WELCOME TO THE AUDITING AND ACCOUNTING UPDATE

Transcription

1 WELCOME TO THE AUDITING AND ACCOUNTING UPDATE JANUARY 26,

2 Welcome and introduction You say goodbye and I say hello 2 2

3 HFMA A&A UpdaTe Presented by: Michael F. Garczynski, CPA, CGMA Partner Health Care Services Arnett Carbis Toothman LLP Jordan P. Pitzer, CPA Supervisor Health Care Services Arnett Carbis Toothman LLP 3

4 AccounTing STandards UpdaTe ASU : Definition of a Public Business Entity ASU No : Statement of Cash Flows (Topic 230): Restricted Cash ASU : Compensation Retirement Benefits ASU : Plan Accounting: Defined Benefit Pension Plans ASU : Intangibles Goodwill and Other 4 4

5 AccounTing STandards UpdaTe ASU : Revenue from Contracts with Customers ASU : Leases ASU : Financial Instruments ASU : Credit Losses ASU : Presentation of Financial Statements of Notfor Profit Entities 5 5

6 ASU : DefiniTion of a Public Business EnTiTy Amends ASC Master Glossary One definition of public business entity for future use in U.S. GAAP Does not affect existing U.S. GAAP requirements Used by FASB, PCC, and EITF for scope of future financial accounting and reporting guidance Used to identify types of business entities excluded from scope of private company decision making framework 6 6

7 ASU : DefiniTion of a Public Business EnTiTy Public Business Entity A public business entity is a business entity meeting any one of the criteria below. Neither a notfor profit entity nor an employee benefit plan is a business entity. a. It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing). b. It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC. c. It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer. d. It 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. e. It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion. An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity s filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC. 7 7

8 ASU No : STaTemenT of Cash Flows (Topic 230): ResTricTed Cash Key provisions: The FASB issued final guidance to clarify how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. The guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. 8 8

9 ASU No : STaTemenT of Cash Flows (Topic 230): ResTricTed Cash 9 9

10 ASU No : STaTemenT of Cash Flows (Topic 230): ResTricTed Cash 10 10

11 ASU No : STaTemenT of Cash Flows (Topic 230): ResTricTed Cash Retrospective application Effective dates: Public business entities Years beginning after December 15, 2017 Calendar YE December 31, 2018 Fiscal YE June 30, 2019 All other entities Years beginning after December 31, 2018 Calendar YE December 31, 2019 Fiscal YE June 30,

12 ASU No : CompensaTion - ReTiremenT BenefiTs ASU No , Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, was issued in March 2017 to address diversity in presenting periodic pension and postretirement benefit cost Update also addresses stakeholder feedback concerning appropriateness of presenting service cost along with other components of net benefit costs: Components of expense have different drivers, impacting their predictability Update applies to all employers, including not for profits, that offer defined benefit and post retirement benefit plans accounted for under Topic

13 Key Provisions of ASU No Entities will present defined benefit and post retirement benefit cost as follows: Service costs are to be presented in the same line item(s) as other compensation costs arising from services rendered by pertinent employees Only service cost would be eligible for capitalization under applicable accounting guidance (i.e., inventory or PP&E) Other components of net benefit costs to be presented outside of income from operations: If other components are presented in a separate line item, it should be labeled as such Entity should disclose the line where other components are presented if not presented separately 13 13

14 EffecTive date of ASU No and TransiTion ASU No is effective as follows: Public entities Fiscal years beginning after December 15, 2017, including interim periods Non public entities Fiscal years beginning after December 15, 2018, and interim periods one year later Early adoption permitted Transition approach for ASU No : Separate presentation of service cost will be applied retrospectively Capitalization of service cost to be applied prospectively Practical expedient Entities can use such cost information appearing in benefit plan footnote for disaggregation if having difficulty obtaining data for prior period presentation Entity should disclose use of the practical expedient 14 14

15 ASU No : Plan AccounTing: Defined BenefiT Pension Plans Update issued in February 2017 Addresses stakeholder concerns about adequacy of disclosures related to investments in master trusts by employee benefit plans Applies to investments in master trusts by the following plans: Defined benefit pension plans (Topic 960) Defined contribution benefit plans (Topic 962) Health and welfare benefit plans (Topic 965) Master trust defined as follows: Trusts for which a regulated financial institution, such as a bank, serves as a trustee or custodian, and in which assets of more than one plan, sponsored by a single or group of employers under common control, are held 15 15

16 Required Disclosures Under ASU No For each master trust in which a plan holds an interest, assets are presented as a single line item in the following: Statement of net assets available for benefits Statement of changes in net assets available for benefits For Topic 960 and 962 plans with divided ownership interest in the master trust, plans must disclose the following: Dollar amount of their interest by general investment type Master trust s balance by each type of investment (currently required) Disclose master trust s other assets and liability balances and the dollar value of the plan s interest in each of those balances Eliminate redundant disclosures found in 401(h) plan 16 16

17 EffecTive DaTe and TransiTion of ASU No Update is effective for fiscal years beginning after December 15, 2018 Early adoption is permitted Update should be applied on a retrospective basis to all plan financial statements for each year presented 17 17

18 ASU No : InTangibles - Goodwill and OTher Update issued as part of FASB s simplification initiative For entities, including not for profits, which have not already adopted ASU No (the PCC alternative with regard to goodwill impairment and amortization), this Update eliminates the need for the Step 2 test when testing for impairment: Step 2 test, if applicable, requires reallocation of reporting unit s fair value of assets and liabilities, including goodwill, at the impairment testing measurement date, with subsequent comparison of resultant goodwill to current carrying value of the goodwill Goodwill impairment will be determined at the reporting unit level and be the difference between the reporting unit s carrying value and its fair value, determined at the measurement date, up to the amount of goodwill recorded by the reporting unit 18 18

19 OTher Provisions and EffecTive DaTe of ASU No Requirement for entity to test for goodwill impairment when reporting unit has zero or negative carrying value is eliminated Update to be applied prospectively, as follows: Public entities which are SEC registrants Goodwill impairment tests performed in fiscal years beginning after December 15, 2019 Non SEC registrant public entities Such tests performed in fiscal years beginning after December 15, 2020 Private entities Such tests performed in fiscal years beginning after December 15, 2021 Early adoption permitted for impairment tests performed after January 1,

20 ASU : Revenue from ConTracTs with CusTomers Effective Dates Public business entities, certain not for profit entities*, and certain employee benefit plans Years beginning after December 15, 2017 Calendar YE December 31, 2018 Fiscal YE June 30, 2019 *Certain not for profit entities are those that have issued or are a conduit bond obligor for securities that are traded, listed, or quoted on an exchange or an over the counter market. All other entities Years beginning after December 15, 2018 Calendar YE December 31, 2019 Fiscal YE June 30,

21 ASU : Revenue from ConTracTs with CusTomers Core Principle 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. Five step model: Identify the contract with a customer (Step 1) Identify the separate performance obligations in the contract (Step 2) Determine the transaction price (Step 3) Allocate the transaction price to the separate performance obligations (Step 4) Recognize revenue when (or as) each performance obligation is satisfied (Step 5) 21 21

22 ASU : Revenue from ConTracTs with CusTomers IDENTIFIED REVENUE RECOGNITION IMPLEMENTATION ISSUES # Implementation Issue 1 Consideration of the following regarding self pay balances Application of step 1 (determine if there is a contract) and step 3 (determine the transaction price) for health care services provided to self pay patients, including uninsured patient balances and self pay patient balances arising from co payments and deductibles. This implementation issue will discuss evaluating whether a contract exists and what (including consideration of implicit price concessions) the transaction price is to arrangements for health care services provided to self pay patients and balances arising from co payments and deductibles. 2 Application of the portfolio approach to contracts with patients 3 Identifying and satisfying the performance obligation(s) and recognizing the monthly/periodic fees and nonrefundable entrance fees under Type A or life care contracts for continuing care retirement communities 4 Recognizing a CCRC s performance obligation(s) to provide future services and use of facilities to residents 5 Significant financing component CCRC contracts and patient and third party payor amounts in arrears 6 Disclosure requirements 7 Accounting for contract costs 8 Consideration of FASB ASC 606, Revenue from Contracts with Customers, for third party settlement estimates 9 Bundled Payments 10 Performance Obligations 22 22

23 ASU : Revenue from ConTracTs with CusTomers AICPA Health Care Revenue Recognition Task Force Implementation Issues Finalized Issue 8 1: Application of Step 1 and Step 3 to Self Pay Patients Issue 8 2: Application of the Portfolio Approach to Contracts with Patients Issue 8 6: Presentation and Disclosure Out for Exposure Issue 8 8: Third Party Settlements Issue 8 9: Bundled Payments Issue 8 10: Performance Obligations Submitted to FinREC Issue 8 3: CCRC Entrance Fees Under Type A Or Life Care Contracts Issue 8 4: CCRC Recognizing Future Services And Use Of Facilities Issue 8 5: CCRC Significant Financing Component Issue 8 7: Accounting for Contract Costs 23 23

24 ASU : Revenue from ConTracTs with CusTomers Health Care Revenue Recognition Implementation Issue 8 1: Application to Self Pay Patient Accounts Implicit price concession Uninsured patient with uninsured discount Self pay patient charges: $40,000 Provider has a self pay discount policy that provides a 75% discount off charges to uninsured patients Expected collections based on historical experience: 10% ($1,000) Charity care still does not qualify for recognition as revenue Charges $ 40,000 Charges $ 40,000 Discount $ (30,000) Explicit price concession $ (30,000) NPSR before bad debt $ 10,000 Implicit price concession $ (9,000) Bad Debt $ (9,000) NPSR $ 1,000 NPSR $ 1,000 Bad Debt $ 24 24

25 ASU : Revenue from ConTracTs with CusTomers Health Care Revenue Recognition Implementation Issue 8 2: Application of the Portfolio Approach Key take aways: Contracts must have similar characteristics in order to be grouped together. Potential considerations in grouping contracts include: Type of service (inpatient, outpatient, skilled nursing, elective, non elective, etc.) Type of payor (insurance/managed care, governmental payors, uninsured) Type of patient responsibility (uninsured self pay, co pay/deductible after insurance, high deductible/coinsurance) Whether contracts are entered into at or near the same time Portfolio data must be sufficient (historical trends) and homogeneous (similar payment rates/methodologies) Portfolio approach may be appropriate for some, but not all, of a health care provider s patient population If portfolio approach is not applied, new revenue model would be applied on a contract bycontract basis 25 25

26 ASU : Revenue from ConTracTs with CusTomers Health Care Revenue Recognition Implementation Issue 8 6: Presentation and Disclosure An entity shall disclose qualitative and quantitative information about all of the following: Its contracts with customers The significant judgments, and changes in the judgments, made in applying the guidance to those contracts Any assets recognized from the costs to obtain or fulfill a contract with a customer 26 26

27 ASU : Revenue from ConTracTs with CusTomers Disaggregation of revenue Qualitative and quantitative* disaggregation of revenue into categories that depict how revenue and cash flows are affected by economic factors Explain the relationship with segment disclosures Information about contract balances Opening and closing balances Amount of revenue recognized from contract liabilities Explanation of significant changes in contract balances Performance obligations When the entity typically satisfies PO Significant payment terms Retroactive settlements with 3 rd party payors * Disclosure requirements in red are not required for nonpublic entities 27 27

28 ASU : Revenue from ConTracTs with CusTomers Remaining performance obligations Transaction price allocated to remaining performance obligations Quantitative or qualitative explanation of when amounts will be recognized as revenue Significant judgments Method used to recognize performance obligation over time Judgments to determine the point in time that revenue is recognized Methods and inputs to determine the transaction price Costs to obtain or fulfill a contract Quantitative disclosures * Disclosure requirements in red are not required for nonpublic entities 28 28

29 ASU : Revenue from ConTracTs with CusTomers Health Care Revenue Recognition Implementation Issue 8 10: Performance Obligations Performance obligations are identified if each promise to the customer is either a good or service (or a bundle of goods or services) that is distinct or a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer

30 ASU : Revenue from ConTracTs with CusTomers Example 1 Performance Obligations Inpatient Health Care Services Goods and services provided during an inpatient stay should be accounted for as a single performance obligation The inpatient procedure should be accounted for over time (versus point in time) because the patient simultaneously received and consumed the benefits provided by the hospital 30 30

31 ASU : Revenue from ConTracTs with CusTomers Example 2A Performance Obligations Outpatient Health Care Services Discrete Physician Visit Goods and services provided during this exam represent a single performance obligation, even though the underlying tasks performed in each patient s annual physical exam will vary by patient. Because the patient simultaneously received and consumed the benefits of the services provided in the physical exam, the revenue should be recognized over time; however, in this case, because all of the goods and services were provided the same day the exam was performed (including the lab services), the revenue recognition would be the same point in time 31 31

32 ASU : Revenue from ConTracTs with CusTomers Example 2B Performance Obligations Outpatient Health Care Services Physical Therapy In this case, each visit would be a separate performance obligation based on the fact that the patient has the unilateral right to terminate the contract after each visit with no penalty or compensation due 32 32

33 ASU : Revenue from ConTracTs with CusTomers Example 3 Performance Obligations Skilled Nursing Facility Services Each day that Resident A receives services represents a separate contract and performance obligation, based on the fact that Resident A has the unilateral right to terminate the contract after each day with no penalty or compensation due 33 33

34 ASU : Revenue from ConTracTs with CusTomers Financial Statement Impact Decrease in patient service revenue Decrease in bad debts Increased disclosures in financial statements Preparing for the ASU Review contracts and allowance models Determine potential groups for contracts Update budgets and forecasts when appropriate 34 34

35 ASU : Leases Effective for public business entities and certain not for profit entities* beginning after December 15, Calendar Year End December 31, 2019 Fiscal Year End June 30, 2020 * Certain not for profit entities are those that have issued or are a conduit bond obligor for securities that are traded, listed, or quoted on an exchange or an over the counter market. For all other entities it is effective for annual periods beginning after December 15, Calendar Year End December 31, 2020 Fiscal Year End June 30,

36 ASU : Leases Main provisions of the ASU FASB concluded that the economics of leases can vary for a lessee and that such economics should be reflected in the financial statements Recognition of lease assets and liabilities for leases classified as operating leases A lessee should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease Retains the differentiation between finance leases and operating leases that impacts the balance sheet, income statement, and cash flows 36 36

37 ASU : Leases Right of Use Model Lessor Right of use asset Lease payments Lessee A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration 37 37

38 ASU : Leases Definition of a Lease Lease contracts in the scope of Topic 842 involve An identified asset The right to control the use during the lease term That is explicitly or implicitly specified Supplier has no practical ability to substitute and would not economically benefit from substituting the asset Decision making authority over the use of the asset The ability to obtain substantially all benefits from the use of the asset 38 38

39 ASU : Leases Scope Relief Short Term Lease Exemption for Lessees For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities, but rather recognize expense ratably over 12 month period of time 39 39

40 ASU : Leases Lessee Model Current U.S. GAAP Topic 842 Capital (Finance) Leases Finance Leases Operating Leases Operating Leases All leases are recognized on the Lessee s balance sheet Need to evaluate at the inception of the contract 40 40

41 ASU : Leases Identifying a Lease ASU decision tree as to whether or not a contract is or contains a lease: Is there an identified asset No Not a lease Yes Go to next step Does the customer have the right to obtain substantially all of the economic benefits from the use of the asset throughout the term No Not a lease Yes Go to next step 41 41

42 ASU : Leases Identifying a Lease ASU decision tree as to whether or not a contract is or contains a lease: Does the customer or the supplier have the right to direct how and for what purpose the identified asset is used throughout the term Supplier Not a lease Customer Lease If neither (i.e. how and for what purpose the asset is predetermined) Go to next step 42 42

43 ASU : Leases Identifying a Lease ASU decision tree as to whether or not a contract is or contains a lease: Does the customer have the right to operate the asset throughout the period of use without the supplier having the right to change the operating instructions Yes Lease No Go to next step 43 43

44 ASU : Leases Identifying a Lease ASU decision tree as to whether or not a contract is or contains a lease: Did the customer design the asset (or specific aspects of the asset) in a way that determined how and for what purpose the asset will be used throughout the term Yes Lease No Not a lease 44 44

45 Lessee AccounTing Overview Balance Sheet Income Statement Cash Flow Statement Finance Leases Right of use asset Lease liability Amortization expense Interest expense Cash paid for principal and interest payments Operating Leases Right of use asset Lease liability Single lease expense on a straight line basis Cash paid for lease payments 45 45

46 Lessor AccounTing Overview Balance Sheet Income Statement Cash Flow Statement Direct Financing & Sales Type 1 Net investment in the lease Interest income and any selling profit on the lease 1 Cash received for lease payments Operating Continue to recognize underlying asset Lease income, typically on a straight line basis Cash received for lease payments 1 Selling profit recognized at lease commencement for sales type leases, over the lease term for direct financing leases (note: selling profit is rare for direct financing leases) 46 46

47 Lease ClassificaTion CriTeria Would account for as a financing lease when the lease... Transfers ownership by end of lease term Includes a purchase option that the lessee is reasonably certain to exercise Term is for the major part of the remaining economic life of the underlying asset Present value of lease payments and the present value of any residual value guarantees amounts to substantially all of the fair value of the underlying asset; or The asset is of such specialized nature that it would have no alternative use to the lessor at the end of the lease term 47 47

48 Lease ClassificaTion CriTeria The required bright line rules in current U.S. GAAP will be eliminated, but "When determining lease classification, one reasonable approach to assessing the criteria [...] would be to conclude both of the following: 75 % or more of the remaining economic life of the underlying asset is a major part of the remaining economic life of the underlying asset 90 % or more of the fair value of the underlying asset amounts to substantially all the fair value of the underlying asset" 48 48

49 ASU : Leases Lessee Accounting Recognition Finance Leases Lessee effectively obtains control of underlying asset Asset/Liability measured at present value of the lease payments Recognize interest on the lease liability separately from the amortization of the leased asset Classify repayments of principal portion of the lease liability within financing activities on SOCFs and payments of interest on the lease liability and variable lease payments within operating section of SCOFs 49 49

50 ASU : Leases Lessee Accounting Recognition Operating Leases Lessee does not effectively obtain control of asset Asset/Liability measured at present value of the lease payments Recognize a single lease cost, calculated so that the cost of the lease is allocated over the term of the lease on a straight line basis Classify all cash payments within operating activities section of the SOCFs 50 50

51 ASU : Leases Initial Measurement Present value of lease payments + Initial direct costs Use discount rate implicit in lease if unavailable, use incremental borrowing rate Initial direct costs Commissions and/or payments made to an existing tenant to terminate lease Does not include costs that would have been incurred regardless of obtaining lease or not Lease incentives are a reduction of asset 51 51

52 ASU : Leases Financial Statement Impact Increase in assets and liabilities Note: ASU states that finance and operating leases cannot be in same line item on balance sheet. Increased disclosure in financial statements Practical Expedients for Implementation An entity need not reassess whether any expired or existing contracts are leases or contain leases. An entity need not reassess the lease classification for any expired or existing leases. Operating leases are operating leases. Capital leases are financing leases. An entity need not reassess initial direct costs for any existing leases. May also elect, which must be applied consistently by an entity to all of its leases, to use hindsight in determining the lease term and assessing impairment of the entity s right of use assets

53 ASU : Leases Assets Before After Current assets Cash and equivalents 1,260 1,260 Accounts Receivable, net 4,590 4,590 Inventory 5,830 5,830 Other current assets Total current assets 12,360 12,360 Noncurrent assets Property and equipment 17,820 17,820 Accumulated depreciation (6,780) (6,780) Property and equipment, net 11,040 11,040 Right of use assets 12,540 Intangible assets 1,960 1,960 Goodwill 1,370 1,370 Total Assets 26,730 39,270 Current ratio Percentage change 14% Liabilities and equity Before After Current liabilities Accounts payable and other 5,250 5,250 Lease liabilities 870 Total current liabilities 5,250 6,120 Noncurrent liabilities Long term debt 7,560 7,560 Lease liabilities 11,670 Deferred taxes 1,190 1,190 Shareholders' equity Common stock Additional paid in capital 6,210 6,210 Retained earnings 6,420 6,420 Total shareholders' equity 12,730 12,730 Total liabilities and equity 26,730 39,270 Debt to equity ratio Percentage change 90% 53 53

54 ASU : Leases Preparing for the ASU Compile listing, including terms and periods, of current operating leases Compile listing, including terms and periods, of contracts that could contain leases Consider leasing terms of any new leases now Consider any impact on debt covenants 54 54

55 ASU : Financial InsTrumenTs Effective dates for public business entities: Years beginning after December 15, 2017 Calendar YE December 31, 2018 Fiscal YE June 30, 2019 For all other entities including not for profit entities and employee benefit plans: Years beginning after December 15, 2018 Calendar YE December 31, 2019 Fiscal YE June 30,

56 ASU : Financial InsTrumenTs All equity investments will be measured at FV through excess of revenue over expenses Equity investments that are accounted for under the equity method or result in consolidation of an investee are not included No longer classify equity investments as trading or other than trading No longer recognize unrealized gains and losses in other changes in net assets No longer use the cost method of accounting for equity securities that do not have readily determinable FV s Measure at cost, less impairment, plus or minus changes resulting from observable price changes in similar investments of the same issuer 56 56

57 ASU : Financial InsTrumenTs Cost method investments (including other ownership interests such as partnerships, unincorporated joint ventures, and LLCs) to be measured at fair value with the changes in the fair value being recognized through net income Change in fair value measured through earnings If fair value is not readily determinable, entities will need to search for observable price changes Entities will need to perform a qualitative assessment for each reporting period to identify impairment Enhanced disclosures about those investments are required The amendments improve financial reporting by providing relevant information about an entity s equity investments and reducing the number of items that are recognized in other changes in net assets Does not impact investments valued at net asset value (NAV) 57 57

58 ASU : Financial InsTrumenTs Identifying Observable Price Changes To identify observable price changes, an entity should consider relevant transactions that occurred on or before the balance sheet date that are known or can reasonably be known. To identify price changes that can reasonably be known, the entity should make a reasonable effort (that is, without expending undue cost and effort) to identify any observable transactions that it may not be readily aware of. The entity need not conduct an exhaustive search for all observable price changes

59 ASU : Financial InsTrumenTs Relevant Definitions Equity Security Any security representing an ownership interest in an entity (for example, common, preferred, or other capital stock) or the right to acquire (for example, warrants, rights, forward purchase contracts, and call options) or dispose of (for example, put options and forward sale contracts) an ownership interest in an entity at fixed or determinable prices. Fair Value The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Orderly Transaction A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (for example, a forced liquidation or distress sale)

60 ASU : CrediT Losses (Topic 326) Effective dates for public business entities: Years beginning after December 15, 2019 Calendar YE December 31, 2020 Fiscal YE June 30, 2021 For all other entities including not for profit entities and employee benefit plans: Years beginning after December 15, 2020 Calendar YE December 31, 2021 Fiscal YE June 30,

61 ASU : CrediT Losses (Topic 326) Current Expected Credit Loss (CECL) Model Move from incurred loss to expected loss methodology, which: reflects expected credit losses requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Considers past history, current conditions, and reasonable expectations about foreseeable future Entities will no longer wait until credit loss is probable to record loss 61 61

62 ASU : CrediT Losses (Topic 326) CECL Model not expected to result in significant impact on most entities other than financial institutions For NFPs, would apply to trade receivables (such as patient receivables), loans receivable, and lease receivables, but not to pledges receivable Likely already taking CECL considerations into account for such assets 62 62

63 ASU : CrediT Losses (Topic 326) Applicability Entities holding financial assets and net investments in leases that are not accounted for at fair value (i.e., accounted for at amortized cost): Loans Debt securities Trade receivables Net investments in leases Off balance sheet credit exposures Reinsurance receivables Other financial assets not excluded from the scope that have the contractual right to receive cash 63 63

64 ASU : CrediT Losses (Topic 326) Assets measured at amortized cost Financial assets measured at amortized cost are to be presented at the net amount expected to be collected Entities should use an allowance account to present net carrying value, not write down individual asset Statement of Operations recognizes the following in excess of revenue over expenses: Credit losses for newly recognized financial assets Changes of expected credit losses previously recorded 64 64

65 ASU : PresenTaTion of Financial STaTemenTs of NoT-for- ProfiT EnTiTies Effective dates: Years beginning after December 15, 2017 Calendar YE December 31, 2018 Fiscal YE June 30,

66 ASU : PresenTaTion of Financial STaTemenTs of NoT-for- ProfiT EnTiTies History of the NFP Financial Statements Project The FASB originally initiated a project as part of its ongoing review of GAAP standards to ensure they continue to meet the needs of a changing financial reporting environment. For the most part, the current reporting guidance was established in 1993, when the Board issued FASB Statement No. 117, Financial Statements of Not for Profit Organizations. The FASB s Not for Profit Advisory Committee (NAC) and other stakeholders told the Board that while existing standards for financial statements of NFPs are sound, they could be improved to provide better information to donors, creditors, and other users of financial statements

67 ASU : PresenTaTion of Financial STaTemenTs of NoT-for- ProfiT EnTiTies History of the NFP Financial Statements Project In April 2015, the FASB issued a proposed ASU intended to improve existing standards for financial statement presentation of NFP organizations. FASB redeliberated the exposure draft into two phases. In August 2016, the FASB issued ASU No , Presentation of Financial Statements of Not For Profit Entities. Impacts Not for Profit Entities (Topic 958) and Health Care Entities (Topic 954)

68 ASU : PresenTaTion of Financial STaTemenTs of NoT-for- ProfiT EnTiTies Improvements to NFP Financial Reporting The first of a two phase project, the amendments in FASB ASU are intended to make immediate improvements that address: Complexity in net asset classification Clarity of information regarding liquidity and availability of cash Transparency in reporting of financial performance measures Consistency in reporting expenses by function and nature Utility of the statement of cash flows 68 68

69 ASU : PresenTaTion of Financial STaTemenTs of NoT-for- ProfiT EnTiTies Who Will Be Affected by ASU ? The ASU will affect substantially all NFPs as well as creditors, donors, grantors, and others that use their financial statements. Those NFPs typically include, among others: Nongovernmental health care providers Continuing Care Retirement Communities Nursing Homes Hospitals Charities Foundations Private colleges and universities Cultural institutions Religious organizations Trade associations 69 69

70 Phase I: ASU : PresenTaTion of Financial STaTemenTs of NoT-for- ProfiT EnTiTies Net Asset Classes: Classification scheme Disclosure of board designated net assets Underwater endowments Expirations of capital restrictions Expenses/Investment Return: Expenses by nature analysis of expenses by function and nature Netting investment expenses against investment return Enhanced disclosures about cost allocations Operating Measures: Modest improvements to disclosures for those that use an operating measure, especially about board appropriations, designations and similar transfers Liquidity: Quantitative disclosures Qualitative disclosures Statement of Cash Flows: Methods of presenting operation cash flows (direct/indirect) Phase II: Operating Measures all other elements of the 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 Need to decide whether to wait to deliberate at same time as the Financial Performance Reporting project for business entities 70 70

71 ASU : PresenTaTion of Financial STaTemenTs of NoT-for- ProfiT EnTiTies Net Asset Classifications Currently, GAAP requires three classes of net assets Unrestricted Temporarily restricted Permanently restricted These classifications have resulted in confusion: About whether and how limits imposed by laws, contracts, and governing boards affect an NFP s classes of net assets, and How those kinds of limits and donor restrictions affect liquidity, financial performance, and cash flows. The term unrestricted net assets also has been misunderstood by some stakeholders

72 ASU : PresenTaTion of Financial STaTemenTs of NoT-for- ProfiT EnTiTies Current GAAP Unrestricted Temp. Restricted Perm. Restricted Proposed GAAP + Disclosures Without Donor Restrictions Amount, purpose, and type of board designations * * New disclosure requirement With Donor Restrictions Nature and amount of donor restrictions 72 72

73 ASU : PresenTaTion of Financial STaTemenTs of NoT-for- ProfiT EnTiTies Net Asset Classifications Footnote Disclosures Net assets with donor restrictions Timing and nature of restrictions Composition at the end of the period Continue to show an analysis by time, purpose, and perpetual restrictions Board designated net assets Enhanced information will be required on the amounts and purposes of these designations 73 73

74 ASU : PresenTaTion of Financial STaTemenTs of NoT-for- ProfiT EnTiTies Net Asset Classifications of Underwater Donor Restricted Endowment Funds Endowment fund an established fund of cash, securities, or other assets to provide income for the maintenance of a NFP. Underwater endowment fund the current FV of the fund is below its original gift amount or other amount that the NFP is required to maintain by the donor or by law. Existing GAAP, rather than reporting the amounts by which an endowment fund has fallen below its original gift within the restricted class of net assets, that amount must be disaggregated from the fund and presented within unrestricted net assets

75 ASU : PresenTaTion of Financial STaTemenTs of NoT-for- ProfiT EnTiTies Net Asset Classifications Underwater Donor Restricted Endowment Funds Revised net asset classification To be reflected in net assets with donor restrictions rather than in net assets without donor restrictions Expanded disclosures will be required The following information will be required: The original amount of the endowment The NFP s policy relating to spending from these funds Whether that policy was followed 75 75

76 ASU : PresenTaTion of Financial STaTemenTs of NoT-for- ProfiT EnTiTies Net Asset Classifications Expirations of Capital Restrictions Requirement of placed in service approach and elimination of over time approach for expirations of restrictions to acquire or construct long lived assets. In the absence of explicit donor instructions, NFPs would be required to reclassify net asset with donor restrictions that are for the acquisition or construction of long lived assets 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)

77 ASU : PresenTaTion of Financial STaTemenTs of NoT-for- ProfiT EnTiTies Presentation of Investment Expenses How to Present? Net presentation of investment expenses against investment return on the face of the statement of operations What to Disclose? Disclosure of investment expenses would be permitted but no longer required No longer require disclosure of investment return components in the endowment net asset footnote 77 77

78 ASU : PresenTaTion of Financial STaTemenTs of NoT-for- ProfiT EnTiTies Expenses Classified by Function and Nature Report expenses by function and natural classification Separate statement Face of statement of operations Footnotes Enhanced disclosures Provide qualitative disclosures about methods used to allocate costs among program and support functions Investment expenses that have been netted against investment return are not permitted to be included in this analysis 78 78

79 ASU : PresenTaTion of Financial STaTemenTs of NoT-for- ProfiT EnTiTies Analysis of operating expenses by nature and function one place in the F/S (statement of operations, separate statement, or schedule in notes), with additional qualitative information about cost allocations) N A T U R E Salaries & Benefits Grants to Others Equipment Rental & Maintenance Occupancy Cost Depreciation Information Technology Professional Service Fees Supplies Travel Printing & Publication Interest Other Total FUNCTION Program Activities Supporting Activities Total Operating Program A Program B M&G Fundraising Expenses Functionalization is optional Non Operating Total Expenses 79 79

80 ASU : PresenTaTion of Financial STaTemenTs of NoT-for- ProfiT EnTiTies Reporting Financial Performance Measures Reporting the change in total net assets for the period continues to be a requirement NFPs will also report the amount of change in each of the two classes of net assets on the statement of operations Presenting an intermediate measure of operations is still allowable Disclosures will be enhanced to provide additional information about the items included or excluded from the operating measure 80 80

81 ASU : PresenTaTion of Financial STaTemenTs of NoT-for- ProfiT EnTiTies Transparency and Utility of Liquidity Information Availability of financial assets may be affected by: Its nature External limits imposed by donors, laws, and contracts with others Internal limits imposed by governing board decisions Quantitative and qualitative information about liquidity will be required for the purpose of providing financial statement users: Understanding of an entity s exposure to risks, as well as how an entity manages its liquidity risk Information about the availability of assets to meet cash needs for general expenditures within one year of the balance sheet date 81 81

82 ASU : PresenTaTion of Financial STaTemenTs of NoT-for- ProfiT EnTiTies Cash Flows Statement Board decided not to require NFP entities to use the direct method of presenting operating cash flows Continue to use either the direct or indirect method Indirect reconciliation is no longer required if the direct method is chosen 82 82

83 STaTemenTs of Financial PosiTion 83 83

84 STaTemenT of OperaTions 84 84

85 STaTemenT of OperaTions 85 85

86 STaTemenT of Cash Flows - DirecT 86 86

87 STaTemenT of Cash Flows 87 87

88 FooTnoTe B NeT assets with donor restrictions are restricted for The following purposes or periods

89 FooTnoTe D NeT assets were released from donor restrictions 89 89

90 FooTnoTe DD Not for Profit Entity A s governing board has designated, from net assets without donor restrictions of $92,600, net assets for the following purposes as of June 30, 20XX

91 NoTe E InvesTmenTs 91 91

92 FooTnoTe F The table below presents expenses by both their nature and their function for fiscal year 20XX

93 FooTnoTe G Financial AsseTs Less AmounTs NoT Available 93 93

94 ASU No : STaTemenT of Cash Flows (Topic 230): ResTricTed Cash Effective dates: Public business entities Years beginning after December 15, 2017 Calendar YE December 31, 2018 Fiscal YE June 30, 2019 All other entities Years beginning after December 31, 2018 Calendar YE December 31, 2019 Fiscal YE June 30,

95 ASU No : STaTemenT of Cash Flows (Topic 230): ResTricTed Cash Key provisions: Provides guidance on the presentation of restricted cash and cash equivalents in both the beginning and ending cash balances, as well as in cash flows from operations, investing, and financing activities in the statement of cash flows Restricted cash and cash equivalents, as well as changes therein, should be included in the statement of cash flows The Update addresses disparity in practice Entities impacted by the Update: All entities that have restricted cash or cash equivalents, and Are required to prepare a statement of cash flows under Topic

96 QUESTIONS? Michael F. Garczynski, CPA, CGMA Arnett Carbis Toothman LLP Partner Health Care Services voice: or e mail: michael.garczynski@actcpas.com Jordan P. Pitzer, CPA Arnett Carbis Toothman LLP Supervisor Health Care Services voice: or e mail: jordan.pitzer@actcpas.com 96 96