Accounting and Auditing Update. Nick D. Lombardo

Transcription

1 Accounting and Auditing Update Nick D. Lombardo

2 Agenda ASU : Revenue from Contracts with Customers Leases Other Highlights Recently issued/newly effective ASUs Other projects/initiatives of interest Going Concern Financial Statement Project for NFP Entities OMB s Uniform Grant Guidance 2

3 Revenue From Contracts With Customers (ASU ) Objective: single, principle-based revenue standard Improve accounting for contracts with customers More robust framework for recognizing revenue Increased comparability across industries & capital markets Better disclosures Excludes contributions and collaborative arrangements Substantially converged on major decisions Final standard issued on May 28,

4 Core Principle and Application Core Principle: 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 or services 4

5 ASU : Disclosure Requirements* Disaggregation of Revenue Disaggregate revenue into categories that depict how revenue and cash flows are affected by economic factors Explain the relationship with segment disclosures Information about Contract Balances Opening and closing balances Amount of revenue recognized from contract liabilities Explanation of significant changes in contract balances Remaining Performance Obligations Transaction price allocated to remaining performance obligations Quantitative or qualitative explanation of when amounts will be recognized as revenue Interim Requirements All quantitative disclosures in annual and interim (Public entities only) *Most quantitative disclosures optional for nonpublic entities 5

6 ASU : Issuance & Effective Dates - Timelines Issued Final Standard May 2014 Established Joint Transition Resource Group June 2014 Effective Date Public Entity January 2017 Effective Date Nonpublic Entity January 2018 A nonpublic entity has the option to early adopt (no earlier than a public entity) An entity may apply the guidance retrospectively, either to Each prior period presented The current period with supplemental footnote disclosures 6

7 ASU : Implementation Significant effort likely to be expended as the U.S. moves from the current industry specific guidance to this new, broader, principles based approach FASB s formation of a Joint Transition Resource Group To identify and discuss broader issues, including those that may warrant follow-up standard-setting activity by the FASB Similar to what we ve done in the past following issuance of FAS 157 (Valuation Resource Group) and certain other broad standards AICPA s formation of various industry-focused groups Includes one for Health Care and one for NFPs 7

8 Leases 8

9 Proposed Right-of-Use Model A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration 9

10 Lessee Model Approach All leases (more than 12 months) are recognized on the lessee s balance sheet Current U.S. GAAP (IFRS) Capital (Finance) Leases IASB Type A FASB Type A Operating Leases Type A Type B All leases are the same Not all leases are the same Classification is based on IAS 17 (similar to FAS 13) 10

11 Lessee Accounting Overview Balance Sheet Income Statement Cash Flow Statement Type A Right-of-use asset Lease liability Amortization expense Interest expense Cash paid for principal and interest payments Type B Right-of-use asset Lease liability Single lease expense on a straight-line basis Cash paid for lease payments 11

12 Short-Term Leases: Exemption Recognition and Measurement Exemption For leases with a term of 12 months or less No longer based on maximum possible term, now aligned with definition of lease term (threshold of reasonably certain ) 12

13 Other Topics Discussed by Boards March/April 2014 Lease term Lease modifications/contract combinations Variable lease payments In-substance fixed payments Discount rate May 2014 Definition of a lease Separating lease and non-lease components Initial direct costs and lease incentives 13

14 Next Set of Topics for Board Discussion June 2014 Subleases Presentation Balance sheet Presentation Cash flows July 2014 Sale and leaseback transactions Lessee disclosures Lessor disclosures Leases of small assets Future topics include: Related party leases, Leveraged leases, Transition, Effect date, etc. 14

15 Recently Issued/ Newly Effective ASU s 15

16 ASU : Services Received from Personnel of an Affiliate Personnel services received from affiliate (parent/sub or common control) for which affiliate doesn t charge recipient NFP should be recognized in recipient NFP s financials, measured at actual costs incurred by the affiliate Contributed services criteria no longer applicable FV practicability exception if cost will significantly over-state or understate the value of the services received Entities under Topic 954 (healthcare) would report as equity transfer Effective for f/y beginning after Modified retrospective application; early adoption permitted 16

17 ASU : Obligations Resulting from Joint and Several Liability Arrangements Requires entity to measure such obligations for which total amount of obligation is fixed at reporting date as the sum of: a) amount the entity agreed to pay on the basis of its arrangement among its co-obligors, and b) any additional amount the entity expects to pay on behalf of its co-obligors Also requires disclosures about nature and amount of obligation and other information about those obligation Effective date: Nonpublic entities: f/y ending after Retrospective application; early adoption permitted 17

18 Two Other Recent ASUs Liquidation Basis of Accounting (ASU ) a) Defines when it should be used, how assets and liabilities should be valued under it, and what should be disclosed b) Effective for f/y beginning after ; applied prospectively Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU ) a) Only disposals involving major strategic shifts (e.g., geographic area, line of business) henceforth will be reported as discontinued operations; others will merely be disclosed b) Effective for disposals in f/y beginning after ; applied prospectively 18

19 ASU : Newly Effective: Classification of Sales Proceeds of Donated Financial Assets NFP should classify cash receipts from sale of financial assets that upon receipt are (1) directed for sale and (2) converted nearly immediately into cash, as operating or financing activities in statement of cash flows, rather than as investing activities Operating unless restricted to a long-term purpose, e.g., endowment or plant, then classified as financing activities Consistent with cash contributions Effective for f/y beginning after Retrospective application, early adoption permitted 19

20 Going Concern: Single-Threshold Model In May 2014, the Board directed the staff to draft a final Accounting Standards Update. Summary of Board s Decisions Single threshold model similar in principle to current auditing standards (AU 341) Disclosures required when there is substantial doubt, or when Substantial doubt has been alleviated primarily by management plans Substantial doubt exists when it is probably that entity will not meet obligations for a period of one year from the financial statement issuance date Applies equally to both public and nonpublic entities Effective prospectively for annual periods beginning after December 15, 2015 and interim periods thereafter 20

21 Financial Statements Project for NFP Entities 21

22 Financial Statements of Not-for-Profit Entities: Topics Net asset classification Financial Performance Reporting of Expenses Cash Flow Statement Liquidity NFP Note Disclosures 22

23 Net Assets Issues UPMIFA and PRNA/TRNA distinction Ability to spend from donor-restricted endowments even if underwater Board action required to appropriate investment returns for spending TRNA considered by many to be Hodgepodge Need for better disclosure of the nature and availability (timing) of donor restricted resources URNA open to misinterpretation Better disclosure surrounding availability/liquidity would be helpful, including limits imposed by an entity s governing board 23

24 Net Assets Two Approaches Approach 1 Restrictions as primary cut Without Restrictions Operating Endowment Plant With Restrictions Operating Endowment Plant Approach 2 Purpose as primary cut Without restrictions Without restrictions Without restrictions Operating Endowment Plant With restrictions With restrictions With restrictions 24

25 Net Assets Can we streamline and make more meaningful? Current GAAP Unrestricted Temp. Restricted Perm. Restricted Proposed GAAP + Disclosures Without Donor Restrictions Amount and purpose of board designations With Donor Restrictions Nature and amount of donor restrictions 25

26 Financial Performance: Statement Approach 1 Statement Ability to present total revenue and contributions Effect of transfers easier to identify Too much information in one statement Labeling of totals difficult 2 Statement Retain Flexibility Greater emphasis on the operating measure Facilitates multi-year comparison Some may ignore the second statement Incorrectly equate the operating measure to net income 26

27 One Statement Approach Statement of Activities Without Donor Restrictions With Donor Restrictions Total Revenue and support: Fees for services $ 495 $ 495 Bequests Other contributions 425 1,500 1,925 Restricted support released for current period 1,375 (1,375) Total revenue and support 2, ,020 Expenses: Total expenses 1,950-1,950 Excess/(Deficit) before appropriations/transfers ,070 Board appropriations/transfers to/(from) operations: Investment returns appropriated from donor endowment 60 a 60 Investment returns appropriated from quasi-endowment 90 b 90 Bequests transferred to quasi-endowment (500) c (500) Total appropriations/transfers to/(from) operations: (350) - (350) Excess/(deficit) from operations $ 595 Investment return, net Board appropriations/transfers from/(to) operations: Investment returns appropriated from donor endowment (60) a (60) Investment returns appropriated from quasi-endowment (90) b (90) Bequests transferred to quasi-endowment 500 c 500 Total appropriations/transfers from/(to) operations: 410 (60) 350 Total change in net assets 1, ,685 Net assets at the beginning of the period 1,500 2,100 3,600 Net assets at the end of the period $ 2,675 $ 2,610 $ 5,285 27

28 Two Statement Approach Statement of Operations Operating Revenue and Support: Fees for services $ 495 Bequests 600 Other contributions 425 Restricted support released for current period 1,375 Total Operating Revenue and Support 2,895 Operating Expenses: Total Operating Expenses 1,950 Excess/(Deficit) before appropriations/transfers 945 Board appropriations/transfers to/(from) operations: Investment returns appropriated from donor endowment 60 a Investment returns appropriated from quasi-endowment 90 b Bequests transferred to quasi-endowment (500) c Total Board transfers to/(from) operations: (350) Excess/(deficit) from operations $ 595 d 28

29 Two Statement Approach (cont d) Statement of Changes in Net Assets Without Donor Restrictions With Donor Restrictions Total Excess/(deficit) from operations $ 595 d $ $ 595 Nonoperating activities Contributions 1,500 1,500 Restricted support released for current period (1,375) (1,375) Investment return, net Board designated transfers from/(to) operations: Investment returns appropriated to operations from donor endowment (60) a (60) Investment returns appropriated to operations from quasi-endowment (90) b (90) Bequests transferred to quasi-endowment 500 c 500 Changes in Net Assets 1, ,685 Net assets at the beginning of the period 1,500 2,100 3,600 Net assets at the end of the period $ 2,675 $ 2,610 $ 5,285 29

30 Cash Flow Statement Issues #1 Understandability/Utility #2 Relation to Statement of Activities (and any operating measure therein) 30

31 Cash Flow Statement Board Decisions Require direct method for operating cash flows No longer require indirect method Ask in ED if it should still be required for certain NFPs Re-categorize certain items to better align operating with activities statement (next slide) 31

32 Cash Flow Statement Cash Flows from Operating Activities Cash received from service recipients Cash received from donors Cash paid to employees Cash paid to vendors Purchase of property and equipment Contributions restricted for property and equipment Net cash from operating activities Cash Flows from Investing Activities Cash received from interest and dividends Purchase of investment assets Proceeds from sale of investment assets Net cash from investing activities Cash Flows from Financing Activities Payments of principal on long-term debt Interest paid on long-term debt Contributions restricted for endowment Net cash from financing activities Net increase in cash Cash at the beginning of year Cash at end of year 32 32

33 Reporting of Expenses Issues AICPA Issue Who should be required to present a Statement of Functional Expenses? FASB Deliberations Should natural expenses be required? Should functional expenses still be required? Should both be required together? Which breakout on the Statement of Activities? Should investment /other nonoperating expenses be functionalized? 33

34 N A T U R E Reporting of Expenses Expense by nature and function one place in the F/S (statement of activities, separate statement, or schedule in notes) * Salaries & Benefits Grants to Others Equipment Rental & Maintenance Occupancy Cost Depreciation Information Technology Professional Service Fees Supplies Travel Printing & Publication Interest Other Total F U N C T I O N Program Activities Supporting Activities Total Operating Program A Program B M&G Fundraising Expenses * Not-functionalized Non- Operating Total Expenses *Either (or both) on face of Statement of Activities 34

35 Remaining Topics Reporting of investment expenses (Board discussion begun) Liquidity and financial flexibility (Board discussion begun) NFP-specific notes (in-process) Expiration of capital restrictions and other display issues concerning capital transactions 35

36 Project Timeline Board Deliberations First half 2014 Comment Period Q Q Q Exposure Draft 2015 Final ASU 36

37 OMB s Uniform Grant Guidance 37

38 Agenda Introduction to OMB s Uniform Grant Guidance (Super Circular) Subpart A Acronyms and Definitions Subpart B General Provisions Subpart C Pre-Award Requirements Subpart D Post-Award Requirements Subpart E Cost Principals Subpart F Audit Requirements 38

39 What Is the Super Circular? OMB s Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards Project to streamline Circulars A-21, portion of A-50, A- 87, A-89, A-102, A-110, A-122, and A-133 Eliminate duplicative and conflicting guidance Consistent and transparent treatment of costs Effective for f/y that begin on or after December 26, 2014 Guidance reviewed at least every 5 years 39

40 Subpart F Audit Requirements The final guidance strengthen oversight and focuses audits where there is the greatest risk of waste, fraud, and abuse of taxpayer dollars Improves transparency and accountability by providing on-line access to complete single audit reports Encourages Federal agencies to take a more cooperative approach to resolve weaknesses in internal controls Reinforces risk-based approach to determining Major Programs The basic structure of the Single Audit process is unchanged 40

41 Subpart F Audit Requirements COFAR has provisions throughout the Uniform Guidance to strengthen the level of oversight for non-federal entities that fall below the new threshold Audit threshold increases from $500,000 to $750,000 Major Program determination focuses on internal control deficiencies identified as material weaknesses Type A/B programs minimum threshold will also be $750,000 41

42 Subpart F Audit Requirements Type A/B Threshold Table (2 CFR (b)(1)) Total Federal Awards Expended Type A/B Threshold Equal to $750,000 but <=$25M M = Million and B = Billion $750,000 > $ 25M but <= $100M.03 times total FAE > $100M but <= $1B $3M > $1B but <= $10B.003 times total FAE > $10B but <= $20B $30M > $20B.0015 times total FAE 42

43 Subpart F Audit Requirements High-Risk Type A Program Current A-133 Criteria Not audited as major program in 1 of 2 most recent audit periods In most recent period had ANY audit finding Provided for limited auditors judgment Oversight exercised by Federal agencies or pass-through entities, audit follow-up, or changes in personnel or systems that significantly increased risk New Uniform Guidance Unchanged In most recent period had a HIGH-RISK AUDIT FINDING Modified opinion Material weakness in internal control Known or likely questioned costs more than 5% of program expenditures Auditors judgment basically unchanged 43

44 Subpart F Audit Requirements High-Risk Type B Program Current A-133 Criteria Two Type B risk assessment options: Option 1 Perform risk assessment of ALL Type B programs and select 50% of Type B programs identified as high risk up to the number of low-risk Type A programs Uniform Guidance Perform risk assessments on Type B programs until high-risk Type B programs have been identified UP TO at least 25% of the number of low-risk Type A programs. Option 2 Perform risk assessments on all Type B programs until as many highrisk Type B programs have been identified as there are low-risk Type A programs 44

45 Subpart F Audit Requirements Uniform Guidance reduces the minimum audit percentage of coverage of total SEFA programs as follows: Type of Auditee Current New Not low-risk 50% 40% Low-risk 25% 20% 45

46 Subpart F Audit Requirements Low-Risk Auditee Current Criteria (2 prior years) Annual single audits Unmodified opinion on financial statements in accordance with GAAP Uniform Guidance (2 prior years) Unchanged Unmodified SEFA in relation to opinion Unchanged No GAGAS material weaknesses No Type A programs had: Material Weaknesses Material noncompliance Questioned costs > 5% Timely filing with FAC Auditor reporting going concern does not preclude low-risk Unmodified opinions on GAAP statements or basis of accounting required by state law Unchanged Unchanged Unchanged No audit reporting of going concern Waivers No waivers 46

47 Subpart F Audit Requirements All auditees must submit the complete reporting package and Data Collection Form (DCF) electronically to the Federal Audit Clearinghouse (FAC) FAC will be responsible to make the reports available on a website Subrecipient is only required to submit report to FAC Pass-through entity not required to retain copy of subrecipient report 47

48 Subpart F Audit Requirements The threshold for reporting know and likely questioned costs increases from $10,000 to $25,000 Requires that questioned costs be identified by CFDA number and applicable award number Requires report on status of prior year audit finding(s) in the Summary Schedule of Prior Audit Findings Audit finding numbers must be formatted as prescribed by the DCF Requires disclosure of population and number of cases examined, quantified in terms of dollar value and whether the sampling was statistically valid for the finding 48

49 QUESTIONS 49