National Academy for State Health Policy

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1 MACPA s 2014 Government & Not-for-Profit Conference New Audit Guide: The AICPA s Overhauled Audit and Accounting Guide, Not-for-Profit Entities 1 MACPA s 2014 Government & Not-for-Profit Conference Ellen K. Hobby, CPA, CAE Chief Operating Officer, Chief Financial Officer National Academy for State Health Policy ehobby@nashp.org (202)

2 NEW Audit Guide: Agenda To help you better understand the AICPA s Not- For-Profit Guide Overhaul project: Learn how the Guide has changed Understand auditor objectives and expectations Hear issues, scenarios and interpretive conclusions 3 AICPA Audit and Accounting Guide Not-For Profit Entities The Guide can be purchased at: PA2BIZ_Primary/AuditAttest/Industry specificguidance/notforprofit/prdov R~PC /PC jsp 4 2

3 Focus of the NFP Guide Not-for-profit entities GAAP-basis financial statements Audited financial statements Provides assistance in the unique preparation, auditing, accounting and reporting of NFP financial statements 5 Issuance of Overhauled 2013 Guide The AICPA issued a comprehensive revision of the Audit and Accounting Guide Not-for-Profit Entities in the spring of 2013 Financial Reporting Executive Committee (FinREC) Not-for-Profit Entities Expert Panel Not-for-Profit Guide Task Force First revision, other than annual conforming changes, since the Guide was released in

4 Issuance of Overhauled 2013 Guide New edition released on March 1, 2014 Includes additional guidance on: Reporting donated services between affiliated NFP s Split interest agreements Contributions and grants Functional expenses and joint costs Includes FASB ASU No Not-for-Profit Entities (Topic 958): Services Received from Personnel of an Affiliate; a consensus of the FASB Emerging Issues Task Force 7 Issuance of Overhauled 2013 Guide Includes FASB ASU No Intangibles Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment 8 4

5 Source of New Guide Content Considered over 100 unique questions asked by members who called the AICPA Help Line Authoritative guidance from FASB Codification Non-authoritative guidance from FinREC conclusions Incorporated relevant non-authoritative AICPA literature NFP-related Technical Questions and Answers (TIS) section 6140 AICPA White Paper on Fair Value Measurement Alternative investments TIS section Authoritative Status of AICPA Guides Accounting & Financial Reporting Basis of accounting content is from GAAP, but Guide provides additional explanation and practical guidance Auditing Auditing guidance considered interpretive publication under AU-C section 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards The auditor should consider applicable interpretive publications in planning and performing the audit. AU-C

6 Guide: Table of Contents Chapter 1 Introduction Chapter 2 General auditing considerations Chapter 3 Financial statements, the reporting entity, and general financial reporting matters Chapter 4 Cash, cash equivalents, and investments Chapter 5 Contributions received and agency transactions Chapter 6 Split-interest agreements and beneficial interests in trusts Chapter 7 Other assets Chapter 8 Programmatic investments Chapter 9 Property and equipment Chapter 10 Debt and other liabilities Chapter 11 Net assets and reclassifications of net assets Chapter 12 Revenues and receivables from exchange transactions Chapter 13 Expenses, gains, and losses Chapter 14 Reports of independent auditors Chapter 15 Tax and regulatory considerations Chapter 16 Fund accounting Appendices 11 Chapter 1: Introduction Lists types of entities covered by the audit guide Basis of accounting GAAP! Definition of fund accounting vs. net asset classes Other resources for financial reporting by NFP s 12 6

7 Chapter 2: General Auditing Guidance Conformed to the Clarity project; includes NFPspecific guidance (e.g. fraud risks specific to NFPs) Other guide chapters have NFP-specific suggested audit procedures relating to the chapter s topic 13 Reporting Entity, and General Financial Reporting Matters Expanded guidance and FinREC Comments Financial Statements Reporting Related Entities Mergers & Acquisitions; Collaborative Arrangements; Use of Fair Value; and Disclosures 14 7

8 Chapter 3: continued Financial Statements & Presentation Issues Sequencing assets according to nearness of conversion to cash How is this impacted by restrictions? Classified Balance Sheet helpful observations Assets restricted to payment of LT debt is noncurrent to extent they exceed current portion of debt If governing board identifies specific assets to be invested/held to a designation for noncurrent purposes, these assets would also be noncurrent 15 Chapter 3: continued Significantly expanded guidance on interests in related entities Summary chart of examples that reference to sections of both the Guide and the FASB ASC NFP entities For-profit entities Special-purpose leasing entities 16 8

9 17 Chapter 3: continued Statement of functional expenses Required as a basic financial statement for voluntary health and welfare entities FinREC encourages presentation by all NFPs that are supported by the general public Cost benefit, preparation and auditing NFP with contributions of 20-30% of total revenue presumed to be supporteed by general public (excluding government support) Consider the facts and circumstances and use judgment 18 9

10 ASU Statement of Cash Flows Sale Proceeds of Donated Financial Assets If donated financial asset was converted nearly immediately to cash upon receipt Requires NFPs to classify cash receipts from the sale of those financial assets as cash inflows from operating activities Unless the donor restricted the use of the contributed resources to long-term purposes, which are financing Otherwise, classify as investing activities

11 Chapter 4: Cash, Cash Equivalents and Investments Not all cash is cash! Discussion of centralized cash management arrangements Significantly expanded guidance on common investments held by NFPs Recommended guidance on investment expenses 21 Chapter 4: continued Accounting for investments where NFP is the general partner in a for-profit partnership NFP is a limited partner in a for-profit partnership NFP holds derivative instruments NFP has an interest in an investment pool Other specific situations 22 11

12 Excerpt from Exhibit Chapter 5: Contributions Received and Agency Transactions Receipt of resources by a NFP is it a contribution or an exchange transaction? Flowchart (Table 5-1) Table of indicators (FASB ASC ) When elements of both are present, divide the transaction in two, measuring exchange first Examples Membership Dues Grants University athletics Naming opportunities 24 12

13 Contributions vs. Exchange Transactions 25 Chapter 5: continued Grants Use Table 5-1 to determine if grant is contribution or exchange based on the facts and circumstances If contribution consider if any conditions exist, consider donor restrictions If exchange determine revenue recognition NFP should establish accounting policy for grants so they are accounted for consistently Government grants Apply the above guidance FASB Not-for-Profit Advisory Committee topic 26 13

14 Chapter 5: continued Membership Dues Is the value received by the member commensurate with the dues paid? Often elements of both contribution and exchange Measure the exchange portion first and recognize as revenue as the earning process is completed Remainder is a contribution, recognize as revenue upon receipt Performing Arts The Kennedy Center $ free parking $$ access to private receptions 27 Chapter 5: continued University Athletics Some universities offer perks for higher levels of donation. For example: $ support student athletic experience $$ university logo jacket $$$ passes to stadium skybox $$$$ travel with the team to an away game 28 14

15 Chapter 5: continued Naming Opportunities May be accompanied by additional rights & privileges Is it acknowledgement of a gift or advertising? Donor sponsors a faculty position Donor sponsors a major event Building named after a significant donor 29 Chapter 5: continued Recognition and Measurement of Contributions Contributed fundraising material, informational material, or advertising, including media time or space Administrative costs of restricted contributions Below-market interest rate loans 30 15

16 Chapter 5: continued Contributed Fundraising Material, Info Material, or Advertising, Including Media Time or Space Examples radio advertising time, newspaper print space Donated asset, not a donated service Record contribution even if the asset would not typically needed to be purchased if not provided by donation FinREC recommends: Recognize a contribution if NFP has active involvement in determining and managing the message and use of the materials; otherwise not a contribution 31 Chapter 5: continued Administrative costs of restricted contributions Policy of designating a certain % of restricted gifts to offset the costs of raising and administering those gifts Example Policy that 5% of contributions to scholarship fund go to pay administrative costs; so $95 of a $100 gift is restricted for the scholarship fund Policy needs to be effectively communicated to or from the donor prior to receipt of the contribution If not, then 100% of gift should be donor restricted 32 16

17 Chapter 5: continued Below-Market Interest Rate Loans No or low-interest of funds is a contribution to the NFP Record contribution revenue and interest expense for fair value of the contribution Fair value typically estimated at difference between market rate interest and actual interest. Related party status doesn t impact recording Recognition of contribution /interest different for longterm loan versus due on demand loan 33 Chapter 5: continued Example 1 Long-term Loan from a Foundation On 1/1/2013 NFP receives 0% interest loan of $200,000 payable on 12/31/2015 Market interest rate is 6% 34 17

18 Chapter 5: continued Record receipt of loan - 1/1/2013 DR Cash $200,000 CR Loan payable (200,000) Record annual interest and contribution (same entry also booked at 12/31/2014 and 12/31/2015) 12/31/2013 DR Interest expense $12,000 CR Contribution Revenue (12,000) Record repayment of loan 12/31/2015 DR Loan payable $200,000 CR Cash (200,000) 35 Chapter 5: continued Loans - Other issues Government loans at below-market interest rates Forgivable Loans 36 18

19 Chapter 6: Split Interest Agreements and Beneficial Interests in Trust Beneficial interest in a trust held by another entity Questions: What if NFP isn t notified about trust until years after it is created? What if NFP is unable to obtain information to verify it is named as an irrevocable beneficiary? What if NFP is unable to obtain information to measure the beneficial interest? 37 Chapter 6: continued Answers: NFP generally needs the following information in order to record beneficial interest in the trust: Copy of executed trust document, statement from the trustee, or other information to verify existence Sufficient information about the trust in order to value it (e.g. trust assets, payout rate/amount, age of life beneficiaries) Make reasonable efforts to obtain necessary information 38 19

20 Chapter 6: continued Answers, continued: Recognize beneficial interest in the trust and contribution revenue in the first year the necessary information becomes available. Should not record a prior period adjustment if the NFP made, and continues to make, reasonable efforts to obtain necessary information 39 Chapter 7: Other Assets Inventory Acting as an Agent in a Sale of Commodities Prepaid Expenses and Deferred Costs Collections and Works of Art and Historical Treasures Goodwill Intangible Assets Other than Goodwill 40 20

21 Chapter 8: Programmatic Investments (New!) Programmatic investments are any investment by an NFP that meets the following two criteria: Its primary purpose is to further the tax exempt objectives of the NFP. The production of income or the appreciation of the asset is not a significant purpose (that is, an investor seeking a market return would not enter into the investment). Similar to program-related investment, IRS Sec. 4944(c). 41 Chapter 8: continued Specific examples discussed in the chapter: Loans Low or no interest loans Forgivable loans Guarantees Guarantee provided without commensurate return Equity investments Often no contribution element 42 21

22 Chapter 8: continued Core Considerations Determine when the initial transaction occurs whether the investment is programmatic If there is a contribution element, report it as contribution expense Use GAAP for similar financial instruments, except for the contribution element, if any Significance of the investments and the quantitative and qualitative risks determine the type of financial statement presentation and the extent of disclosures 43 Chapter 9: Property and Equipment Contributed Property and Equipment Use of P&E Owned by Others Capitalized Interest Expiration of Restrictions on Property and Equipment Impairment or Disposal of Long-lived Assets Asset Retirement Obligations 44 22

23 Chapter 10: Debt and Other Liabilities New section on tax-exempt (municipal bond) debt based on the AICPA Audit and Accounting Guide Health Care Entities Expanded discussion of credit enhancements, debt extinguishments, debt modifications, and classification 45 Chapter 10: continued Public Entity - Any entity that meets any of the following conditions: Its debt or equity securities trade in a public market either on a stock exchange (domestic or foreign) or in an over-the-counter market, including securities quoted only locally or regionally. It is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets). It files with a regulatory agency in preparation for the sale of any class of debt or equity securities in a public market. It is required to file or furnish financial statements with the Securities and Exchange Commission. It is controlled by an entity covered by criteria above

24 Chapter 10: continued Fair Value Measurement Municipal Bond Financing and Other Long-term Debt Conduit Bonds that Trade in the Public Markets Credit Enhancement Extinguishment and Modification Transactions Calls and Made Conversions Defeasance Bond Modifications and Exchanges Debt Issuance Costs Puts/Tender Options IRS Considerations 47 Chapter 10: continued Tax Liabilities Deferred Revenue Refunds Due to and Advances from Third Parties Promises to Give Split-Interest Agreements Amounts Held for Others Under Agency Transactions Revenue Sharing and Other Agreements Guarantees Contingencies Pension and Other Defined Benefit Postretirement Plan Obligations Multi-employer Plans 48 24

25 Chapter 11: Net Assets and Reclassifications of Net Assets Significantly expanded guidance on expiration of restrictions Using restricted contributions first Restrictions met in the same year as the contribution was received Promises to give, including implied time restriction on multi-year pledges Gifts of long-lived assets or gifts for their purchase Donor restricted endowments (e.g. term endowments) 49 Chapter 11: continued Expiration of restrictions on promises to give By specifying future payment dates donors indicate that their gift is to support activities in each period in which a payment is scheduled (i.e. an implied time restriction) Time restrictions lapse when the receivable is due; gift becomes available for the donor-specified purpose If the gift is for the construction or purchase of a specific long-lived asset, the donor supports activities of the period in which that asset is constructed or placed in service, even though the payment dates may extend beyond that period

26 Chapter 12: Revenues and Receivables from Exchange Transactions Modest expanded guidance FASB Revenue Recognition Project Guidance on Conceptual Principles When is revenue recognized? Revenue vs. gains Gains commonly result from transactions or other events that involve no earnings process Exchange Transactions Loan Receivable Examples 51 Chapter 13: Expenses, Gains and Losses Fund-raising costs Financial Aid and Other Reductions in Amounts Charged for Goods and Services Advertising Costs Start-up Costs Contributed Use of Facilities Functional Reporting of Expenses 52 26

27 Chapter 14: Reports of Independent Auditors Reports on Financial Statements Unmodified Reports Modified Reports Gong Concern Supplementary Information Reports Required under Government Auditing Standards and OMB Circular A The Board of Directors The Global Not-for-profit Report on the Financial Statements We have audited the accompanying financial statements of The Global Not-for-profit (GNFP), which comprise the statements of financial position as of June 30, 2013 and 2012, and the related statements of activities and cash flows for the years then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to GNFP s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of GNFP s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Global Not-forprofit as of June 30, 2013 and 2012, and the changes in its net assets and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. [Auditor s signature] [Auditor s city and state] [Date of the auditor s report] 54 27

28 Chapter 15: Tax and Regulatory Considerations Greatly expanded discussion about legal and regulatory environment Maintaining the NFP s tax-exempt status Unrelated business income and income tax positions State and local regulations issues (state charitable solicitation laws, state and local gaming regulations, UPMIFA) 55 Chapter 16: Fund Accounting Few Changes Fund Accounting: Is it still needed? Converting Fund Balances to Net Asset Classes Current funds Plant funds Loan funds Endowment funds Annuity funds 56 28

29 Resource Decision Tree Own the resource? Unrestricted? Current Operations? Plant Funds? Board designatedendowment or other? Expendable? Purpose restriction? Time restriction? Current Operations? Plant Fund? Expendable Term Endowment? Income restricted? Affiliate? Restricted? Expendable in future year? Agency? Nonexpendable? Endowment? Split interest agreement? Income restricted? Purpose restricted? 57 Unrestricted Net Assets Temporarily Restricted Net Assets Permanently Restricted Net Assets Current Unrestricted The general operating budget. It contains no restricted resources. Current Restricted Only if entity adopts policy to record restricted receipts as UNA if expended in the same period Donor restricted funds available for current operations E.g., restricted gifts and restricted endowment spending accounts. Loan Funds Loans available to students under the Federal Perkins Loan program. Established by donors that become fully expendable w/ the passage of time or lifting of restriction Established by donors [if funds to be used for loans perpetually] that are available to students 58 29

30 Endowment Funds Quasi-endowment Funds or Boarddesignated endowments Life Income Funds (deferred giving trusts and annuities) Unrestricted Net Assets Underwater portion of Donorendowment, or UMIFA: Accumulated and reinvested endowment return whose income use is unrestricted Board has designated unrestricted and expendable funds to function as an endowment. Charitable gift annuities where purpose restrictions do not exist. Temporarily Restricted Net Assets Accumulated and reinvested endowment return whose income use is restricted by donor; also term endowments Board has designated funds to function as an endowment that were from expendable restricted gifts Time or purpose restriction exists but is expendable upon maturity Permanently Restricted Net Assets The endowment corpus or original historic gift value of endowment gifts. Includes perpetual trusts controlled by 3rd parties. The fund remainder is designated as a permanent endowment 59 Plant Fund- Unrestricted Plant Fund- Restricted Unrestricted Net Assets Funds designated for department capital replacement/renewal, campus repair, and debt service Temporarily Restricted Net Assets Donor restricted funds available for the acquisition of longlived / capital assets Permanently Restricted Net Assets Investment in Plant Includes land, building, and equipment and related liabilities. Depreciation expense is recorded in this fund Long-lived assets acquired by restricted gifts and policy adopted to imply a time restriction on the long-lived asset & release restriction over life of asset 60 30

31 Questions. 61 Resources AICPA Financial Reporting Whitepaper: Measurement of Fair Value for Certain Transactions of Not-for-Profit Entities (Link is for AICPA Members Only) Update No Not-for-Profit Entities (Topic 958): Services Received from Personnel of an Affiliate (A Consensus of the FASB Emerging Issues Task Force) Update No Statement of Cash Flows (Topic 230) 62 31

32 Resources Update No Intangibles Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment Financial Accounting Standards Board (FASB) Website Alternative Investments TIS Section AICPA AU-C Section 200 AICPA Improving the Clarity of Auditing Standards 63 Ellen K. Hobby, CPA, CAE Chief Operating Officer, Chief Financial Officer National Academy for State Health Policy (202)