Selected Implementation Issues

Transcription

1 Selected Implementation Issues Presentation of Financial Statements Not-for-Profit Entities Accounting Standards Update and Dan Campbell, Partner Fran Brown, Partner CapinCrouse LLP February 2018

2 Agenda Presentation of Financial Statements of Not-for-Profit Entities Accounting Standards Codification Section 958 FASB ASU and ASU Implementation Challenges Financial Statement Presentation Disclosures (a bunch)

3 Key Provisions of ASU No Net Asset Classification Updates net asset scheme, changes underwater endowment accounting, removes option for implied time restrictions on capital gifts, board designations, enhances disclosures Liquidity & Availability Quantitative and qualitative disclosures about liquidity and availability of resources Expenses Requirement to report expenses by function (already required) and nature, and an analysis showing the relationship between function and nature Statement of Cash Flows Free choice : indirect reconciliation no longer required for direct method Investment Return Present investment return net of external and direct internal investment expenses; no longer required to disclose netted expenses

4 Selected Implementation Issues ASU Financial Statement Format Cash Flow Statement Optional Direct Method Expense Analysis by Natural and Functional Cost Methodology Disclosure of Board Designations Disclosure of Liquidity and Financial Assets Available

5 Net Assets Current GAAP Unrestricted Temp. Restricted Perm. Restricted Revised GAAP + Disclosures Without Donor Restrictions* Amount, purpose, and type of board designations** With Donor Restrictions* Nature and amount of donor restrictions * NFPs may choose to disaggregate further ** New disclosure requirement

6 Implementation Balance Sheet

7 Net Asset Display Minimum presentation required Alternative disaggregation allowed

8 Net Asset Display You can make it look very familiar:

9 Net Asset Disclosure

10 Underwater Endowments Net asset classification revised Reflect underwater amount in net assets with donor restrictions rather than without donor restrictions Disclosures enhanced Aggregate of original gift amounts (or level required by donor or law) for such funds, fair value, and any policy or decision to reduce or not spend from such funds

11 Endowments Two Net Asset Categories Disaggregation is optional, not required

12 Endowment Roll Forward

13 Disclosure on Interpretation of UPMIFA and Spending from Underwater Endowments The Seminary's endowment consists of 160 individual funds established for scholarships and educational programs. Its endowment includes both donor-restricted endowment funds and funds designated by the board to function as endowments. As required by GAAP, net assets associated with endowment funds are classified and reported based on the existence or absence of donor-imposed restrictions. Donor-restricted endowments are classified as net assets with donor restrictions and boarddesignated endowments are classified as net assets without donor restrictions.

14 Disclosure on Interpretation of UPMIFA and Spending from Underwater Endowments (continued) The Uniform Prudent Management of Institutional Funds Act (UPMIFA) was enacted in the state of Texas in Although UPMIFA does not preclude the Seminary from spending below the original gift value of donor-restricted endowments, the Seminary considers a fund to be underwater if the fair value of the fund is less than the sum of (a) the original value of initial and subsequent gift amounts donated to the fund and (b) any accumulations to the fund that are required to be maintained in perpetuity in accordance with the direction of the applicable donor gift instrument. The Seminary has adopted a policy to not spend from underwater endowments unless directed otherwise by the donor.

15 Disclosure on Underwater Endowments Deficiencies Funds with deficiencies: From time to time, the fair value of assets associated with individual donor-restricted endowment funds may fall below the level that the donor or UPMIFA requires the Seminary to retain as a fund of perpetual duration. Deficiencies of this nature exist in two donor-restricted endowment funds, which together have an original gift value of $62,780, a current fair value of $59,930, and a deficiency of $2,850 as of June 30, In the prior year, deficiencies existed in six donor-restricted endowment funds, which together had an original gift value of $1,261,109, a current fair value of $1,251,172, and a deficiency of $9,937 as of June 30, These deficiencies resulted from unfavorable market conditions that occurred shortly after the investment of new perpetually restricted contributions, and continued appropriation of certain programs that was deemed prudent by the board.

16 Implementation Statement of Activities Statement of Activities Intermediate Operating Measure

17 Statement of Activities, page 1 (continued)

18 Statement of Activities, page 2

19 Operating Measure: Improved Disclosures Reinforcing current GAAP requirement about transparency of components of any operating measures presented: NFPs utilizing an operating measure that reflects governing board designations, appropriations, and similar actions (internal transfers) must report these types of internal transfers appropriately disaggregated and described by type (either on the face of the statement of activities or in the notes)

20 ASU No Improving the Presentation of Net Periodic Pension Cost & Net Periodic Postretirement Benefit Cost Background Net benefit cost contains several components with different natures Reduced predictive value and usefulness of information to users Presentation of net benefit cost in the income statement (retrospective application) Service cost in the same line item or items as other current employee compensation costs Remaining components in a separate line item or items outside operating items, if applicable Capitalization of only service cost in assets (prospective application) ASU No is effective December 15, 2017 for public business entities and December 15, 2018 for other entities

21 Disclosure of Employee Benefits

22 Gifts of cash restricted for acquisition or construction of PP&E In absence of explicit donor restrictions, NFPs would be required to use the placed-in-service approach (no more implied time restrictions) Healthcare NFPs are already required to do so

23 Operating Cash Flows Direct Method Indirect Method Indirect reconciliation no longer required for Direct Method

24 Implementation Operating Cash Flows DM

25 Implementation Expense Reporting Report expenses, either on the face of financial statements or in the notes, by: Analysis (disaggregate function by nature) Function Natural classification

26 Analysis of Expense by Nature and Function ASC Total expenses include all operating expenses AND the nonoperating other components of net periodic pension cost.

27 Example: Analysis of Expenses Presentation on face of the statement of activities

28 Expense Reporting (continued) NFPs required to provide qualitative disclosures about methods used to allocate costs among program and support functions ASU also provides enhanced guidance on allocations from M&G expenses Key concept: direct conduct or direct supervision

29 Cost Methodology Issues - DTS Allocation Current Cost Allocation Method Revised Allocation Method Facilities O&M Sq. Footage basis Service & effort estimate Depreciation & amortization Sq. Footage basis No change Interest Usage of Space No change IT-related costs Did not allocate Service & effort estimate and costs of specific technology utilized Media production & communication Did not allocate Service & effort estimate

30 Cost Methodology DTS Disclosure Description of the methods used to allocate costs among program and support functions. The financial statements report certain categories of expenses that are attributable to one or more program or supporting functions of the Seminary. These expenses include depreciation and amortization, interest, the president s office, communications, media production, information technology, and facilities operations and maintenance. Depreciation is allocated base on square footage and interest is allocated based on usage of space. Costs of other categories were allocated on estimates of time and effort.

31 Guidance on Management & General Allocations Terms Clarified Revised Definition Examples Management and general Direct conduct or direct supervision of program or other supporting activities Supporting activities that are not directly identifiable with one or more program, fundraising, or membership development activities. [958 Glossary] These require allocation from management and general activities to the activities that they benefit [ A] Employee benefits management and oversight (human resources) and Payroll Administrating & reporting sponsored contracts [ ] CEO (M&G, Fundraising, other) CFO (M&G, Investment expense) Grant accounting and reporting, Human Resources (all M&G) [ thru 175]

32 Investment Expense Current GAAP: Two Options Report investment expense net (against investment return), or Report investment expenses gross (in expenses) New ASU: Only 1 option Report investment expense net (against investment return) ( ) Netted investment expense limited to external and direct internal investment expenses Investment expense excluded from analysis of expense by nature and function

33 Reporting of Investment Return How to present? Net presentation of investment expenses against investment return on the face of the statement of activities (excludes programmatic investing) Netting limited to external and direct internal expenses May report net return in multiple, appropriately labeled lines (e.g., from different portfolios, in different net asset classes, or in operating versus nonoperating) What to disclose? Disclosure of investment expenses no longer required If reported, label carefully and don t include in expense analysis No longer require disclosure of investment return components

34 What is Direct Internal Investment Expense? Direct internal investment expenses involve the direct conduct or direct supervision of the strategic and tactical activities involved in generating investment return. a. Salaries, benefits, travel, and other costs associated with the officer and staff responsible for the development and execution of investment strategy b. Allocable costs associated with internal investment management and supervising, selecting, and monitoring of external investment management firms. Exclude expenses 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.

35 Implementation - Disclosure on Board Designations Net Assets Without Donor Restrictions Voluntary resolutions of your board Board-designated endowments Other resolutions earmarking net assets for a specific future expenditure (not budget approval) Considered board decisions related to year-end operating surplus DTS considered Not Designated where board decisions were in the nature of a spending authorization DTS focused on decisions regarding net assets where saving or setting aside, i.e., not spending, was determined Include designations where delegation decisions are delegated to internal management

36 Disclosure on Board Designations Net Assets Without Donor Restrictions

37 Implementation Liquidity and Availability of Resources NFPs required to provide: 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 financial assets at the balance sheet date to meet cash needs for general expenditures within one year (on the face and/or in the notes)

38 Liquidity and Availability of Resources Quantitative Example ASC A

39 Liquidity and Availability of Resources

40 Liquidity and Availability DTS Disclosure Qualitative information on available financial assets: The following table reflects the Seminary s financial assets as of June 30, 2017, reduced by amounts not available for general use within one year. Financial assets are considered unavailable when illiquid or not convertible to cash within one year, state required annuity reserves, trust assets, assets held for others, perpetual endowments and accumulated earnings net of appropriations within one year, or because the governing board has set aside the funds for a specific contingency reserve or a long-term investment as board designated endowments. These board designations could be drawn upon if the board approves that action.

41 Liquidity and Availability DTS Disclosure Qualitative information regarding liquidity: The Seminary has a policy to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due. The Seminary also has an unsecured $5,000,000 line of credit, which it could draw upon in the event of an anticipated liquidity need. The line of credit matures on December 31, The interest rate is PRIME (4.25% as of June 30, 2017), with interest due monthly and principal due upon maturity. No funds were borrowed under this agreement during the fiscal year ended June 30, 2017.

42 Effective Date Early Adoption and Transition Effective Date: For fiscal years beginning after 12/15/2017 (calendar YE 2018 and fiscal YE 2019) 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: 1) Analysis of expenses by nature and function, and/or 2) Disclosures around liquidity and availability of resources

43 Example of Early Adoption Choose to early adopt in FY Apply all provisions to FY If choose to present comparative financials for FY , apply all provisions to FY , except can choose not to present: 1. Analysis of expenses by nature and function, and/or 2. Disclosures around liquidity and availability of resources

44 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: Presenting one class of restricted net assets (consolidating temporarily and permanently restricted) Underwater endowment accounting Eliminated disclosures of investment return components and netted expenses Eliminated requirement to provide indirect reconciliation if using direct method for operating cash flows

45 Questions?

46 Thank you. Dan Campbell, Partner CapinCrouse LLP Fran Brown, Partner CapinCrouse LLP