Accounting Standards Updates on the Horizon: What You Need to Know

Transcription

1 Accounting Standards Updates on the Horizon: What You Need to Know

2 Presenters Frank Jakosz, CPA, CGMA Partner-in-Charge Not-for-Profit and Higher Education Practices Sikich LLP Melisa Galasso, CPA, CGMA Senior Manager, Cherry Bekaert LLP Owner, Galasso Learning Solutions LLC

3 Learning Objectives Identify Accounting Standards Updates (ASUs) that will be effective in the upcoming fiscal year ends Determine how a not-for-profit will implement recently issued ASUs

4 Coming Soon - Significant Impact

5 ASU : Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern

6 Background Currently only mentioned in AU-C 570 A GC standard was exposed by FASB in 2008 spurred by current economy and by IFRS convergence FASB tried again in 2011

7 Disclosures Disclosure is required when substantial doubt exists when conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued Current auditing standards don t give a definition of substantial doubt

8 Triggers Negative financial trends Other indications of financial difficulties Internal matters External matters

9 Time Horizon 3/1/20X3 12/31/20X1 Balance Sheet Date 3/1/20X2 FS Issuance Date 12/31/20X2 Current Auditing Standard Requirement: One Year from Balance Sheet Date FASB Requirement: One Year from FS Issuance Date

10 Disclosures Principal conditions or events Management s evaluation Management s plan Statement that there is substantial doubt about the entity s ability to continue as a going concern This is only necessary when management s plans do not alleviate concern

11 Effective Date For annual periods ending after December 15, 2016

12 ASU , Simplifying the Presentation of Debt Issuance Costs

13 Update Debt issuance costs related to a recognized debt liability should be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability Recognition and measurement guidance for debt issuance costs are not affected

14

15 Effective Date Financial statements issued for fiscal years beginning after December 15, 2015

16 ASU , Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)

17 Update Removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient

18 Example EXAMPLE: FAIR VALUE HIERARCHY W/ NAV

19 Effective Date Retrospective application NFP Entities Fiscal years beginning after December 15, 2016

20 ASU No , Simplifying the Transition to the Equity Method of Accounting

21 Update Removes the requirement to retroactively adopt the equity method on a stepby-step basis

22 Effective Date For fiscal years beginning after December 15, 2016

23 NFP Financial Statements

24 ASU , Presentation of Financial Statements of Not-for- Profit Entities

25 Change in Net Asset Classes Net Assets Unrestricted Temporarily Restricted Permanently Restricted Without Donor Restrictions With Donor Restrictions

26 Endowments Net Assets With Donor Restrictions Net Assets Without Donor Restrictions Permanent Endowment Board-designated endowment fund Term Endowment

27 Not-for-Profit Entity A Statements of Financial Position June 30, 20X1 and 20X0 (in thousands) Assets: 20X1 20X0 Cash and cash equivalents $ 4,575 $ 4,960 Accounts and interest receivable 2,130 1,670 Inventories and prepaid expenses 610 1,000 Contributions retrievable 3,025 2,700 Short-term investments 1,400 1,000 Assets restricted to investment in land, buildings and equipment 5,210 4,560 Land, buildings and equipment 61,700 63,590 Long-term investments 218, ,500 Total assets $ 296,720 $ 282,980 Liabilities and net assets: Accounts payable $ 2,570 $ 1,050 Refundable advance 650 Grants payable 875 1,300 Notes payable 1,140 Annuity trust obligation 1,685 1,700 Long-term debt 5,500 6,500 Total liabilities 10,630 12,340 Net assets: Without donor restrictions 92,600 84,570 With donor restrictions 193, ,070 Total net assets 286, ,640 Total liabilities and net assets $ 296,720 $ 282,920

28 Disclosures Information about the restrictions imposed by donors Composition of net assets with donor restrictions at the end of the period and how the restrictions affect the use of resources.

29 Examples of Restrictions Subject to expenditure for specified purpose: Program A activities Purchase of equipment Research Educational seminars and publications Program B activities Disaster relief Educational seminars and publications Program C activities: general Buildings and equipment Annuity trust agreements for research $ 1,530 2, ,120 1,079 1,484 1,075 1,425 10,601 Subject to the passage of time: For periods after June 30, 20X1 3,140 Subject to NFP spending policy and appropriation: Investment in perpetuity (including amounts above original gift amount of $22,337), the income from which is expendable to support: Program A activities Program B activities Program C activities Any activities of the organization Subject to appropriation and expenditure when a specified event occurs: Endowment requiring income to be added to original gift until fund s value is $2,500 Paid-up life insurance policy that will provide proceeds upon death of insured for an endowment to support general activities Not subject to appropriation or expenditure: Land required to be used as a recreation area Total net assets with donor restrictions 27,524 13,662 13, , ,382 2, ,290 3,000 $ 193,413

30 Additional Disclosures Governing board designations, appropriations, and similar transfers that result in the addition or removal of self-imposed limits on the use of resources Description of the purpose, amounts, and types of transfers and qualitative and quantitative information about any period-end balances

31 Governing Board Designation Not-for-Profit Entity A s governing board has designated net assets without donor restrictions for the following purposes as of June 30, 20X1: Quasi-endowment $ 34,628 Liquidity reserve 1,300 Total $ 35,928

32 Liquidity & Availability Qualitative information that is useful in assessing an entity s liquidity and that communicates how an NFP manages its liquid resources available to meet cash needs for general expenditures within 1 year of the BS date Quantitative information and qualitative information that communicates the availability of an NFP s financial assets at the BS date to meet cash needs for general expenditures within 1 year of the BS date

33 Liquidity & Availability (continued) 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.

34 Example Financial assets, at year-end $ 234, Less those unavailable for general expenditures within one year, due to: Contractual or donor-imposed restrictions: Restricted by donor with time or purpose restrictions (11,940.00) Subject to appropriation and satisfaction of donor restrictions (174,700.00) Investments held in annuity trust (4,500.00) Board designations: Quasi-endowment fund, primarily for long-term investing (36,600.00) Amounts set aside for liquidity reserve (1,300.00) Financial assets available to meet cash needs for general expenditures within one year $ 5,370.00

35 Underwater Endowments Defined: A donor-restricted endowment fund for which the fair value of the fund at the reporting date is less than either the original gift amount or the amount required to be maintained by the donor or by law that extends donor restrictions. Considered to be with donor restrictions

36 Disclosure The fair value of the underwater endowment funds The original endowment gift amount or level required to be maintained nor restrictions The amount of the deficiencies of the underwater endowment funds

37 Policy Disclosures A description of the NFP s policies for the appropriation of endowment assets for expenditure Including its policy, and any actions taken during the period, concerning appropriation from underwater endowment funds.

38 Policy Disclosures (continued) A description of the governing board s interpretation of the law or laws that underlie the NFP s net asset classification of donor-restricted endowment funds Including its interpretation of the ability to spend from underwater endowment funds

39 Functional Expenses All Expenses Function (required) Nature (required)

40 Excludes Excluded from functional expense determination External and direct internal investment expenses that have been netted against investment return Certain items that are typically reported in other comprehensive income of for-profit entities

41 Example Program Activities Supporting Activities A B C Programs Management & General Fund- Raising Supporting Total Expenses Salaries & Benefits $ 7,400 $ 3,900 $ 1,725 $ 13,025 $ 1,130 $ 960 $ 2,090 $ 15,115 Grants to Other Orgs 2, ,925 4,750 4,750 Supplies & Travel 865 1, , ,155 Services & Professional Fees 160 1, , ,840 Office & Occupancy 1, , ,528 Depreciation 1, , ,200 Interest Total Expenses $ 13,296 $ 8,649 $ 5,873 $ 27,782 $ 2,038 $ 2,150 $ 4,188 $ 31,970

42 Disclosures A qualitative description of the methods used to allocate costs among program and support functions

43 Presentation Face of Statement of Activities Schedule in the Notes Separate Financial Statement

44 Investment Income/Expense Investment returns reported net of related external and direct internal investment expenses

45 Direct Internal Expenses Direct internal investment expenses involve the direct conduct or direct supervision of the strategic and tactical activities involved in generating investment return. Examples: Salaries, benefits, travel, and other costs associated with the officer and staff responsible for the development and execution of investment strategy Allocable costs associated with internal investment management and supervising, selecting, and monitoring of external investment management firms.

46 Disclosures Endowment reconciliation Removes the requirement to disclose separately investment income and net appreciation or depreciation Shows only investment return, net

47 Release of Restrictions Unless donor stipulations limit the use of the assets for a period of time or for a particular purpose, donor restrictions on long-lived assets or cash to acquire or construct long-lived assets are considered to have expired when the assets are placed in service.

48 Optional Measure of Operation If an NFP presents internal board designations, appropriations, and similar actions on the face of the financial statements, an appropriate disaggregation and description by type of these actions if not provided on the face of the financial statements should be disclosed

49 Cash Flow Allows for the use of the direct method or the indirect method If direct method selected, no longer required to present reconciliation

50 Effective Date Fiscal years beginning after December 15, 2017 Retrospective Application Early Implementation Permitted

51 Coming Down the Pike

52 ASU No , Revenue from Contracts with Customers (Topic 606)

53 Scope This FASB ASU applies when an entity enters into contracts with customers to transfer goods or services; or enters into contracts for the transfer of nonfinancial assets Unless those contracts fall within the scope of other standards, such as insurance, lease contracts, or guarantees within the scope of Topic 460

54 Overview Joint convergence project between the FASB and the IASB Addresses concerns regarding the complexity and lack of consistency surrounding the accounting for revenue Creates a new Topic in the Codification ASC 606 Supersedes or amends existing revenue recognition requirements (Will replace ASC 605)

55 Overview (continued) Eliminates transaction and industryspecific revenue recognition guidance under current GAAP Provides a principlesbased approach Avoids inconsistencies of accounting treatment across different geographies and industries Provides more useful information through enhanced disclosure requirements

56 Guidance Recognize revenue to depict the transfer of promised goods or service to customers in an amount that reflects the considerations to which the entity expects to be entitled in exchange for these goods and services

57 Key Terms Transfer Amount Transfer of promised goods and services Reflects consideration expects to receive

58 5 Step Process 1. Identify contracts 2. Identify performance obligations (PO) 3. Determine transaction price 4. Allocate transaction price 5. Recognize revenue when PO is satisfied

59 Effective Date For a public entity (including NFP entities that have issued or are conduit bond obligors for securities that are traded, listed, or quoted on an exchange or OTC market) For annual reporting periods beginning after December 15, For all other entities For annual reporting periods beginning after December 15, 2018.

60 Task Forces The AICPA has formed 16 industry task forces to help develop a new accounting guide on revenue recognition that will provide illustrative examples for how to apply the new standard. One is for NFPs

61 FASB Project Revenue Recognition of Grants and Contracts by Not-for-Profit Entities Objective is to improve and clarify existing guidance on revenue recognition of grants and contracts by not-for-profit entities Issues Characterizing grants and similar contracts with government agencies and others as (i) reciprocal transactions (exchanges) or (ii) nonreciprocal transactions (contributions) Distinguishing between conditional and unconditional contributions.

62 ASU , Leases

63 Updates New Definition of a Lease Lease Classification Finance Lease Operating Lease Recognition & Measurement Right of Use Asset Lease Liability Subsequent Measurement Short Term Lease Exception

64 Effective Date NFP entities that have issued, or are conduit bond obligors for, securities that are traded, listed, or quoted on an exchange or an OTC market) For All Other Entities Fiscal years beginning after December 15, 2018 Fiscal years beginning after December 15, 2019

65 ASU , Classification of Certain Cash Receipts and Cash Payments

66 Update Debt prepayment or debt extinguishment costs (financing) Settlement of zero coupon debt (split between operating and financing) Contingent Consideration in Business Combination (financing, operating or investing based on timing of payment) Proceeds from insurance (including lump sum) (based on nature of loss)

67 Update (continued) Proceeds from COLIs Investing Equity Method Distributions GR - operating, Exception cumulative distributions exceed cumulative equity investing Beneficial Interests in Securitization Transactions Receipts - investing Predominance Principle

68 Effective Date NFP Entities All Entities Fiscal years beginning after December 15, 2018 Must adopt all amendments in the same period

69 ASU , Restricted Cash

70 Update Statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents Presentation & Disclosure

71 Effective Date NFP Entities For Fiscal Years beginning after December 15, 2018

72 Other ASUs to Consider

73 ASU No , Amendments to the Consolidation Analysis

74 Impacts Amendments to the Consolidation Analysis Limited partnerships and similar legal entities Evaluating fees paid to a decision maker or a service provider as a variable interest The effect of fee arrangements on the primary beneficiary determination The effect of related parties on the primary beneficiary determination Certain investment funds

75 Limited Partnerships The specialized consolidation model for limited partnerships has been eliminated No presumption that a GP should consolidate a LP For LPs that qualify as voting interest entities, a limited partner with a controlling financial interest should consolidate a limited partnership May be achieved through holding a limited partner interest that provides substantive kick-out rights

76 Effective Date May use a modified retrospective approach or retrospectively NFP Entities Effective for fiscal years beginning after December 15, 2016

77 ASU No , Clarifying When a Not-for-Profit Entity That Is a General Partner or a Limited Partner Should Consolidate a For-Profit Limited Partnership or Similar Entity

78 Update Retains the consolidation guidance that was in Subtopic for NFPs by including it within Subtopic Adds guidance to Subtopic on when an NFP limited partner should consolidate a for-profit limited partnership

79 Effective Date For fiscal years beginning after December 15, 2016 Early adoption is permitted

80 ASU , Simplifying the Measurement of Inventory

81 ASU Measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation Not in scope LIFO or Retail Inventory Method

82 Effective Date Fiscal years beginning after December 15, 2016 Prospectively application Early adoption permitted

83 ASU , Technical Corrections

84 Update Standing project on its agenda to address suggestions received from stakeholders on the Codification and to make other incremental improvements to GAAP Impacts NFPs PP&E Fair Value Compensation Debt

85 Effective Date Most of the changes do not require transition guidance and are effective upon issuance Early adoption is permitted for the changes that require transition guidance.

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