revised GAAP + Disclosures Without Donor Restrictions* Amount, purpose, and type of board designations** With Donor Restrictions* Nature and amount of donor restrictions * NFPs may choose to disaggregate further ** New disclosure requirement 2017, American Institute for CPAS. All rights reserved. Reprinted by permission.

28 Net Asset Classes Two net asset classes: 1. With Donor/grantor-imposed restrictions Perpetual (used to be permanent ) and temporary 2. Without Donor/grantor-imposed restrictions Includes board designated Disclosure Requirements Detail of what is included in net assets Emphasis on how and when net assets can be used Includes: - Specified purpose - Specified time - Perpetual (endowment) Quantitative and qualitative information about board designations Underwater endowments included in with donor restriction

29 Implementation Net Assets 1. Determine whether you will need to adjust your internal records (general ledger, Excel spreadsheet, or other tracking mechanism). 2. Determine the appropriate level of disaggregation of net assets you wish to present: net assets without donor restrictions those with donor restrictions that will be satisfied over time and/or by expenditure for a particular purpose those that will be maintained in perpetuity 3. Determine the appropriate level of disaggregation you wish to present on the face of the SOFP vs in the footnotes

30 Implementation Board-designations 1. Assemble information about the amounts and purposes of board designations of net assets without donor restrictions 2. Determine presentation of information either on the face of the SOFP or in the footnotes 3. Determine proper presentation of any board-designated endowment funds in the related endowment note 4. Consider the liquidity and availability footnote ensure language includes self-imposed limitations on board-designated funds, and the conditions under which such funds would be made available to meet expenditure needs

Example SOFP Presentation Minimum presentation required Alternative disaggregation

34 Underwater Endowments Now defined in Master Glossary Donor-restricted endowment fund for which the fair value of the fund at the reporting date is less than either the original gift amount or the amount required to be maintained by the donor or by law that extends donor restrictions The entire balance of the underwater endowment fund is reported in the with donor restrictions class of net assets

35 Underwater Endowments New disclosure requirements: The organization's policy for spending from underwater endowments Whether any actions taken during the fiscal period For each period a statement of financial position is presented, organizations must present (in the aggregate) for all underwater endowments: 1. Fair value of the endowments 2. Original gift amount or level required to be maintained by donor requirements or by law 3. Amount of the deficiency (1 less 2)

36 Implementation Endowments 1. Update endowment note to conform to the new two-net-asset categories presentation 2. For underwater endowments, determine: a) The fair value of underwater funds b) The original gift amount or level required by donor stipulations or law that extends donor restrictions c) The aggregate amount of the deficiencies of each underwater fund 3. Ensure the underwater portion of endowments is presented entirely in funds with donor restrictions

Example Endowment Footnote 2017, American Institute

Example Endowment Footnote (continued) 2017, American

39 Example of Reclassification of Opening Balances

40 INVESTMENT RETURN

41 Net Investment Return - Requirements Must present on a net basis, with all external and direct internal investment management and custodial expenses netted against the return Eliminates requirement to report investment income components and related expenses separately Direct internal expenses include the direct conduct or direct supervision of the strategic and tactical activities involved in generating investment return - Salaries, benefits, travel, and other costs associated with staff responsible for development and execution of investment strategy, including supervising, selecting and monitoring external managers - Excludes costs not associated with generating investment return, such as administrative management, contracts, and pooled-fund administration

Programmatic Investments are Excluded Programmatic investing: the activity of making loans or other investments that are directed at carrying out an NFP s purpose for existence rather than investing

42 Programmatic Investments are Excluded Programmatic investing: the activity of making loans or other investments that are directed at carrying out an NFP s purpose for existence rather than investing in the general production of income or appreciation of an asset (for example, total return investing). An example of programmatic investing is a loan made to lower-income individuals to promote home ownership.

43 Implementation Investment Expenses 1. Determine external and direct internal investment expenses. 2. Establish procedures to accumulate the investment expenses to be netted against investment return. 3. Draft footnote with net presentation including external and direct internal investment expenses as a component of net investment return.

44 Implementation Investment Expenses (continued) 4. Exclude external and direct internal investment expenses from the presentation of expenses by nature and function. 5. Draft endowment footnote to present investment return as: net of investment income (interest and dividends), net appreciation or depreciation, and direct internal and external investment expenses. 6. Consider other areas in the financial statements that will need to be updated fair value footnote and level 3 rollforward.

45 The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. This information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although this information may have been prepared by professionals, it should not be used as a substitute for professional services. If legal, accounting, investment, or other professional advice is required, the services of a professional should be sought. Assurance, tax, and consulting offered through Moss Adams LLP. Wealth management offered through Moss Adams Wealth Advisors LLC. Investment banking offered through Moss Adams Capital LLC.

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