Innovate Your Audit Process and Other Accounting & AFR Tips

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1 Innovate Your Audit Process and Other Accounting & AFR Tips June 2nd, 2017 Presented By: Jennifer Forrester, CPA & Jane Lastinger, CPA James Moore & Co.

2 Accounting Update

3 Recent Accounting Issues to be Aware of Revenue Leases Not For Profit GASB

4 FASB Revenue Recognition Standards The objective of the new guidance is to establish the principles to report useful information to users of financial statements about the nature, timing, and uncertainty of revenue from contracts with customers.

5 FASB Revenue Recognition Standards Under the new standard, revenue recognition will be achieved by applying the following five steps from FASB: 1. Identify the contract with a customer. 2. Identify the performance obligations (promises) in the contract. 3. Determine the transaction price. 4. Allocate the transaction price to the performance obligations in the contract. 5. Recognize revenue when (or as) the reporting organization satisfies a performance obligation.

6 Definitions and Core Principle Contract: any agreement between two or more parties Customer: a party that has contracted with an entity to obtain goods or services that are an output of the entity s ordinary activities Core Principle An entity would 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 and services

7 Accounting Standards ASU (ASC Topic 606): Revenue from Contracts with Customers ASU : Revenue from Contracts with Customers; Deferral of the Effective Date ASU : Revenue from Contracts with Customers; Principal vs Agent Considerations

8 Accounting Standards (continued) ASU : Revenue from Contracts with Customers; Identifying Performance Obligations and Licensing ASU : Revenue from Contracts with Customers; Narrow-Scope Improvements and Practical Expedients

9 Effective Date Collectively the Revenue Recognition Standards Effective for fiscal years beginning after December 15, 2018 Early application is permitted for periods beginning after December 15, 2016

10 What DO You Need to Know? Gain an understanding of your current contracts with customers and begin planning and discussing your proposed updates with your CPA.

11 What Else? The AICPA also recommends a four-step roadmap that you can start following to ensure compliance to the new standard: 1. Understand the changes to current GAAP based on FASB ASU No , Revenue from Contracts with Customers. 2. Understand transition and retrospective adoption of the revenue recognition standard, and determine how your Station will adopt the new guidance.

12 What Else? 3. Find resources to help train your professional staff to ensure effective and efficient implementation of the revenue recognition standard. 4. Educate users about the changes they can expect in your Station s financial statements.

13 Changes Clarify the principles for recognizing revenue Result in a common revenue standard for U.S. GAAP and IFRS Remove inconsistencies and weaknesses in existing revenue recognition standards and practices Provide a more robust framework for addressing revenue recognition issues

14 Changes (continued) Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets Provide more useful information to users of financial statements through improved disclosure requirements Simplify the preparation of financial statements by reducing the number of requirements to which entities must refer to

15 What Else is Changing? The new standard also includes disclosure requirements regarding revenues that will make financial statements clearer and more useful to the users of the financial statements.

16 You must adopt the new standard for reporting periods beginning on or after December 15, 2018!

17 FASB Lease Accounting Standard

18 FASB Lease Accounting Standard Takes effect in fiscal years beginning December 15, 2019 Stations that lease assets such as real estate and equipment will need to include these operating leases on their statement of financial position Will drastically impact financial ratios such as debt to equity, return on asset, and overall leverage of the statement of financial position.

19 Statement of Financial Position All assets leased (except short term leases that are less than 12 months at lease commencement) will be brought on to the statement of financial position Lease Liability = present value of the lease payments. Right-of-Use Asset = based on the liability, subject to certain adjustments, such as for the initial direct costs.

20 Statement of Activities Leases will be classified as either operating or finance. Operating leases will result in straight-line expense (similar to current operating leases) Finance leases will result in a front-loaded expense pattern (similar to current capital leases). Classification is based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. While bright lines no longer exist, we believe that a reasonable approach may be to consider the previous percentages when determining lease classification

21 What Does This Mean to You? Inventory your leases Capture data according to the new standard Re-examine technology systems used to track leases Develop appropriate accounting policies

22 Existing Leases Begin extracting information, such as: Lease term and rents timing and amounts Renewal option terms and rents Contingent rent/percentage rent terms Residual guarantee terms Purchase options terms Service elements in lease

23 Ongoing Processes Input and maintain information on each lease: Rents Renewal rents Percentage rents formulas Service element amount included in rents Residual guarantees Purchase options Incremental borrowing rate Estimated future sales for the location

24 Ongoing Processes (continued) Input CPI estimates for the future Provide information for necessary journal entries Initial accounting Monthly entries Amortize asset over lease term Interest amortization on lease liability

25 Ongoing Processes (continued) Periodic review of estimates Every time a Station reports earnings: Re-run the process contacting internal sources to get new estimates of key information Input changes to system Adjusting journal entries

26 Ongoing Processes (continued) Provide lease data Tax department Actual rent paid for tax return Finance/Controllers department Footnote disclosure information Projected future rents by year, including estimates Breakdown of projected rents estimates vs. contractual

27 Effective Date Leases ASC Topic 842 will replace ASC Topic 840 Effective for fiscal years beginning after December 15, 2019 Early application is permitted

28 FASB Nonprofit Reporting Guideline Update Problem? Complex reporting model with insufficient transparency and limited usefulness

29 FASB Nonprofit Reporting Guideline Update Solution! Updated reported model to help nonprofits more easily and clearly report their financial activity. Changes take effect for fiscal years beginning after December 15, 2017.

30 ASU Not-for-Profit Entities (ASC Topic 958): Presentation of Financial Statements of Not-for-Profit Entities

31 Key Facts The AIPCA identified the following four key facts about the new standard: 1. It s an update, not a complete overhaul of the current financial reporting model 2. It will enhance reporting of expenses 3. Reduction in net asset classifications puts more focus on disaggregation and disclosure 4. It requires new disclosure on liquidity

32 Reporting of Expenses Required disclosure of an analysis of expenses by both natural AND functional classifications Required disclosure of the methods used to allocate expenses to the functional categories

33 Net Asset Classification Reduces the net asset classifications from the current three to two Current: 1. Unrestricted Net Assets 2. Temporarily Restricted Net Assets 3. Permanently Restricted Net Assets New Standard 1. Net Assets Without Donor Restrictions 2. Net Assets With Donor Restrictions Must disclose board designations on net assets without donor restrictions

34 Liquidity Must disclose how the not-for-profit manages liquidity and information that communicates the availability of financial assets to meet cash needs for general expenditures. Reaches beyond the typical financial data contained in the financial statements and disclosures and instead focuses on financial management issues.

35 Liquidity (continued) ASU requires: Qualitative Information: must disclose in the notes to financial statements information that is useful in assessing an entity s liquidity and that communicates how the entity manages its liquid resources available to meet cash needs for general expenditures within one year of the date of the statement of financial position Quantitative Information: must be shown either on the face of the statement of financial position 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 date of the statement of financial position to meet cash needs for general expenditures within one year of the date of the statement of financial position. Availability of a financial asset may be affected by: Its nature External limits imposed by donors, laws, and contracts with others Internal limits imposed by governing board decisions. See ASU for examples of liquidity disclosures

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37 Effective for fiscal years beginning after December 15, 2017 Early application is permitted

38 Transition Applied on a retrospective basis If presenting comparative financial statements, the following can be omitted for the prior year presented: Analysis of expenses by both natural and functional classifications Disclosures about liquidity and the availability of resources Must disclose the nature of any reclassifications or restatements and their effects, if any, on changes in the net asset classes for each period presented

39 GASB Pension Standards 67 & 68 Do they affect institutional licensees?

40 GASB 72 GASB 72 addresses accounting and financial reporting issues related to fair value measurement for assets and liabilities.

41 GASB 72 Update Fair Value Measurements and Application Effective for fiscal years beginning after June 15, 2015; early application is encouraged. This requirement is effective for fiscal years ending June 30, 2016!

42 GASB 72 Update (continued) GASB 72 provides guidance on the following: Determining a fair value measurement for financial reporting purposes Disclosures related to all fair value measurements

43 Required Disclosures for Recurring & Nonrecurring Fair Value Measurements Fair value measurement at the end of the reporting period Level of fair value hierarchy (excluding any investments measured at NAV as a practical expedient) A description of the valuation techniques used For significant changes in valuation techniques, the changes and the reason for making them

44 The Three Levels of Fair Value Hierarchy Level 1 inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Entity has the ability to access. Level 2 inputs are inputs (other than quoted prices included within Level 1) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

45 What is NAV? Net asset value (NAV) is a common measure of fair value for certain fund investments. A fund s NAV is simply its assets less its liabilities, and is often reported as a per share amount for fair value measurement purposes. Fair values of investments that are measured at the NAV per share (or its equivalent) should not be categorized within the fair value hierarchy. Additional disclosures are required for investments that calculate the NAV per share (or its equivalent), do not have a readily determinable fair value, and are measured at fair value on a recurring or nonrecurring basis during the reporting period.

46 Nonrecurring Fair Value Measurements Important! Nonrecurring fair value adjustments that occur in a particular year are also required to be disclosed.

47 Innovate Your Audit Process

48 Does your Audit process seem routine? Do you feel your auditors rarely listen to you? Do you dread audit preparation and fieldwork?

49 Take a Closer Look at YOUR Audit Process Can you invigorate some innovation and communication into the process so that you and the auditors work together to meet your financial reporting goals and requirements.

50 Planning Makes Perfect (almost) SCHEDULING IS KEY! Ask for more time Communicate with your auditors

51 Improved Communication = Fewer errors and inefficiencies

52 Your Auditor Should Provide you with a detailed list of items requested Number the list

53 You Should Number your requests to correspond with the auditor s request list

54 Client Request List Example

55 Be INNOVATIVE Empower yourself to contribute to the audit process

56 HOW?? Communicate helpful information Ask questions Schedule meetings throughout the year Ask what you can do to help

57 Contribute to your audit process. If you identify items you feel would be helpful to the auditor set them aside, or them to the auditor, and initiate a dialogue.

58 IS YOUR AUDITOR A TEAM PLAYER?

59 What Can Your Auditor Do? Advise you and provide feedback Provide examples and share best practices Help you develop a strong financial reporting model Monitor progress toward future goals Suggest practices to improve internal controls

60 What CAN T Your Auditor Do? Make Management Decisions!

61 CPB/AFR Update

62 Don t forget! New CPB-sponsored training session requirement for CSG recipients effective fiscal year 2018.

63 What Your Auditor Should Know What should they understand before signing AFR? Do they review the AFR and the allocation of revenues including NFFS? Are they putting themselves and your organization at risk?

64 How Can You Help? Discuss with your auditor their role in the Station s AFR Make sure revenue is recorded by source of income properly on the AFR; this is key and integral to what they are attesting to when they sign the AFR Track revenue by source throughout the year Document details about what the revenue was for if non-recurring or unusual

65 CBP Compliance Alert The following indirect costs may not be included when calculating total net direct expenses, or station salaries and wages for direct activities. General and administrative; Fundraising; Membership development; and Grant solicitation.

66 Questions?

67 James Moore, CPAs and Consultants Committed to Serving the Public Broadcast Industry Audit Tax Agreed Upon Procedures Lean Six Sigma Human Resources & Moore Technology Solutions Accounting & Controllership Servi Consulting

68 Jennifer Forrester, CPA Partner James Moore & Co. jenniferforresterinnovationcpa Jane Lastinger, CPA Manager James Moore & Co. jane-lastinger