Alerding CPA Group Accounting Update 2016 Preparing for Change. James Schmutte Ball State University December 9, 2016

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1 Alerding CPA Group Accounting Update 2016 Preparing for Change James Schmutte Ball State University December 9, 2016

2 Overview Revenue recognition Leases Financial reporting for not-for-profits

3 Update Revenue from Contracts with Customers 706 pages

4 Core Principle and Related Process 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 and services.

5 Important Concepts Distinct goods/services Standalone selling price

6 Distinct Goods/Services Customer can benefit from good/service either on its own or together with other resources readily available to customer; and Entity s promise to transfer good/service to customer is separately identifiable from other promises in contract Not an input to produce/deliver output specified by customer Does not significantly modify another good/service in contract Not highly dependent on or interrelated with other goods/services in contract

7 Standalone Selling Price Price entity would sell goods/services separately to customer at contract inception Observable standalone prices (contractually stated or list price) Estimate using reasonably available information current market conditions, entity-specific factors, and information about customer Adjusted market assessment approach Expected cost plus a margin approach Residual approach

8 Core Principle and Related Process Combining contracts Contract modifications

9 Core Principle and Related Process Separate or combine

10 Core Principle and Related Process Variable Consideration Financing Element

11 Core Principle and Related Process Discounts

12 Core Principle and Related Process Point in Time Over Period of Time

13 Effective Date Public entities Annual reporting periods beginning on or after December 15, 2017 Nonpublic Entities Annual reporting periods beginning on or after December 15, 2018 Early application is permitted, but no earlier than annual reporting periods beginning on or after December 15, 2016

14 Update Leases 491 pages

15 Classification of Leases Classification based on defined criteria Finance lease Operating lease Classification is determined at commencement of the lease Initial lease classification is not reassessed unless lease contract is modified Short-term leases ( 12 months) an accounting policy choice

16 Finance Lease Criteria The lease transfers ownership to the lessee by the end of the lease term The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise The lease term is for the major part of the remaining economic life of the underlying asset The present value of the sum of the lease payments and any residual value guaranteed by the lessee exceeds substantially all of the fair value of the underlying asset The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term

17 Operating Lease Criteria Lease meets none of the finance lease criteria

18 So after nearly 11 years where are we?

19 Lessee Accounting At the commencement date of the lease measure and recognize: The liability to make lease payments measured as the present value of the lease payments The right-of-use asset measures as the sum of: The initial amount of the lease liability to make lease payments Any initial direct costs incurred by the lessee Payments made by a lessee to the lessor at or before the lease commencement date minus any lease incentives received

20 Lessee Accounting and Financial Reporting

21 Comparison of Expense Patterns Finance Lease Operating Lease 21

22 Effective Date Public business entities fiscal years beginning after December 15, 2018 All other entities fiscal years beginning after December 15, 2019 All entities may adopt early

23 If It Was Only Going To Be That Easy: Lessee Lease Issues Does the contract contain a lease Identify the lease components Measure the consideration Allocate the consideration to the lease and non-lease components Measure and record the ROU and lease liability Determine the lease classification Subsequent recognition and measurement of expenses Lease modification, impairment, early termination 23

24 Update Presentation of Financial Statements of Not-for-Profit Entities 270 pages

25 Statement of Financial Position Present on the face of the statement the amounts of net assets with donor restrictions net assets without donor restrictions, total net assets Underwater endowments reflected in net assets with donor restriction

26 Statement of Financial Position 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 receivable 3,025 2,700 Short-term investments 1,400 1,000 Assets restricted to investments 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 Grants payable 875 1,300 Notes payable - 1,140 Annuity trust obligations 1,685 1,700 Long-tern 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

27 Statement of Activities Present on the face of the statement (for each period presented) - the amount of the change In each of the two classes of net assets In total net assets Continued flexibility in reporting formats Single statement, single column Single statement, multi-columns Separate statements (each class of net assets)

28 Statement of Activities

29 Report Expenses By Function and Nature Presentation Options: - Within the statement of activities - Within the footnotes - Combination of statement of activities and notes - As a separate statement

30 Statement of Cash Flows Present the net amount of cash flows from operations using either the direct or indirect method of reporting Eliminate the required presentation or disclosure of the indirect (reconciliation) if using the direct method

31 Other Provisions Report investment return - net of external and direct internal expenses In the absence of explicit donor restrictions, use the placed-in-service approach for reporting gifts of cash or other assets used to acquire or construct a long-lived assets

32 Enhanced Disclosures The effects, if any, of the limits on the use of resources imposed by an NFP s governing board, donors, grantors, laws, and contracts on the NFP s liquidity, financial flexibility, and allocation of resources How the NFP manages its liquidity to meet shortterm demands for ash The types of resources used and how they are allocated in carry out an NFP s activities

33 Enhanced Disclosures The effects, if any, of the methods used for allocating costs among an NFP s program and support activities The effects, if any, of underwater endowment funds on an NFP s spending policies and its financial flexibility

34 NFP Revenue Questions What is nature of the revenue Contribution (unilateral and unconditional) Unrestricted Restricted Exchange transaction When to recognize the revenue Contribution when received Exchange transaction when earned ASU

35 Effective Date Fiscal years beginning after December 15, 2017 Early application permitted Apply retrospectively Option to omit information for periods prior to adoption Expenses by functional and natural classification Disclosure about liquidity and availability of resources

36 Thank you for an enjoyable morning

37 James Schmutte Professor Ball State University Department of Accounting Whitinger Business Building, Room W. University Ave. Muncie, IN James Schmutte, professor of accounting, received his BA from Marian College, his MBA from Indiana State University, and his DBA from the University of Kentucky (1983). He is a CPA and joined the Ball State faculty in His primary teaching areas are auditing and financial accounting. Dr. Schmutte was named the 1998 Outstanding Accounting Educator by the Indiana CPA Society and designated a 2008 Super CPAs by Indiana Business Magazine. His research interests include the implementation of auditing standards, the peer review process, and accounting education. His research has been published in The Journal of Accountancy, The CPA Journal, The Ohio CPA, Issues in Accounting Education, and The Journal of Accounting Education. Dr. Schmutte also serves as a consultant to the Indiana CPA Society and several public accounting firms. His specialization is continuing professional education. He has presented over 450 professional education seminars. Dr. Schmutte also works as a Technical Reviewer with the Peer Review Committee of the Indiana CPA Society. James Schmutte Bio