9/11/2017. Agenda. What Drove the Change. Not-for-Profit Financial Statements: Changes are Coming!

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1 Not-for-Profit Financial Statements: Changes are Coming! Presented by Tony Smith, CPA Beth Allen, CPA GreerWalker LLP Agenda Understanding what drove the change for an overhaul of not for profit financial statements What not for profits are involved? What are the changes? Implementation suggestions What Drove the Change Not-for-Profit Advisory Committee Created in 2009 Standing committee that works closely with FASB in an advisory capacity members who demonstrate: Keen interest in and knowledge of financial accounting and reporting matters Experience working within the NFP sector Commitment to improving financial reporting for users of financial statements Ability to provide input on a wide variety of financial reporting matters 1

2 Who? And What? Generally receive significant contributed resources Includes charities, foundations, private colleges and universities, nongovernmental health care providers, cultural institutions, religious organizations, and trade associations, etc. Will improve usefulness of the information provided to stakeholders, reduce the complexity of reporting, or both Financial Statement Areas Affected All!! Statement of Financial Position Statement of Activities Statement of Functional Expense Statement of Cash Flows Footnote Disclosures Where are we Now? ASU was issued in August 2016 Current decisions 2

3 Financial Statements of Not-for-Profit Organizations (ASU ) Improve presentation of financial statements for not-for-profit entities Goal to improve the usefulness of the information provided to stakeholders Reduce the complexity Statement of Financial Position and Related Disclosures Net Asset Classification & Related Disclosures The temporarily and permanently restricted classes of net assets will be combined into net assets with donor restrictions. Unrestricted net assets will be renamed net assets without donor restrictions. 3

4 Net Asset Classification & Related Disclosures (cont d.) Consistent with the current GAAP requirement, NFPs will continue to provide relevant information about the nature and amounts of donor restrictions on net assets (either on the face of the statement of financial position or in notes). NFPs will be required to disclose the amounts and purposes of board-designated net assets either on the face of or notes to financial statements. Classifying Net Assets Net Assets Unrestricted Temporarily Restricted Permanently Restricted Without Donor Restrictions With Donor Restrictions Endowments Net Assets With Donor Restrictions Net Assets Without Donor Restrictions Permanent Endowment Board-designated Endowment Fund Term Endowment 4

5 Net Asset Classification & Related Disclosures (cont d.) The aggregate amount by which endowment funds are underwater will be classified within net assets with donor restrictions rather than the current unrestricted category. NFPs will be required to disclose the following for endowment funds that are underwater, if any: The NFP s policy to either reduce expenditure or not spend from underwater endowment funds The aggregate fair value The aggregate original endowment gift amount or level required by donor stipulations or by law to be maintained The aggregate of the amount of the deficiencies. Net Asset Classification & Related Disclosures (cont d.) In the absence of explicit donor instructions, NFPs will be required to reclassify net asset with donor restrictions that are for the acquisition or construction of long-lived asset as net assets without donor restrictions when the long-lived asset is placed-in-service, eliminating the alternative of recognizing the expiration of the donor restriction over-time (as the asset is used/consumed). Information Useful in Assessing Liquidity The Standard clarifies the objectives of providing information useful in assessing an NFP s liquidity and the type of information that financial statements are capable of providing for that purpose. The Board decided to require NFPs to provide Qualitative information Quantitative information 5

6 Assessing Liquidity Qualitative information in the notes that communicates how an NFP manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet date Quantitative information either on the face of the balance sheet 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 balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date. Availability of a financial asset may be affected by (a) its nature, (b) external limits imposed by donors, laws, and contracts with others, and (c) internal limits imposed by governing board decisions. Statement of Financial Position Example NFP Charitable Entity June 30, 20X1 Assets: Liabilities: Cash and cash equivalents $ 4,575 Accounts payable $ 2,570 Accounts and interest receivable 2,130 Grants payable 875 Inventories and prepaid expenses 610 Annuity obligations 1,685 Contributions receivable 3,025 Long-term debt 5,500 Short-term investments 1,400 Total Liabilities 10,630 Assets restricted to investment 5,210 PP&E 61,700 Net Assets: Long-term investments 218,070 Without donor restrictions 92,677 With donor restrictions 193,413 Total Net assets 286,090 Total Assets $ 296,720 Total Liabilities and Net Assets $ 296,720 Statement of Activities 6

7 Investment Return NFPs will be required to present investment return net of external and direct internal investment expenses. The Board directed the staff to provide implementation guidance to illustrate what activities constitute direct internal investing activities. NFPs will not be required to disclose internal salaries and benefits that are netted against investment return. NFPs will be permitted but no longer required to disclose any investment expenses that are netted against investment return. NFPs will no longer be required to display the investment return components in the endowment net assets rollforward. Investment Return (cont.) NFPs will not be required to include external and direct internal investment expenses that have been netted against investment return in the functional expense analysis. The Board directed the staff to add implementation guidance for the reporting of net investment return for NFPs that present a performance indicator. Statement of Functional Expenses and Related Disclosures 7

8 Expenses by Function & Nature NFPs will be required to disclose expenses by natural classification. Functional Expenses Operating Expenses Function (required) Nature (required) Non- Operating Nature (required) Function (optional) Cost Allocation & Improved Guidance on Management & General NFPs will be required to provide enhanced disclosures about the method(s) used to allocate costs among program and support functions. The Board affirmed the proposal to refine the FASB Accounting Standards Codification definition of management and general activities and directed the staff to provide additional implementation guidance to better depict the types of costs that can be allocated among program and/or support functions and those that should not be allocated. 8

9 Functional Expenses Program Total Supporting Activities Management and General Fundraising Supporting Operating Nonoperating Expenses Expenses Total Expenses Salaries and benefits $ 13,025 $ 1,130 $ 960 $ 2,090 $ 15,115 $ - $ 15,115 Grants to other organizations 4,750 4,750 4,750 Supplies and travel 2, ,155 3,155 Services and professional fees 2, ,840 2,840 Office and occupancy 2, ,528 2,528 Depreciation 2, ,200 3,200 Interest Total Expenses $ 27,400 $ 2,038 $ 2,150 $ 4,188 $ 31,588 $ 382 $ 31,970 Statement of Cash Flows Statement of Cash Flows NFPs will no longer be required to provide the indirect reconciliation when choosing the direct method of presenting operating cash flows NFPs will be allowed to use EITHER the DIRECT method or INDIRECT method of presenting operating cash flows 9

10 Transition & Effective Date Retrospective application for all years presented Can omit Analysis of expenses by functional and natural classification Disclosures around liquidity Effective for fiscal years beginning AFTER December 15, 2017 For many it will be for reports dated June 30, 2019 Early adoption is permitted Tips for Adoption From an early adopter Adoption Time Consuming Rebuild reports Reclassifications Could be Challenging Don t Delay most substantial changes in reporting in more than 20 years 10

11 Classifying Net Assets Reduction of net asset classes from 3 -> 2 In theory should be easy to consolidate In practice it was time consuming Good idea to do a thorough review of the records to make sure they were originally classified correctly Verification of donor restrictions and ability to use unrestricted dollars in the best way for the organization Functional Expense Statement Now a required statement If new to organization, use the same methodology as used to prepare the form 990 Allocates expenses among program management, general and fundraising Generally use analysis of employee time spent serving each category Liquidity Disclosure Requires disclosure (face of statements or footnotes) regarding: Qualitative information about how the organization manages its liquid available resources Quantitative information on the availability of assets to meet cash needs for general expenditure within one year Very time consuming 11

12 Cash Flow Direct vs. Indirect Either is permitted Need to consider which method would provide more information to stakeholders Should an organization move to direct, consider the need for tracking and reporting those cash flows Investment Earnings Requires reporting net investment returns Simplified information to donors Organizations should have both the investment income and the fees, so implementation should be relatively simple Underwater Amounts Underwater amounts are required to be reported as Net Assets with Donor Restriction It was often practice to report these as unrestricted As long as the underwater amounts have been tracked, implementation should be relatively simple 12

13 Phase 2 Phase 2 (Not Complete) Operating measure: All other elements of the proposal not currently addressed 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) Statement of Cash Flows: Realignment of certain line items Other Accounting Standard Updates 13

14 Revenue from Contracts with Customers (ASU ) New revenue recognition model replaces virtually all existing revenue guidance Impacts public, private and not-for-profit entities New qualitative and quantitative disclosure requirements ASU extended the effective date for all entities by one year Nonpublic entities periods beginning after December 15, 2018 Revenue Recognition Comprehensive framework for determining how much revenue to recognized and when it should be recognized Simplifying the Issuance of Debt Costs (ASU ) Previously reported as a deferred charge (an asset) Now reported as a direct deduction of the related debt liability Recognition and measurement guidance not affected Effective for nonpublic entities periods beginning after December 15, 2016 Applied retrospectively to all periods presented 14

15 Leases (ASU ) Previously, the recognition, measurement, and presentation of expenses and cash flows arising from a lease for lessees primarily depended on its classification as a finance (capital) lease or operating lease. Now lessees will recognize most leases onbalance sheet Effective for nonpublic entities periods beginning after December 15, 2019 Early adoption permitted Leases Operating leases: Right-to-use asset and lease liability, initially measured at the present value of the lease payment Recognize a single lease cost, calculated to the cost of the lease is allocated over the lease term on straight line basis Classify all payments within operating activities on the statement of cash flows Questions? Beth Allen, CPA GreerWalker LLP beth.allen@greerwalker.com Tony Smith, CPA GreerWalker LLP tony.smith@greerwalker.com 15