ACCOUNTING & AUDITING UPDATE FOR NONPROFITS

Transcription

1 ACCOUNTING & AUDITING UPDATE FOR NONPROFITS BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. Presenter Lee Klumpp, CPA, CGMA National Assurance Technical Partner, Nonprofit & Education (703) lklumpp@bdo.com Page 2 Exempt Organizations Conference 1

2 NFP Accounting Trifecta Page 3 The NFP TRIFECTA NFP Presentation, ASU Effective Date: For fiscal years beginning after 12/15/2017 Early Adoption: Permitted Revenue Recognition from Contracts with a Customer, ASU Effective Date: Nonpublic entities, Fiscal years beginning after December 15,2018 (Conduit Debt Obligors will be one year earlier) Early Adoption: Permitted but not before years ended December 31, 2017 Leases, ASU Effective Date: Nonpublic entities, Fiscal years beginning after December 15, 2019 (Conduit Debt Obligors will be one year earlier) Early Adoption: Permitted Page 4 Exempt Organizations Conference 2

3 Revenue From Contracts with a Customer Page 5 NFP Revenue Recognition Task Force Don Alcuino, AQD (NY) Carla Di Martin, AQD (NY) Amy Duffin, AQD (McLean) Sean Kilbane (Cleveland) Dick Larkin, National Assurance NFP (McLean) Ashely Reynolds (McLean) Tammy Ricciardella, National Assurance NFP (McLean) Andrea Taylor (Raleigh) Everything done by this group will be run through National Accounting for final approval. Page 6 Exempt Organizations Conference 3

4 Revenue Recognition (Topic 606) Objective: To develop a single, principle-based revenue standard for US GAAP and IFRS The revenue standard aims to improve accounting for contracts with customers by: Providing a robust framework for addressing revenue issues as they arise Increasing comparability across industries and capital markets Requiring better disclosure Substantially converged with IFRS on major provisions Page 7 Scope All contracts with customers, except Lease contracts Insurance contracts Financial instruments Guarantees Non-monetary exchanges in the same line of business to facilitate sales to customers Contracts not with customers are excluded: Contributions Collaborative arrangements Page 8 Exempt Organizations Conference 4

5 Final U.S. GAAP Model Recognition 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 Steps to apply the core principle: 1. Identify the contract(s) with the customer 2. Identify the performance obligations 3. Determine the transaction price 4. Allocate the transaction price 5. Recognize revenue when (or as) a performance obligation is satisfied Page 9 Revenue from Contracts with Customers Nonprofit Specific Revenue Subject to this ASU i. Membership ii. Subscription iii.products and Services iv.royalty Agreements v. Sponsorship vi. Conferences and Seminars vii.tuition viii.advertising ix.licensing x. Federal and State Grants and Contracts Page 10 Exempt Organizations Conference 5

6 Final U.S. GAAP Model Disclosure Disaggregation of revenue Information about contract balances Remaining performance obligations Qualitative and quantitative* disaggregation of revenue into categories that depict how revenue and cash flows are affected by economic factors Opening and closing balances * Amount of revenue recognized from contract liabilities * Explanation of significant changes in contract balances * Transaction price allocated to remaining performance obligations * Quantitative or qualitative explanation of when amounts will be recognized as revenue * Interim requirements Quantitative disclosures * * for public entities only Page 11 Transition, Effective Date and Early Application Retrospective (with optional practical expedients) Cumulative catch-up PY2 (2016) PY1 (2017) CY (2018) Rev rec under new standard CY Footnotes Cumulative effect at date of application Rev rec under legacy standard Cumulative catch-up Existing* and new contracts Existing and new under new contracts disclosed standard under legacy standard for CY (2018) *contracts for which all (or substantially all) of the revenue has not been recognized under legacy revenue guidance Effective dates: - Public entities: annual reporting periods after 12/15/2017 (including interim period) - Nonpublic entities: one year later (annual reporting periods after 12/15/2018) annual period in first year, interim periods thereafter - Early application option no earlier than original public company effective date (annual reporting periods after 12/15/2016) Page Exempt Organizations Conference 6

7 Grants and Contracts (Currently in Exposure Draft) Unique NFP guidance on contributions, but longstanding diversity in practice in classifying grants and contracts, particularly from governmental entities Terminology and Transition Contributions encompasses both grants and donations A change in classification in connection with enhanced/clarified guidance would not be the correction of an accounting error Page 13 Grants and Contracts (Currently in Exposure Draft) U.S. GAAP focuses on: Issue 1: Exchange vs. Non-exchange (contribution) Issue 2: Conditions vs. Restrictions ASU , Topic 606 (Revenue from Contracts with Customers) Heightened this issue; raised question as to whether grants and contracts are in scope of that guidance Removed limited exchange guidance and focuses on whether or not the transaction is reciprocal Page 14 Exempt Organizations Conference 7

8 Financial Statements of Not-for-Profit Entities ASU Page 15 Net Assets Cash Flows Liquidity Expenses Operating Measure Exempt Organizations Conference 8

9 Net Assets Page 17 Net Assets Current GAAP Unrestricted Temp. Restricted Perm. Restricted Proposed GAAP + Disclosures Without Donor Restrictions Amount, purpose, and type of board designations * With Donor Restrictions Nature and amount of donor restrictions * New disclosure requirement Page 18 Exempt Organizations Conference 9

10 Example Effect on Statement of Financial Position Not-for-Profit Entity A Statements of Financial Position June 30, 20X1 and 20X0 (in thousands) 20X1 20X0 Assets: Cash and cash equivalents $ 4,575 $ 4,960 Accounts and interest receivable 2,130 1,670 Inventories and prepaid expenses 610 1,000 Contributions receivable 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 obligations 1,685 1,700 Long-term debt 5,500 6,500 Total liabilities 10,630 12,340 Net assets: Without donor restrictions (Note DD) 92,600 84,570 With donor restrictions (Note B) 193, ,070 Total net assets 286, ,640 Total liabilities and net assets $ 296,720 $ 282,980 Note: Shaded lines are required to be presented. Source: ASU 958 Page 19 Example of Effect on Statement of Activities - Columnar Format EXAMPLE OF EFFECT ON STATEMENT OF ACTIVITIES - COLUMNAR FORMAT Note: Shaded lines are required to be presented. Source: ASU Page 20 Exempt Organizations Conference 10

11 Disclosures Related to Net Assets Amounts and purposes of governing board designations, appropriations, and similar actions that result in self-imposed limits on the use of resources without donorimposed restrictions as of the end of the period. Composition of net assets with donor restrictions at the end of the period and how the restrictions affect the use of resources. Additional information related to underwater endowment funds. Page 21 Disclosures Related to Net Assets (Cont d) Information about the nature and amounts of different types of donorimposed restrictions should be reported either on the face of the statements or in the notes. Separate line items that distinguish between the different types of restrictions may be used such as: Assets, such as land or works of art, donated with stipulations that they be used for a specified purpose, be preserved, and not be sold. Assets donated with stipulations that they be invested to provide a permanent source of income. Support of particular operating activities. Investment for a specified term. Use in a specified future period. Acquisition of long-lived assets. Page 22 Exempt Organizations Conference 11

12 Net Asset Disclosure Example With donor restrictions Perpetual in nature $ 200,000 Purpose restricted 1,840,000 Time-restricted only, for periods after 20X1 150,000 $ 2,190,000 Without donor restrictions Designated by the Board for [purpose] $ 1,000,000 Undesignated 24,000,000 25,000,000 Net assets $ 27,190,000 Excerpt from ASC Source: ASU 958 Page 23 Expiration of Capital Restrictions Gifts of cash restricted for acquisition or construction of PP&E: NFPs would be required to use the placed-in-service approach (no more implied time restrictions) Page 24 Exempt Organizations Conference 12

13 Liquidity Page 25 Liquidity and Availability NFPs are required to provide the following information that will be useful for a reader to determine how the organization manages its liquid assets to meet cash needs for general expenditures within one year of the Statement of Financial Position (SOFP) date: Qualitative information on how an NFP manages its liquid available resources and its liquidity risk (in the notes) Quantitative information that communicates the availability of an NFP s current financial assets at the balance sheet date to meet cash needs for general expenditures (on the face and/or in the notes) Availability of financial assets may be affected by the nature of the asset, external limits imposed by donors, laws or contracts with others, or internal limits imposed by governing board decisions. Page 26 Exempt Organizations Conference 13

14 Quantitative Disclosure of Financial Asset Availability Financial assets, at year end* $ 234,410 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) Subject to apropriation and satisfaction of donor restrictions** (174,700) Investments held in annuity trust (4,500) Board designations: Quasi-endowment fund, primarily for long-term investing** (36,600) Amounts set aside for liquidity reserve (1,300) Financial assets available to meet cash needs for general expenditures within one year $ 5,370 * Total assets, less nonfinancial assets (e.g., PP&E, inventory, prepaids) ** Excludes amounts that have been appropriated for next 12 months that do not have purpose restrictions Source: ASU Page 27 Quantitative and Qualitative Liquidity and Availability of Resources Disclosure Example Source: ASU Page 28 Exempt Organizations Conference 14

15 Operating Measure Page 29 Operating Measure: Improved Disclosures For those NFPs that utilize an operating measure and show governing board designations, appropriations, and similar actions (internal transfers) in the measure These NFPs must report these types of internal transfers appropriately disaggregated and described by type (either on the face of the financial statements or in the notes) Page 30 Exempt Organizations Conference 15

16 Example of Operating Measure Presentation Source: ASU Page 31 Expenses Page 32 Exempt Organizations Conference 16

17 Expense Reporting Report expenses, either on the face of financial statements or in the notes, by: Function * Natural classification Analysis (disaggregate function by nature) * currently required in GAAP NFPs are now required to provide qualitative disclosures about methods used to allocate costs among program activities and supporting services ASU also provides enhanced guidance on allocations from management and general (M&G) expenses Key concept: direct conduct or direct supervision Page 33 Expense Reporting Additional Information If expenses are reported in other line items within the statement of activities (e.g., salaries are included in costs of goods sold) they should be included in the functional reporting schedule by their natural classification. External and direct internal investment expenses that are netted against investment return should not be included in the functional expense analysis. Page 34 Exempt Organizations Conference 17

18 Expenses By Both Nature and Function For example: Note F (Page 66 of ASU) Page 35 Cost Methodology Issues Examples Allocation Facilities Operation & Maintenance Depreciation & amortization Current Cost Allocation Method Sq. Footage basis Sq. Footage basis Revised Allocation Method Service & effort estimate No change Interest Usage of Space No change IT related costs Do not allocate Service & effort estimate and costs of specific technology utilized Media production & Communication Do not allocate Service & effort estimate Page 36 Exempt Organizations Conference 18

19 Example Disclosure for Expense Allocation Disclosure NOTE X. METHODS USED FOR ALLOCATION OF EXPENSES FROM MANAGEMENT AND GENERAL ACTIVITIES The financial statements report certain categories of expenses that are attributable to one or more program or supporting functions of the Organization. Those expenses include depreciation and amortization, the president s office, communications department, and information Source: ASU 958 technology department. Depreciation is allocated based on square footage, the president s office is allocated based on estimates of time and effort, certain costs of the communications department are allocated based on estimates of time and effort, and the information technology department is allocated based on estimates of time and costs of specific technology utilized. Page 37 INVESTMENT RETURN Page 38 Exempt Organizations Conference 19

20 Reporting of Investment Returns Net presentation of investment expenses against investment return on the face of the statement of activities Netting limited to external and direct internal expenses Disclosure of investment expenses no longer required, no longer require disclosure of investment income components Page 39 Investment Return Direct internal investment expenses involve the direct conduct or direct supervision of the strategic and tactical activities involved in generating investment return including: 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. Direct internal investment expenses do not include items that are not associated with generating investment return. For example, the costs associated with unitization and other such aspects of endowment management would not be allocated. Page 40 Exempt Organizations Conference 20

21 Cash Flow Statement Page 41 Cash Flow Statement Continue to Allow free choice between the Direct Method and the Indirect Method However the Indirect reconciliation will no longer be required for Direct Method Page 42 Exempt Organizations Conference 21

22 Implementation and Effective Date Page 43 Effective Date, Early Adoption, and Transition Effective Date: For fiscal years beginning after 12/15/2017 Interim financials the following year Early Adoption: Permitted, but must apply the regular transition provisions. Transition: For year of adoption: apply all provisions. For comparative years presented: apply all provisions, except can choose not to present: Analysis of expenses by nature and function, and/or Disclosures around liquidity and availability of resources Page 44 Exempt Organizations Conference 22

23 Important Notes NFPs are already permitted to incorporate many of the changes in the ASU The only changes that cannot be done without formally adopting the ASU are: (1) Presenting one class of restricted net assets (consolidating temporarily and permanently restricted) (2) Underwater endowment accounting (3) Eliminated disclosures of investment return components and netted expenses (4) Eliminated requirement to provide indirect reconciliation if using direct method for operating cash flows Page 45 Leases Page 46 Exempt Organizations Conference 23

24 Leases (Topic 842) A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration Page 47 Lessee Model 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 accounted for the same. Classification is based on existing U.S. GAAP/IFRS Page 48 Exempt Organizations Conference 24

25 Lessee Accounting Overview Balance Sheet Income Statement Cash Flow Statement Financing Right-of-use asset Lease liability Amortization expense Interest expense Cash paid for principal and interest payments Operating Right-of-use asset Lease liability Single lease expense on a straight-line basis Cash paid for lease payments Page 49 Lessor Accounting Overview Balance Sheet Income Statement Cash Flow Statement Sales- Type / Direct Financing Net investment in the lease Interest income and any profit on the lease Cash received for lease payments Operating Continue to recognize underlying asset Lease income, typically on a straight-line basis Cash received for lease payments Page 50 Exempt Organizations Conference 25

26 Leases Effective Date Public Companies* Fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (CY 2019; FY ) All Other Organizations Fiscal years beginning after December 15, 2019 and interim periods beginning after December 15, 2020 (CY 2020; FY ) Early Application Permitted for all organizations * Public Companies refers to the following: (1) public business entities, (2) a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an-over-the-counter market, and (3) an employee benefit plan that files or furnishes statements with or to the SEC (Same as the Revenue Recognition Standard) Page 51 Questions? 52 Page 52 Exempt Organizations Conference 26