READY TO ROLL WITH THE NEW NFP REPORTING STANDARD? 7/19/2017. July 19, Dustin Haywood Director

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1 READY TO ROLL WITH THE NEW NFP REPORTING STANDARD? July 19, 2017 Kieth McGovern Director Dustin Haywood Director 1

2 TO RECEIVE CPE CREDIT Participate in entire webinar Answer polls when they are provided If you are viewing this webinar in a group Complete group attendance form with Title & date of live webinar Your company name Your printed name, signature & address All group attendance sheets must be submitted to training@bkd.com within 24 hours of live webinar Answer polls when they are provided If all eligibility requirements are met, each participant will be ed their CPE certificates within 15 business days of live webinar AGENDA Background & overview of NFP Accounting Standards Update Statement of Financial Position Statement of Activities & Expenses Disclosures, i.e., liquidity Next steps, adoption & other implications 2

3 NFP REPORTING CHANGES OBJECTIVES Refresh & update, not overhaul, financial reporting model Simplify & improve net asset classification presentation Enhance & adjustment information in statements & notes about Financial performance Cash flow Liquidity Allow NFPs tell their financial story NFP REPORTING CHANGES IMPLEMENTATION DATES Fiscal year beginning after December 15, 2017 Early adoption permitted, but not required Retrospective application 3

4 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 7 // experience drive 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 re-deliberated Issued August 18,, ASU No // experience drive 4

5 STATEMENT OF FINANCIAL POSITION 5

6 CHANGE IN NET ASSET CLASSIFICATIONS Current GAAP Unrestricted Temp. Restricted Perm. Restricted Revised GAAP + Disclosures Without Donor Restrictions* Amount, purpose & type of board designations** With Donor Restrictions* Nature & amount of donor restrictions * NFPs may choose to disaggregate further ** New disclosure requirement NET ASSET DISCLOSURES May choose to further disaggregate on SOFP Note: New standard requires disclosures about amounts & purposes of board designations of net assets without donor restriction, either in SOFP or footnotes Footnote requirements NFPs will be required to disclose information about nature & amounts of different types of restrictions that impact how/when donor-restricted net assets can be used 6

7 SOFP: EXAMPLE Assets Cash and cash equivalents $ 500,000 Student accounts receivable, net of allowance 1,500,000 Contributions receivable 1,000,000 Other receivables 500,000 Prepaid expenses and other assets 250,000 Loans receivable, net of allowance 2,500,000 Investments 35,000,000 Assets held in trust 750,000 Property and equipment, net of accumulated depreciation 48,000,000 Total assets $ 90,000,000 Liabilities Accounts payable $ 1,000,000 Line of credit 15,000,000 Accrued and other liabilities 2,000,000 Deferred revenue 1,500,000 Annuities and trusts payable 500,000 Refundable government loan advances 2,500,000 Long-term debt 27,500,000 Total liabilities 50,000,000 Net Assets Without donor restrictions Undesignated 10,000,000 Designated by the Board for endowment 5,000,000 15,000,000 With donor restrictions Perpetual in nature 16,000,000 Purpose restriction 6,600,000 Time-restricted for future periods 2,500,000 Underwater endowments (100,000) 25,000,000 Total net assets 40,000,000 Total liabilities and net assets $90,000,000 NET ASSET DISCLOSURES Endowment footnote Underwater endowment funds will now be shown as reduction in donor-restricted net assets, rather than charged against net assets without restriction (formerly, Unrestricted) NFPs must also disclose Board s interpretation of UPMIFA as to its ability to spend from underwater funds NFP s policy, & any actions taken during the period, concerning appropriation of underwater endowment funds Aggregate amounts of following items Fair value of underwater endowment funds Original endowment gifts Amount of funds deficiencies 7

8 NET ASSET DISCLOSURES EXAMPLE Subject to expenditure for specified purpose: Scholarships $ 1,000,000 Athletics, development and other purposes of the University 3,500,000 4,500,000 Subject to the passage of time: Charitable trust agreements 500,000 Promises to give that are not restricted by donors, but which are unavailable for expenditure until due 2,000,000 2,500,000 Endowments: Subject to appropriation and expenditure when a specified event occurs: Scholarships 1,100,000 Faculty chairs 1,000,000 Underwater endowments (100,000) 2,000,000 Subject to endowment spending policy and appropriation: Scholarships 10,000,000 Faculty chairs 5,500,000 Charitable annuity and trust agreements 250,000 Lectureships 250,000 16,000,000 Total endowments 18,000,000 Total net assets with donor restrictions $ 25,000,000 ENDOWMENT DISCLOSURES EXAMPLE Without Donor With Donor Restriction Restriction Total $ 5,000,000 $ 5,000,000 Board-designated endowment funds - $ Donor-restricted endowment funds Original donor-restricted gift amounts required to be maintained in perpetuity by donor - 16,000,000 16,000,000 Accumulated investment gains - 2,000,000 2,000,000 Total endowment funds $ 5,000,000 $ 18,000,000 $ 23,000,000 Endowment net assets, Without Donor With Donor Restriction Restriction Total beginning of year $ 5,500,000 $ 19,000,000 $ 24,500,000 Investment return, net 250,000 1,000,000 1,250,000 Contributions - 500, ,000 Appropriation of endowment assets for expenditure (1,000,000) (2,500,000) (3,500,000) Other changes: Transfers to create board-designated endowment funds 250, ,000 Endowment net assets, end of year $ 5,000,000 $ 18,000,000 $ 23,000,000 8

9 UNDERWATER RECLASSIFICATION EXAMPLE Without Donor With Donor Restriction Restriction Total Change in Net Assets $ XXX,XXX $ XXX,XXX $ XXX,XXX Net Assets, Beginning of Year, as Previously Stated XXX,XXX XXX,XXX XXX,XXX Assuming adoption as of June 30, 2017 Restatement applicable to prior year underwater endowments XXX,XXX (XXX,XXX) - Net Assets, Beginning of Year, Restated XXX,XXX XXX,XXX XXX,XXX Net Assets, End of Year $ XXX,XXX $ XXX,XXX $ XXX,XXX Restatement amount would be equal to underwater value as of July 1, 2015 Any change in underwater value attributed to activity would be reflected as a change in investment return amount ENDOWMENT DISCLOSURES Example UPMIFA Disclosure From time to time, certain donor-restricted endowment funds may have fair values less than the amount required to be maintained by donors or by law (underwater endowments). We have interpreted UPMIFA to permit spending from underwater endowments in accordance with prudent measures required under law. At June 30,, funds with original gift values of XXX,XXX, fair values of XXX,XXX, and deficiencies of XXX,XXX were reported in net assets with donor restrictions. 9

10 OTHER NET ASSET CONSIDERATIONS Expiration of Capital Restrictions Gifts of cash restricted for acquisition or construction of PP&E In absence of explicit donor restrictions, NFPs would be required to use placed-in-service approach (no more implied time restrictions) SOFP CURRENT STANDARD Assets Cash and cash equivalents $ 581,676 Student accounts receivable, net of allowance of $788,113 and $846,091 for and ,309,783 Contributions receivable 174,965 Federal award reimbursements receivable 691,686 Other receivables 902,355 Prepaid expenses and other assets 717,120 Employee loans receivable 269,800 Loans receivable, net of allowance of $114,418 and $112,617 for and ,516,282 Investments 47,393,303 Assets held in trust 636,443 Property and equipment, net of accumulated depreciation 40,404,807 Total assets $ 95,598,220 Liabilities Accounts payable $ 1,166,220 Line of credit 1,780,000 Accrued and other liabilities 1,973,788 Deposits 233,572 Deferred revenue 1,036,459 Annuities and trusts payable 903,971 Refundable government loan advances 2,675,380 Long-term debt 19,494,000 Total liabilities 29,263,390 Net Assets Unrestricted 25,470,235 Temporarily restricted 8,451,410 Permanently restricted 32,413,185 Total net assets 66,334,830 Total liabilities and net assets $ 95,598,220 10

11 SOFP NEW STANDARD TEMPLATE Assets Cash and cash equivalents $ 581,676 Student accounts receivable, net of allowance of $788,113 and $846,091 for and ,309,783 Contributions receivable 174,965 Federal award reimbursements receivable 691,686 Other receivables 902,355 Prepaid expenses and other assets 717,120 Employee loans receivable 269,800 Loans receivable, net of allowance of $114,418 and $112,617 for and ,516,282 Investments 47,393,303 Assets held in trust 636,443 Property and equipment, net of accumulated depreciation 40,404,807 Total assets $ 95,598,220 Liabilities Accounts payable $ 1,166,220 Line of credit 1,780,000 Accrued and other liabilities 1,973,788 Deposits 233,572 Deferred revenue 1,036,459 Annuities and trusts payable 903,971 Refundable government loan advances 2,675,380 Long-term debt 19,494,000 Total liabilities 29,263,390 Net Assets Without donor restrictions Undesignated 15,890,212 Designated by the Board for endowment 9,592,091 25,482,303 With donor restrictions Perpetual in nature 32,413,185 Purpose restriction 8,167,229 Time-restricted for future periods 284,181 Underwater endowments (12,068) 40,852,527 Total net assets 66,334,830 Total liabilities and net assets $ 95,598,220 NET ASSET DISCLOSURES CURRENT STANDARD Temporarily Restricted Net Assets Building initiatives $ - Charitable trust agreements 109,216 Contributions receivable 174,965 Future periods 4,773,507 Accumulated earnings on endowments 3,393,722 $ 8,451,410 Permanently Restricted Net Assets Investment in perpetuity, the income of which is expendable to support Scholarships $ 15,599,138 Faculty chairs 16,355,038 Charitable annuity and trust agreements 296,155 Lectureships 162,854 $ 32,413,185 11

12 NET ASSET DISCLOSURES NEW STANDARD TEMPLATE Net assets with donor restrictions are restricted for the following purposes or periods: Subject to expenditure for specified purpose: Scholarships $ 856,494 Athletics, development and other purposes of the University 3,917,013 4,773,507 Subject to the passage of time: Charitable trust agreements 109,216 Promises to give that are not restricted by donors, but which are unavailable for expenditure until due 174, ,181 Endowments: Subject to appropriation and expenditure when a specified event occurs: Scholarships 2,357,797 Faculty chairs 1,035,925 Underwater endowments (12,068) 3,381,654 Subject to endowment spending policy and appropriation: Scholarships 15,599,138 Faculty chairs 16,355,038 Charitable annuity and trust agreements 296,155 Lectureships 162,854 32,413,185 Total endowments 35,794,839 Total net assets with donor restrictions $ 40,852,527 ENDOWMENT DISCLOSURES CURRENT STANDARD Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted endowment funds $ (12,068) $ 3,393,722 $ 32,413,185 $ 35,794,839 Quasi endowment funds 9,592, ,592,091 Total endowment funds $ 9,580,023 $ 3,393,722 $ 32,413,185 $ 45,386,930 Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets, beginning of year $ 11,132,999 $ 7,118,787 $ 32,207,449 $ 50,459,235 Investment return Investment income 125, ,527 7, ,352 Transfer of net assets for underwater endowments Net depreciation (637,468) (2,016,812) (21,210) (2,675,490) Total investment return (512,192) (1,536,285) (13,661) (2,062,138) Contributions , ,847 Appropriation of endowment assets for expenditure (1,040,784) (2,189,230) - (3,230,014) Endowment net assets, end of year $ 9,580,023 $ 3,393,722 $ 32,413,185 $ 45,386,930 12

13 ENDOWMENT DISCLOSURES NEW STANDARD TEMPLATE Without Donor With Donor Restriction Restriction Total Board-designated endowment funds $ 9,592,091 $ - $ 9,592,091 Donor-restricted endowment funds Original donor-restricted gift amounts required to be maintained in perpetuity by donor - 32,413,185 32,413,185 Accumulated investment gains - 3,381,654 3,381,654 Total endowment funds $ 9,592,091 $ 35,794,839 $ 45,386,930 Without Donor With Donor Restriction Restriction Total Endowment net assets, beginning of year $ 11,132,999 $ 39,326,236 $ 50,459,235 Investment return Investment income 137, , ,352 Transfer of net assets for underwater endowments Net depreciation (637,468) (2,038,022) (2,675,490) Total investment return (500,124) (1,562,014) (2,062,138) Contributions - 219, ,847 Appropriation of endowment assets for expenditure (1,040,784) (2,189,230) (3,230,014) Endowment net assets, end of year $ 9,592,091 $ 35,794,839 $ 45,386,930 STATEMENT OF ACTIVITIES & EXPENSES 13

14 STATEMENT OF ACTIVITIES Eliminates distinction between temporary & permanent restrictions Retains current GAAP requirements to disclose nature & amounts of donor-imposed restrictions New disclosures highlight how & when resources can be used & not distinction between temporary & permanent restrictions STATEMENT OF ACTIVITIES Two net asset requirement is minimum disaggregation May choose to further disaggregate, but Standard requires total for each of two net asset classes New standard permits flexibility in presentation as long as requirements are satisfied Single column, multiple columns, two separate statements 14

15 STATEMENT OF ACTIVITIES INVESTMENT RETURN New presentation Net presentation investment return is presented net of expenses on face of statement of activities Amount limited to external & direct internal expenses May report net return on multiple lines different net asset classes or operating vs. nonoperating Disclosure impact Disclosure of expenses no longer required STATEMENT OF ACTIVITIES NEW FORMAT EXAMPLE Without Donor Restrictions With Donor Restrictions Total Revenue, Gains (Losses) and Other Support Tuition and fees Institutional scholarships Net tuition and fees Contributions Auxiliary enterprises Investment return designated for operations Net assets released from restrictions Change in value of split-interest agreements Total revenue, gains (losses) and other support Expens es Program Activities Instruction Academic support Student service Operation and maintenance Institutional support Auxiliary enterprises Supporting Activities Mangagement, general, and adminisitrative Fundraising Total expenses Change in Net Assets Before Other Activities Other Activities Investment return less amounts designated for operations Change in Net Assets Net Assets, Beginning of Period Net Assets, End of Period $ - $ - $ - 15

16 STATEMENT OF ACTIVITIES NEW FORMAT EXAMPLE STATEMENT OF ACTIVITIES NEW FORMAT EXAMPLE PART 1 OF 2 16

17 STATEMENT OF ACTIVITIES NEW FORMAT EXAMPLE PART 2 OF 2 EXPENSES Required to report expenses by function & nature in one location Statement of Activities Footnotes Schedule of Functional Expenses Required to show relationship between functional area & natural class No prescribed format by ASU 17

18 EXPENSES ADDITIONAL ITEMS New requirement to provide qualitative disclosure about methods used to allocate expenses attributable to more than one program ASU refines some definitions & enhanced guidance Mgmt & Gen includes additional examples Implementation guidance to help distinguish between direct conduct & direct supervision of program or supporting services EXPENSES BY NATURE & FUNCTION Program Activities Supporting Activities Program Fund- Support Total A B C Subtotal MG&A raising Subtotal Expenses Salaries/benefits $ - $ - $ - $ - $ - $ - $ - $ - Rent/utilities Professional fees Supplies Depreciation Interest Total expenses $ - $ - $ - $ - $ - $ - $ - $ - Program Activities Supporting Activities Academic Student Auxiliary Educational Fund- Support Total Instruction Support Services Enterprises Programs MG&A raising Subtotal Expenses Salaries/benefits $ - $ - $ - $ - $ - $ - $ - $ - Rent/utilities Professional fees Supplies Depreciation Interest Total expenses $ - $ - $ - $ - $ - $ - $ - $ - 18

19 PHASE 1 OTHER CHANGES Cash Flow Statement You have choice between Direct Method or Indirect Method (same as past) NEW! Indirect reconciliation no longer required if you utilize Direct Method cash flow statement DISCLOSURES 19

20 LIQUIDITY Qualitative Disclosures Quantitative Information Information on how you manage liquid resources (in footnotes) Strategy for addressing risks that may affect liquidity Policy for establishing liquidity reserves Information that communicates availability of financial assets at financial statement date to meet cash needs within one year Can be on the face of the Statement of Financial Position or in the notes EXAMPLE FOOTNOTE FOR LIQUIDITY DISCLOSURES Note G The following reflects Not-for-Profit Entity A s financial assets as of the balance sheet date, reduced by amounts not available for general use because of contractual or donor-imposed restrictions within one year of the balance sheet date. Amounts not available include amounts set aside for long-term investing in the quasi-endowment that could be drawn upon if the governing board approves that action. However, amounts already appropriated from either the donor-restricted endowment or quasi-endowment for general expenditure within one year of the balance sheet date have not been subtracted as unavailable 20

21 LIQUIDITY EXAMPLE FOOTNOTE Financial assets, at year-end* XXX,XXX Less those unavailable for general expenditures within one year, due to: Contractual or donor-imposed restrictions: Restricted by donor with time or purpose restrictions Subject to appropriation and satisfaction of donor restrictions** Investments held in annuity trust Board designations: Quasi-endowment fund, primarily for long-term investing** Amounts set aside for liquidity reserve Financial assets available to meet cash needs for general expenditures within one year (XX,XXX) (XXX,XXX) (X,XXX) (XX,XXX) (X,XXX) XX,XXX *Total assets, less nonfinancial assets (e.g., PP&E, inventory, prepaids, etc. **Excludes amounts that have been appropriated for next 12 months that do not have purpose restrictions LIQUIDITY EXAMPLE FOOTNOTE Financial assets available for general expenditure, that is, without donor or other restrictions limiting their use, within one year of the balance sheet date, comprise the following: Cash and cash equivalents Accounts receivable Operating investments Promises to give Distributions from assets held under split-interest agreements Distributions from beneficial interests in assets held by others Endowment spending-rate distributions and appropriations XX,XXX X,XXX X,XXX X,XXX X,XXX X,XXX XX,XXX XX,XXX 21

22 LIQUIDITY DISCLOSURE OTHER NARRATIVE Our endowment funds consist of donor-restricted endowments and funds designated by the board as endowments. Income from donor-restricted endowments is restricted for specific purposes, with the exception of the amounts available for general use. Donor-restricted endowment funds are not available for general expenditure. Our board-designated endowment of $XXX,XXX is subject to an annual spending rate of 4.5 percent as described in Note X. Although we do not intend to spend from this board-designated endowment (other than amounts appropriated for general expenditure as part of our Board s annual budget approval and appropriation), these amounts could be made available if necessary. As part of our liquidity management plan, we invest cash in excess of daily requirements in short-term investments, CDs, and money market funds. Occasionally, the Board designates a portion of any operating surplus to its operating reserve, which was $XXX,XXX as of June 30,. LIQUIDITY EXERCISE Example Financial assets, at year-end $ 39,250,000 Less those unavailable for general expenditures within one year, due to: Contractual or donor-imposed restrictions: Restricted by donor with time or purpose restrictions $ (7,000,000) Subject to appropriation and satisfaction of donor restrictions $ (18,000,000) Investments held in annuity trust $ - Board designations: Quasi-endowment fund, primarily for long-term investing $ (5,000,000) Amounts set aside for liquidity reserve $ - Financial assets available to meet cash needs for general expenditures within one year $ 9,250,000 Assets Cash and cash equivalents $ 500,000 Student accounts receivable, net 1,500,000 Contributions receivable 1,000,000 Other receivables 500,000 Prepaid expenses and other assets 250,000 Loans receivable, net 2,500,000 Investments 35,000,000 Assets held in trust 750,000 Property and equipment, net of accumulated depreciation 48,000,000 Total assets $ 90,000,000 22

23 NEXT STEPS, ADOPTION & OTHER IMPLICATIONS ADOPTION Should be applied on retrospective basis in year first applied However If presenting comparative statements, have option to omit following for any periods presented before period of adoption Disclosures about liquidity & availability of resources Analysis of expenses by both natural classification & functional classification 23

24 ADOPTION Should disclose nature of any reclassifications or restatements, if any, on changes in net asset classes for each period presented Changes in accounting principle represent underwater endowments & placed in service approach for capital assets Emphasis of Matter As discussed in Note to the financial statements, in, the entity adopted new accounting guidance for the financial statements of Not-for-Profit Entities. Our opinion is not modified with respect to this matter. ADOPTION EARLY EXAMPLE Apply all provision for FY 2017 If choose to present comparative financials for FY 2017 you would Apply all provisions to FY 2015 financials, except Analysis of expenses by nature & function Liquidity disclosures 24

25 OTHER IMPLICATIONS FOR HIGHER ED Ratios & covenants Expendable Net Assets in covenant calculations Department of Education Composite Score Moody s & other rating agencies ratio definitions NEXT STEPS Discuss internally to early adopt or not Evaluate any system changes needed Natural expense presentation G/L or Chart of Account changes Perform test run or prepare pro-forma statements under new guidance Develop plan to educate board or committee on financial statement presentation changes 25

26 QUESTIONS CONTINUING PROFESSIONAL EDUCATION (CPE) CREDITS BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered. 26

27 CPE CREDIT CPE credit may be awarded upon verification of participant attendance For questions, concerns or comments regarding CPE credit, please the BKD Learning & Development Department at THANK YOU! FOR MORE INFORMATION Kieth McGovern Dustin Haywood

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