12/3/2015 UPDATE ON NEW AND PROPOSED FASB AND GASB STANDARDS. Presented by Drew Speed, CPA Partner, BKD, LLP

Transcription

1 UPDATE ON NEW AND PROPOSED FASB AND GASB STANDARDS Presented by Drew Speed, CPA Partner, BKD, LLP 1

2 NEW FASBREPORTING MODEL FOR NON-PROFIT ORGANIZATIONS BACKGROUND Current guidance (FAS 117) issued 20 years ago FASB NFP Advisory Committee formed in 2010 Exposure draft issued April 22, 2015 Comments submitted by August 20, 2015 FASB currently in redeliberations 2

3 PERCEIVED WEAKNESSES IN NFP REPORTING Complexity with three net asset classes Confusion regarding statement of cash flows Donors, creditors & other users Difficulty in assessing an entity s liquidity Inconsistent reporting of expenses No clear operating measure defined SIX KEY TOPICS ADDRESSED Note Disclosures Net Asset Classification Cash Flow Statement Liquidity Reporting of Expenses Financial Performance /Operating Measures 3

4 NET ASSET CLASSIFICATION Unrestricted Current GAAP Temporarily restricted Permanently restricted * Underwater endowments included in unrestricted net assets Proposed GAAP Without donor restrictions With donor restrictions * Underwater endowments netted with donor restricted net assets CURRENT STATEMENT OF FINANCIAL POSITION Not-for-Profit Entity A Statements of Financial Position Years Ended June 30, 20X5 and 20X4 (in thousands) 20X5 20X4 Net Assets Unrestricted $ 115,000 $ 104,000 Temporarily Restricted (Note B) 24,000 25,000 Permanently Restricted (Note C) 142, ,000 Total net assets 282, ,

5 PROPOSED STATEMENT OF FINANCIAL POSITION Not-for-Profit Entity A Statements of Financial Position Years Ended June 30, 20X5 and 20X4 (in thousands) 20X5 20X4 Net Assets Without donor restrictions (Note DDD) $ 93,000 $ 74,000 With donor restrictions (Note B) 193, ,000 Total net assets 286, ,000 9 LIQUIDITY Qualitative Disclosures Quantitative Information Define time horizon used to manage liquidity (i.e., 30, 60, 90 days) & basis Strategy for addressing risks that may affect liquidity Policy for establishing liquidity reserves Financial assets available to meet cash needs within time horizon Financial liabilities due within that time horizon 5

6 FINANCIAL PERFORMANCE/OPERATING MEASURES CURRENT PRACTICE FINANCIAL PERFORMANCE/OPERATING MEASURES PROPOSED GUIDANCE Require operating indicator Operating activities based on two criteria Mission (charitable & business activity) Resources used to carry out an NFP s purpose for existence Availability for current period activities Not limited by external/internal restrictions 6

7 STATEMENT OF ACTIVITIES Section Description Examples Operating (w/o donor restrictions) Non-operating (w/o donor restrictions) With donor restrictions Charitable & Business Investing & Finance Patient revenue, tuition, unrestricted contributions, depreciation expense Investment earnings, interest expense Restricted contributions, donor endowment earnings STATEMENT OF ACTIVITIES Operating measure BEFORE transfers reflects legally available amounts generated by or used in operations including releases of donor restrictions Internal decisions to designate available assets as unavailable (or vice versa) shown below subtotal Board Reasoning for Transfers 1. Foster comparability across NFPs 2. Allow NFPs to tell their financial story 7

8 CURRENT STATEMENT OF OPERATIONS Unrestricted Revenues, Gains and Other Support Patient service revenue (net of contractual allowances and discounts) $ 93,313,000 $ 85,848,000 Provision for uncollectible accounts (5,665,000) (5,212,000) Net patient service revenue less provision for uncollectible accounts 87,648,000 80,636,000 Other 3,679,000 3,385,000 20X5 20X4 Total unrestricted revenues, gains and other support 91,328,000 84,022,000 Expenses and Losses Salaries and benefits 48,613,000 50,417,000 Depreciation and amortization 4,273,000 3,931,000 Interest 415, ,000 Supplies and other 24,927,000 22,933,000 Total expenses and losses 78,228,000 77,663,000 Operating Income 13,100,000 6,359,000 Other Income (Expense) Investment return 148, ,000 Other, net (30,000) (28,000) Total other income 118, ,000 Excess of Revenues Over Expenses 13,218,000 6,467,000 Gain from discontinued operations 233, ,000 Increase in Unrestricted Net Assets $ 13,451,000 $ 6,681, CURRENT STATEMENT OF CHANGES IN NET ASSETS 20X5 20X4 Unrestricted Net Assets Excess (deficiency) of revenues over expenses $ 13,218,000 $ 6,467,000 Gain on discontinued operations 233, ,000 Increase in unrestricted net assets 13,451,000 6,681,000 Temporarily Restricted Net Assets Contributions received 72,000 82,595 Investment return 834,000 2,028,393 Net assets released from restriction (173,000) (642,753) Increase in temporarily restricted net assets 733,000 1,468,235 Change in Net Assets 14,184,000 8,149,235 Net Assets, Beginning of Year 90,915,360 82,766,125 Net Assets, End of Year $ 105,099,360 $ 90,915,

9 PROPOSED STATEMENT OF OPERATIONS FIRST NEW OPERATING MEASURE Not-for-Profit Entity-Health Care Entity Statements of Operations Years Ended June 30, 20X5 and 20X4 (in thousands) Without Donor Restrictions: 20X5 20X4 Operating revenues and support: Patient revenue, net of contractual allowances and discounts $ 660,230 $ 620,616 Premium revenue 33,342 31,341 Other operating revenue 21,780 20,473 Contributions 1,216 1,143 Donated property, plant, and equipment 1,940 1,824 Expiration of restrictions 6,145 5,776 Total operating revenue and support 724, ,174 Operating expenses: Salaries and benefits 305, ,546 Purchased services 257, ,097 Supplies 84,820 79,731 Depreciation and amortization 32,040 30,118 Bad-debt expense 19,777 18,590 Other 2,500 2,350 Total operating expenses 702, ,432 Operating excess before transfers 22,066 20, PROPOSED STATEMENT OF OPERATIONS SECOND NEW OPERATING MEASURE Not-for-Profit Entity-Health Care Entity Statements of Operations Years Ended June 30 20X5 and 20X4 (in thousands) Without Donor Restrictions: 20X5 20X4 Operating excess, before transfers $ 22,066 $ 20,742 Transfers to/(from) operating activities: Gifted property, plant, and equipment placed in service 3,290 2,800 Operating excess, after transfers $ 25,356 $ 23,

10 PROPOSED STATEMENT OF OPERATIONS NEW NON-OPERATING MEASURE Not-for-Profit Entity-Health Care Entity Statements of Operations Years Ended June 30 20X5 and 20X4 (in thousands) Without Donor Restrictions: 20X5 20X4 Operating excess, after transfers $ 25,356 $ 23,542 Nonoperating activity: Investment return, net 9,302 8,744 Interest expense (7,350) (6,909) Pension-related changes other than net periodic pension costs 2,300 2,162 Increase from nonoperating activities 4,252 3,997 Increase in net assets without donor restrictions 29,608 27, PROPOSED STATEMENT OF OPERATIONS NEW DONOR-RESTRICTED MEASURE Not-for-Profit Entity-Health Care Entity Statements of Operations Years Ended June 30, 20X5 and 20X4 (in thousands) 20X5 20X4 Increase in net assets without donor restrictions $ 29,608 $ 27,539 With Donor Restrictions: Contributions (6,145) (5,776) Expiration of restrictions 5,152 4,843 Investment return, net 1,397 1,313 Increase in net assets with donor restrictions Increase in net assets 30,012 27,919 Net assets at beginning of year 270, ,250 Net assets at end of year $ 300,262 $ 298,

11 REPORTING OF EXPENSES All NFPs required to report operating expenses by nature & function Options: include in SOA, separate statement or notes Require investment expenses to be netted with investment return Netting limited to external & direct internal expenses REPORTING OF EXPENSES Example: F U N C T I O N N A T U R E * Example obtained from FASB 11

12 STATEMENT OF CASHFLOWS Require direct method for operating cash flows Reclassify certain items to better align with new SOA Operating All fixed asset activities Investing Interest/dividends on investment portfolio Financing Interest paid STATEMENT OF CASH FLOWS DIRECT METHOD Example: Cash Flows from Operating Activities Cash received from program services/patients/students Cash received from donors Cash received from donors restricted for long lived assets Cash paid to employees Cash paid to suppliers Purchase of equipment Net cash provided by operating activities $ $ 12

13 REACTIONS TO PROPOSED STANDARD 264 Comment Letters 10 Workshops 3 Roundtables REACTIONS TO PROPOSED STANDARD Overall Common Themes Support for FASB s overall objective to update current model Desire to maintain as much consistency as possible between NFPs and for-profit reporting Desire for proposal that better takes into consideration differences among NFPs Concern regarding cost to implement proposed changes 13

14 REACTIONS TO PROPOSED STANDARD Overall Support Combining temp and perm net assets Disclosing policy for spending underwater funds Classifying underwater endowments with restricted net assets Reporting expenses by nature and function Concern regarding cost to implement proposed changes REACTIONS TO PROPOSED STANDARD Overall Disagreement Presentation of internal transfers on face of SOA Classification of interest expense as non-operating Classification of capital gifts as operating Removal of HC entities to present classified balance sheet and current performance indicator Aligning operating items on SCF and SOA 14

15 REACTIONS TO PROPOSED STANDARD Mixed Feedback Qualitative and quantitative liquidity info Intermediate measures of operations Direct method cash flows Leases Project Summary of Key Changes & Impact 15

16 Timeline 1 st Exposure Draft (ED) issued August nd ED issued May 2013 Re-deliberations are substantially complete; FASB currently drafting final standard On November 11, 2015 FASB approved drafting of final ASU for voting. Expected Q Effective dates: Nonpublic entities Years beginning after 12/15/19 Public One year earlier 31 Lessee Model Allleases, except short-term leases, result in recognition of lease asset & lease liability on lessee s balance sheet FASB voted for dual approach where leases would be classified as either Type A or Type B leases IASB voted for single approach where all leases would be classified as Type A leases (except short-term leases) 32 16

17 Comparison of Lessee Accounting Models Type A (Financing) Balance Sheet Right of Use (ROU) Asset Lease Liability Income Statement Interest Expense(on lease liability) Amortization Expense(on ROU asset) Cash Flow Cash paid for principal & interest payments Type B(Straight-line) Balance Sheet Right of Use (ROU) Asset Lease Liability Income Statement Lease/Rent Expense Cash Flow Cash paid for lease payments 33 Lease Classification Examples Examples of finance leases (Type A leases) in IAS 17 Ownership of Asset Transfersto lessee by end of lease term Lessee has option to purchase asset at price which is expected to be sufficiently lower than FV at date option becomes exercisable such that it is reasonably certain option will be exercised Lease term is for major part of the remaining economic life of asset Not considered if at or near the end of the economic life Within the last 25% of life may reasonably be at or near the end PV of minimum lease payments amounts to at least substantially all of fair value of leased asset 34 17

18 Discount Rate Tentative Decisions from Re-deliberations Lessees use their incremental borrowing rate as discount rate unless rate implicit in lease is reasonably determinable Lessor uses rate it charges lessee to discount lease assets Lessees not public business entities could make accounting policy election to use risk-free rate for initial & subsequent measurement of lease liabilities (Consistent with 2013 Board Proposal) 35 BKD Resources BKD s Leases Webpage

19 NEW REVENUE RECOGNITION STANDARD Creating a One-Stop Shop for Revenue Literature Current Guidance New Principle General Recognition Concepts Persuasive evidence of an arrangement exists Delivery has occurred or services have been rendered Price is fixed or determinable Collectibility is reasonably assured Construction and production type contracts (Subtopic ) Industry-specific guidance Software (Subtopic ) Real Estate Sales (Subtopic ) Contractors -Construction Revenue Recognition (Subtopic ) Real Estate - General Revenue Recognition (Subtopic ) Real Estate -Retail Land -Revenue Recognition (Subtopic ) The transfer of a promised good or service determines when revenue is recognized and occurs when (or as) the customer obtains control of the asset. Transfer can be made either at a point in time or over time

20 Scope Contracts with customers, except Lease contracts Insurance contracts Financial instruments Certain guarantees (other than product warranties) Certain nonmonetary exchanges 39 Five-Step Model Step 1 Identify contract(s) with customer Step 2 Identify performance obligations Step 3 Determine transaction price Step 4 Allocate transaction price to performance obligations Step 5 Recognize revenue when (or as) performance obligation is satisfied 40 20

21 Some Entities will be Affected Step 2 Step 3 Step 4 Step 5 MORE than Others Industry Step 1 Identify Contract Identify Performance Obligations Determine Transaction Price Allocate Transaction Price Recognize Revenue Contract Costs Health Care X X X X X X Finance -Asset Mgrs. X X X X X X Real Estate & Construction X X X X X Manufacturing X X X X X 41 Step 1 Identify Contract(s) with Customer Contract = agreement between two or more parties that creates enforceable rights & obligations & meets following criteria Commercial substance Approval & commitment by all parties Identifiable rights, obligations & payment terms Collectibility threshold Step 1: Identify Contract(s) with Customer Step 2: Identify Performance Obligations Step 3: Determine Transaction Price Step 4: Allocate Transaction Price Step 5: Recognize Revenue 42 21

22 Collectibility Collectibility will be explicit threshold that must be assessed before applying revenue recognition model to contract. Entity must evaluate customer credit risk & conclude that it is probable that it will collect amount of consideration due in exchange for goods or services Assessment is based on both customer s ability & intent to pay as amounts become due 43 Step 1 Identify Contract(s) with Customer Contract = agreement between two or more parties that creates enforceable rights & obligations & meets following criteria Commercial substance Approval & commitment by all parties Identifiable rights, obligations & payment terms Collectibility threshold Step 1: Identify Contract(s) with Customer Step 2: Identify Performance Obligations Step 3: Determine Transaction Price Step 4: Allocate Transaction Price Step 5: Recognize Revenue 44 22

23 Step 2 Identify Performance Obligations Separate performance obligations should be identified if good or services meet both of following Customer can benefit from good/service on its own or with other readily available resources; & Distinct within context of contract, i.e.,not highly dependent on, or highly interrelated with, other promised goods/services in contract Step 1: Identify Contract(s) with Customer Step 2: Identify Performance Obligations Step 3: Determine Transaction Price Step 4: Allocate Transaction Price Step 5: Recognize Revenue 45 Step 3 Determine Transaction Price Transaction price = amount of consideration entity expects to be entitled to (after collectibility threshold is met) Contract terms Customary business practices Time value of money (if significant financing component) Variable consideration (including consideration of constraint) Cash & noncash consideration Step 1: Identify Contract(s) with Customer Step 2: Identify Performance Obligations Step 3: Determine Transaction Price Step 4: Allocate Transaction Price Step 5: Recognize Revenue 46 23

24 Step 4 Allocate Transaction Price to Separate Performance Obligations Allocate based on relative standalone selling prices of separate performance obligations Observable price when sold separately (best evidence) Otherwise, estimate based on Adjusted market assessment Cost plus margin Residual value - Only if highly variable or uncertain Other Step 1: Identify Contract(s) with Customer Step 2: Identify Performance Obligations Step 3: Determine Transaction Price Step 4: Allocate Transaction Price Step 5: Recognize Revenue 47 Step 5 Recognize Revenue When (or as) Performance Obligations Are Satisfied Revenue recognized when (or as) control of good/service is transferred to customer Transfer of control occurs when customer has ability to direct use of, & receive benefits from, good/service Can be recognized over time or at a point in time, depending on how performance obligations are satisfied Step 1: Identify Contract(s) with Customer Step 2: Identify Performance Obligations Step 3: Determine Transaction Price Step 4: Allocate Transaction Price Step 5: Recognize Revenue 48 24

25 Health Care Entities Revenue Recognition Task Force Kimberly McKay, BKD, LLP (Chair) Chris Pritchard, Moss Adams LLP Jay Adkisson, WipfliLLP Mark Ross, Baker Tilly Virchow Krause, Mike Breen, KPMG LLP LLC Cline Comer, CliftonLarsonAllen LLP Mike Sorelle, Grant Thornton LLP (retired) Deborah Stokes, Kaiser Foundation Gordon Edwards, Marshfield Clinic Health Plan Martha Garner, Don Street, HCA Holdings, Inc. PricewaterhouseCoopers LLP Karen Van Compernolle, Deloitte LLP Nanda Gopal, BDO USA, LLP Dan Vandenberghe, McGladreyLLP John Hawryluk, KPMG LLP Chuck Heimerdinger, Ernst & Young LLP Brian Murray, Crowe HorwathLLP Susan Paulsen, Paulsen, Megaard& Co. Barb Potts, Ascension Health Alliance Health Care Implementation Issue Example Issue # Description of Implementation Issue Sta tus 1 Consideration of the following regarding self-pay balances: 1a-b Application of step 1 (determine if there is a contract) and step 3 (determine the transaction price) for healthcare services provided to self-pay patients, including uninsured patient balances and selfpay patient balances arising from co-payments and deductibles. This implementation issue will discuss evaluating whether a contract exists and what the transaction price is to arrangements for health care services provided to self-pay patients and balances arising from co-payments and deductibles. 25

26 Health Care Implementation Issue Example 1c Implicit price concessions -This implementation issue, being submitted to the TRG, provides two views over the initial accounting for implicit price concessions for services provided to uninsured patients and two views for the subsequent accounting for these types of contracts and whether changes in the estimates of variable consideration represent changes in price concessions or impairments. Submitted to AICPA RRWG Revenue Recognition Standard Effective dates: Public: Annual periods beginning after 12/15/17, including interim periods within that year Nonpublic: Periods beginning after 12/15/18 and interim periods within annual periods beginning after 12/15/19 26

27 Other FASB Pronouncements and Projects Other FASB Pronouncements/Projects Standards expected by year end: Financial Instruments Overall Public YBA 12/15/17 All others YBA 12/15/18 Financial Instruments Credit Losses Public YBA 12/15/18 All others YBA 12/15/19 27

28 Financial Instruments- Overall Financial Instruments-Overall 28

29 ASU Income Statement Extraordinary and Unusual Items (Subtopic ): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items Effective for interim & annual periods beginning after December 15, 2015 Early adoption is permitted, but adoption must occur at beginning of year Items unusual or infrequent or unusual AND infrequent: Separate item in continuing operations Entities can elect to apply the guidance prospectively or retrospectively Resources BKD Thoughtware : Extraordinary Items Eliminated ASU Simplifying the Presentation of Debt Issuance Costs Summary New guidance requires companies to present debt issuance costs as a direct deduction from the debt liability, consistent with debt discounts or premiums, rather than as a deferred asset Effective for public business entities for fiscal years beginning after December 15, 2015, & interim periods within those fiscal years. For all other entities, effective for annual periods after December 15, 2015, & interim periods thereafter. Early adoption is permitted. Amendments should be applied retrospectively. BKD Thoughtware : FASB Standard Simplifies Presentation of Debt Issuance Costs 29

30 ASU Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) Remove requirement to categorize within fair value hierarchy all investments for which fair value is measured using net asset value per share practical expedient Remove requirement to make certain disclosures for all investments eligible to be measured at fair value using net asset value per share practical expedient (those disclosures are limited to investments for which entity has elected to measure fair value) Effective Date & Transition Effective for public business entities for fiscal years beginning after December 15, 2015, & interim periods within those fiscal years For all other entities, effective for fiscal years beginning after December 15, 2016, & interim periods within those years Earlier application is permitted Amendments should be applied retrospectively BKD Thoughtware : FASB Simplifies Fair Value Disclosures RECENT GASB PRONOUNCEMENTS 30

31 STATEMENT No. 68 ACCOUNTING AND FINANCIAL REPORTING FOR PENSIONS AN AMENDMENT OF GASB STATEMENT NO. 27 Summary Employer financial reporting: Details accounting & financial reporting requirements for defined benefit pensions & defined contribution pensions provided to employees of state & local governmental employers. Addresses note disclosure & required supplementary information requirements about pensions For defined benefit pensions, identifies methods & assumptions that should be used to project benefit payments, discount projected benefit payments to their actuarial present value, & attribute that present value to periods of employee service Impact to Employers Cost-sharing employer required to recognize a liability for its proportionate share of net pension liability (of all employers for benefits provided through pension plan) collec ve net pension liability Substantially different than current pension obligation calculation Deferred inflows and outflows for unrecognized actuarial gains and losses BKD Thoughtware GASB 68 Webinar GASB's New Pension Standards Public Sector Pension Plans & OPEB Thoughtware Audit Implications of GASB 68 STATEMENT No. 72 FAIR VALUE MEASUREMENT AND APPLICATION Summary Provides guidance for determining a fair value measurement for financial reporting purposes, as well as for applying fair value to certain investments & disclosures related to all fair value measurements Enhances comparability of financial statements among governments by requiring measurement of certain assets & liabilities at fair value using a consistent & more detailed definition of fair value & accepted valuation techniques Enhances information provided to financial statement users about the impact of fair value measurements on a government s financial position Effective Date & Transition Effective for financial statements for reporting periods beginning after June 15, Earlier application is encouraged Other Resources BKD Thoughtware : GASB Statement No Fair Value Measurement & Application 31

32 GASB74 FINANCIAL REPORTING FOR POSTEMPLOYMENT BENEFIT PLANS OTHER THAN PENSION PLANS Summary Addresses financial reports of defined benefit OPEB plansadministered through trusts that meet certain criteria It also details proposed note disclosure requirements for defined contribution OPEB plans Addresses how plans measure long-term liability & annual costs of OPEB for purpose of reporting them in annual audited financial statements Along with Statement No. 75, Statement No. 74 significantly changes how governments calculate annual costs & long-term obligations associated with OPEBs Effective Date & Transition Effective for fiscal years beginning after June 15, Earlier application is encouraged GASBSTATEMENT 75 ACCOUNTING AND FINANCIAL REPORTING FOR POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS Summary Addresses employer reporting for defined benefit OPEB plans It also details proposed note disclosure requirements for defined contribution OPEB plans Changes in OPEB standards provide a more comprehensive measure of resources that will be needed to make good on benefit promises that state & local governments have made Requires governments to report a liability on face of financial statements, representing their financial obligation for defined benefit OPEB that they provide. Significantly changes to how a government should calculate OPEB liability & annual OPEB expense Expected liabilities much greater than currently calculated OPEB obligation Effective Date & Transition Effective for fiscal years beginning after June 15, 2017 (one year after Statement No. 74 for OPEB Plans) Earlier application is encouraged Other Resources BKD Thoughtware Public Sector Pension Plans & Other Postemployment Benefits (OPEBs) 32

33 QUESTIONS? 33