FASB Update Presenters: Cathy Clarke, CLA; Jeff Mechanick, FASB

Transcription

1 FASB Update Presenters: Cathy Clarke, CLA; Jeff Mechanick, FASB The views expressed in this presentation are those of the presenters. Official positions of the FASB are reached only after extensive due process and deliberations. Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor.

2 Agenda Presentation of Financial Statements of NFP Entities Revenue Recognition Grants and Contracts to NFP Entities Leases Other Recent ASUs Other Current FASB Projects 2

3 Learning Objectives Identify new and proposed FASB Accounting Standards Updates (ASUs) and effective dates Gain a deeper understanding of the new standards Determine which new standards apply, and under what circumstances Learn implementation considerations, challenges, and approaches 3

4 ASU Presentation of Financial Statements of Notfor-Profit Entities

5 Key Areas Affected Net Assets Classes Statement of Cash Flows Key Changes in ASU Liquidity & Availability Investment Return Expense Reporting Not-for-Profit Section 5

6 Net Assets 6

7 Balance Sheet Presentation 7

8 Adjustments Upon Adoption Reclassify unrestricted net assets to net assets without donor restrictions Reclassify temporarily restricted and permanently restricted net assets to net assets with donor restrictions Reclassify any unrestricted net assets related to underwater endowments to net assets with donor restrictions Reclassify any temporarily restricted net assets related to implied restrictions on contributions restricted for acquisition or construction of PP&E to net assets without donor restrictions (to adopt placed-in service approach) 8

9 Sample Reclassifications 9

10 Statement of Activities Presentation EXAMPLE 1 10

11 Statement of Activities Presentation EXAMPLE 2 11

12 Statement of Activities Presentation EXAMPLE 3* * GAAP still allows flexibility in presentation of NFP financials, examples in slide deck are not all inclusive 12

13 Board-designated Net Assets Presentation May disclose on the face of the statement of financial position or in the notes Net Assets Without donor restrictions Undesignated 3,057,607 Designated by the Board for operating reserve 300,000 Designated by the Board for endowment 15,511,186 Invested in property and equipment, net of related debt 21,150,885 40,019,678 Could present in narrative or tabular form in the note. 13

14 Operating Measure Considerations 14

15 Liquidity and Availability 15

16 Liquidity/ Availability Disclosure, Example 1 Liquidity and Availability 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 $ 4,851,231 Operating investments 723,006 Accounts receivable 312,216 Promises to give 985,846 Distributions from assets held under split-interest agreements 145,000 Distributions from beneficial interests in assets held by others 180,110 Endowment spending-rate distributions and appropriations 1,115,664 $ 8,313,073 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 $15,511,186 is subject to an annual spending rate of 4.5 percent as described in Note 9. 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 $300,000 as of December 31, 201X. 16

17 Liquidity/ Availability Disclosure, Example 2 17

18 Example NFP with Deficiency in the Composition of Assets to Comply with Donor-Imposed Restrictions * Donations restricted for purposes more limited than general expenditures total $3,750. Codification references: An NFP shall disclose the following, if applicable, in the notes to the financial statements and may include that information in qualitative disclosures on the availability of an NFP s financial assets in accordance with paragraph A(b): b. The fact that the NFP has not maintained appropriate amounts of cash and cash equivalents to comply with donor-imposed restrictions (see paragraph ) If the noncompliance results from a not-for-profit entity s (NFP s) failure to maintain an appropriate composition of assets in amounts needed to comply with all donor restrictions, the amounts and circumstances shall be disclosed. 18

19 Expense Reporting Report expenses by function and nature in one place Where to Report? Statement of Functional Expenses Statement of Activities Notes to Financial Statements Do not report as supplementary information Describe allocation methods used 19

20 Expense Reporting (cont d.) 20

21 Example 1 Analysis of Expenses Presentation in the notes or a separate statement 21

22 Example 2 Analysis of Expenses Presentation on the face of the statement of activities 22

23 Reporting of Investment Return 23

24 Reporting of Investment Return - Examples Direct internal investment expenses involve the direct conduct or direct supervision of the strategic and tactical activities involved in generating investment return. The following are some examples: CIO s Compensation: Potentially all of expense CFO s Compensation: Potentially a partial allocation of expense Investment Accountant s Compensation: Potentially a partial allocation of expense CIO s Travel Expenses to Visit Fund Managers: Potentially all of expense Accountant Performing Endowment Allocations: None 24

25 Incentive to Use Direct Method for Cash Flow Statement Direct Indirect 25

26 ASU Revenue Recognition (And Amendments: , , , , )

27 Final U.S. GAAP Model for Revenue 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 performanc e obligations 3. Determine the transaction price 4. Allocate the transaction price 5. Recognize revenue when (or as) a performance obligation is satisfied 27

28 Major Changes Relative to Current Guidance Focus is now on the contract rather than on transactions of certain types or within certain industries Variable consideration and constraints on revenue Licenses Recognition and measurement guidance applies to transfers and sales of nonfinancial assets to non-customers (Topic 610) Guidance on accounting for costs to obtain and fulfill a contract with a customer, if not addressed in other topics (Subtopic ) Disclosures 28

29 Contributions (Out of Scope of Topic 606) At its March 30, 2015 meeting FASB Transition Resource Group (TRG) members agreed that nonreciprocal contributions are not within the scope of the new revenue standard FASB will not amend Topic 606 to clarify this scope exception TRG members agreed with FASB Board member s suggestion that the AICPA could evaluate whether to include interpretive clarification in non-authoritative industry guidance 29

30 Exchange vs Non-exchange Transactions :... A grant, sponsorship, or membership may be entirely a contribution, entirely an exchange, or a combination of the two : Moreover, a single transaction may be in part an exchange and in part a contribution See paragraphs through through for direct benefits provided to donors at special events. 30

31 Determination of Elements ASC Contributions ASC 606 Contracts with Customers Individual asset transfers may be contributions, exchange transactions, or a combination of both Indicators Useful in Distinguishing Contributions from Exchange Transactions ASC

32 Determining the Application of Topic

33 Disclosure Disaggregation of revenue Qualitative and quantitative* disaggregation of revenue into categories that depict how revenue and cash flows are affected by economic factors 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 Quantitative disclosures * * for public entities only, including conduit debt obligors 33

34 Revenue Recognition Effective Dates New (deferred) effective dates CY 2018 (FY 2019) for public entities* (including interim) CY 2019 (FY 2020) for nonpublic entities (no interim, just annual period; interims in subsequent years Early adoption permitted, but not before the original effective date Previous effective dates CY 2017 (FY 2018) for public entities* (including interim) CY 2018 (FY 2019) for nonpublic entities (no interim, just annual period; interims in subsequent years Nonpublic entities permitted to adopt early, but no earlier than public entities * Public entities include NFPs with publicly traded direct or conduit debt 34

35 Rev. Rec. Some Areas of Focus for NFPs as Discussed by AICPA Task Forces 35

36 Grants and Contracts to NFP Entities (Improving the Scope and Accounting Guidance for Contributions Received and Contributions Made)

37 Timeline of the Project Issued Proposed Update Comment Period Deadline Final ASU August 3, 2017 November 1, 2017 Q

38 Scope Applies to all entities (NFPs and business entities) that receive or make contributions unless otherwise indicated. Excludes transfers of assets from the government to business entities. Applies to both contributions received by a recipient and contributions made by a resource provider. The intent is simply that both apply the same guidance, the entities do not need to track each other s accounting to achieve the same reporting results. 38

39 Why This Upcoming ASU Is Necessary To address difficulty and diversity in practice among NFPs in: Issue 1 Characterizing grants and similar contracts with government agencies and others as (i) reciprocal transactions (exchanges) or (ii) nonreciprocal transactions (contributions) Issue 2 Distinguishing between conditional and unconditional contributions 39

40 Issue 1: Grants and Contracts Reciprocal vs Nonreciprocal (Exchange vs Nonexchange) Many NFPs treat governmental grants/contracts as exchange transactions without regard to the substance of the agreement Some equate the government with the general public, i.e., the government is merely purchasing benefits for taxpayers that it would otherwise have to provide itself The underlying issue is whether the government receives direct commensurate value in return because the public benefits Many believe the government doesn t make contributions, i.e., it is not within the government s purview to make philanthropic decisions or make contributions using taxpayer monies 40

41 Issue 2: Contributions Conditional vs Unconditional Stakeholders find it difficult to distinguish between conditional and unconditional contributions Especially when funds are provided with certain outcome stipulations, but no specified return policy. Diversity exists in the application of the remote notion Whether the likelihood of failing to meet a condition is remote Some NFPs believe that any condition within their control has a remote likelihood of not being met; other NFPs believe that administrative or other trivial conditions prevent recognition until satisfied 41

42 Issue 1: Who Receives the Benefit? Current Practice Proposed Clarification Direct commensurate value to resource provider Exchange Specified third parties General public Exchange Follow Topic 606 (or other, such as Leases) Direct commensurate value to resource provider Specified third parties Government/ resource provider is a 3 rd party payer on behalf of an identified customer Nonexchange Follow Topic Specified third parties Continue to monitor GASB and IPSASB projects in this area General public *The revenue recognized would be the underlying contract s patient service revenue, tuition revenue, etc. **A focus on whether or not there is a performance obligation possibly could include some contracts where the general public is the primary beneficiary 42

43 Reciprocal vs Nonreciprocal Key Clarifications Resource provider is NOT synonymous with General public A resource provider includes governmental entities, private foundations and others Indirect benefit received by the public is not equivalent to commensurate value received by the resource provider Indirect benefit received by a resource provider in providing a societal benefit is not equivalent to commensurate value received by the resource provider Furthering a resource provider's mission or positive sentiment from acting as a donor does not constitute commensurate value received by the resource provider 43

44 Reciprocal vs Nonreciprocal Key Clarifications The type of resource provider should not override the substance of the transaction If the primary beneficiary of a grant or contract is a 3 rd party, an NFP must use judgment to determine if the transaction is reciprocal or nonreciprocal 44

45 Issue 2: Conditional vs. Unconditional Contributions For a Donor-Imposed Condition to Exist: 45

46 Indicators to Determine a Barrier *During redeliberations, the Board decided to make additional clarifications to each indicator 46

47 When to Recognize Revenue/Expense? Recipients When the contribution is no longer conditional No longer a right of return or release No longer a barrier Funds received in advance would be recorded as a liability in the recipient s books Donors Contributions made generally should be recognized by the donor at the same time the done recognizes the contribution received Donor does not recognize until the contribution has become unconditional Donor follows the same determination criteria as donee 47

48 Example #1: Grant from Federal Government NFP A is awarded a grant from the federal government. The agreement requires NFP A to: Follow the rules and regulations established by the Office of Management and Budget (OMB) Incur certain expenses (or costs) in compliance with rules and regulations established by the OMB and the federal awarding agency Obtain an annual audit in accordance with OMB guidelines Submit a summary of research findings to the federal government Any unused assets are forfeited, and any unallowed costs that have been drawn down by NFP A are required to be refunded. NFP A retains the rights to the findings. Is this transaction exchange or nonexchange? If nonexchange, is it conditional or unconditional? 48

49 Example #1: Conclusion NFP A concludes this is a nonexchange transaction (nonreciprocal). Explanation: Commensurate value is not being exchanged between the two parties NFP A retains all the rights to the research and findings and received the primary benefit of the findings The federal government s benefit is considered indirect because the research and findings serve the general public. 49

50 Example #1: Conclusion, continued NFP A determines that it should account for this grant as conditional. Explanation: The grant agreement limits NFP A s discretion as a result of the specific requirements on how the assets may be spent (qualifying expenses) There is a right of return and release The audit requirement alone is not a barrier to entitlement because it is not related to the purpose of the agreement 50

51 Example #2: Grant from a Private Foundation NFP B receives a grant from a private foundation for funding in the amount of $400,000 to provide specific career training to disabled veterans. The grant requires NFP B to provide training to at least 8,000 disabled veterans during the next fiscal year, with specific minimum targets that must be met each quarter. There is a right of release from the obligation in the agreement. Is this transaction exchange or nonexchange? If nonexchange, is it conditional or unconditional? 51

52 Example #2: Conclusion NFP B determines that it should account for this grant as nonexchange and conditional. Explanation: The foundation does not receive commensurate value in return The agreement contains a right of release from obligation The foundation requires NFP B to achieve a specific level of service that would be considered a measurable performance-related barrier 52

53 Example #3: Pledge from an Individual University C receives a multi-year pledge from a wealthy individual to build a new green building on a college campus. The pledge is for $20 million payable over 3 years. $7 million is payable up front on July 1, 2018 with no associated conditions. A second payment of $6 million is entitled and payable on July 1, 2019 upon evidence that the land was cleared, an architectural design was received, and proper building permits were obtained. A third payment of $7 million is entitled and payable upon receipt of a certificate of occupancy. Is this transaction exchange or nonexchange? If nonexchange, is it conditional or unconditional? 53

54 Example #3: Conclusion University C determines that it should account for this transaction as nonexchange and bifurcates the total pledge. $7 million is unconditional, and $13 million is conditional. Explanation: The wealthy individual is not receiving commensurate value for the $20 million transferred University C will receive the initial $7 million payment without having to satisfy any conditions University C will not be entitled to or receive either of the remaining $13 million in payments unless it overcomes their respective performance barriers, demonstrating the wealthy individual s right of release from obligation if the barriers are not met 54

55 NFP Revenue Recognition Decision Process Resource providers would apply a similar decision making process for recognizing expenses. *Includes thirdparty payments on behalf of identified customers. These do not create new revenue. 55

56 Likely Impact on Funding from Government Agencies Individuals & Corporations Foundations 56

57 Transition Approach Modified Prospective Apply to all agreements: o Existing at the effective date (only apply to the portion of existing agreements not previously recognized) o Entered into after the effective date No restatement of prior amounts recognized Retrospective Application Permitted 57

58 Effective Date *The effective date is the same as the new Revenue Recognition standard (Topic 606) for recipients, and allows for early implementation. 58

59 ASU Leases

60 Lease Definition and Core Principle A lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration A lessee should recognize the assets and liabilities that arise from leases 60

61 Identifying a Lease (The new primary determinant for on/off balance sheet treatment) 61

62 Implications: We Have a Lease Now What? Virtually all leases will require balance sheet recognition as a right-of-use (ROU) asset and lease liability The lease classification (operating or finance) will impact the amount and timing of lease income or expense in the income statement Balance sheet accounting is identical for operating and finance leases Record a right-of-use asset and a lease liability Activities (income) statement accounting is a little more complex 62

63 Activities (Income) Statement Finance Lease Operating Lease Interest expense using the effective interest method Amortization is recorded on the right-of-use asset The periodic expense at the beginning of the lease term will generally be greater than the corresponding cash payments, but will decline over the lease term as the lease liability is reduced Total lease expense is recorded on a straight-line over the lease term: add interest expense (effective interest method) plus amortization of the ROU asset Unlike a finance lease, amortization of the ROU asset is calculated as the difference between the straight-line expense and the interest expense on the lease liability for a given period 63

64 Activities (Income) Statement Finance Lease Operating Lease Interest and amortization expense should generally be presented separately in the income statement The right-of-use asset is tested for impairment in accordance with ASC 360 Lease expense is presented as a single line item in operating expense in the income statement The right-of-use asset is tested for impairment in accordance with ASC

65 How to Determine Lease Classification Finance Lease if ANY of the following 5 criteria are met: 1. Transfer of ownership at end of lease term 2. Option to purchase is reasonably certain 3. Lease term is a major part of the economic life of the asset 4. The present value of the lease payments is substantially all of the fair value of the asset 5. The asset is of a specialized nature Operating Lease if NONE of the above criteria are met 65

66 Lease Classification Implementation Guidance The ASU eliminates the old bright-line rules Lease term is for 75 percent or more of the economic life of the asset The present value of the lease payments (including any guaranteed residual value) is at least 90 percent of the FV of the leased asset Implementation guidance indicates that entities may use thresholds similar to those they currently use; therefore, practice may not be significantly altered 66

67 Components within a lease Lease accounting is applied at the lowest component level After determining the lease and nonlease components, a reporting entity should consider whether the lease contains more than one lease component. Lessee option not to separately account for nonlease components; examples: Property taxes and insurance Common area maintenance (CAM) of leased office space, such as cleaning and landscape services In a lease of specialized equipment to a hospital, the operational or maintenance services that may be provided by the supplier 67

68 Transition Modified retrospective approach; upcoming FASB ASU will add option for reflecting the change as of the beginning of the year of adoption Must recognize ROU Asset & Liability Practical Expedients Identification Classification Use of hindsight 68

69 Effective Date Public Entities: Fiscal years beginning after December 15, 2018, including interim periods within those fiscal years All Other: Fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020 Early application permitted 69

70 Other Recent ASUs

71 Financial Instruments Recognition & Measurement Amendments to current GAAP (Topic 825; ASU ) 71

72 ASU No , Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments 72

73 ASU Classifications of Certain Cash Receipts and Payments 1. Debt prepayment or extinguishment costs 2. Settlement of zero-coupon bonds 3. Contingent consideration payments made after a business combination 4. Proceeds from the settlement of insurance claims 5. Proceeds from the settlement of life settlement contracts 6. Distributions received from equity method investees 7. Beneficial interests in securitization transactions 8. Application of the predominance principle 73

74 ASU Restricted Cash in the SOCF SOCF must explain the change in the total of cash, cash equivalents, restricted cash, and restricted cash equivalents Restricted cash and cash equivalents must be reflected in the beginning and ending totals of cash in the SOCF Must disclose the SOFP line items and amounts with unrestricted and/or restricted cash and cash equivalents The ASU does not define restricted cash or cash equivalents 74

75 Improving the Presentation of Net Periodic Pension Cost & Net Periodic Postretirement Benefit Cost ASU No Background Net benefit cost contains several components with different nature No GAAP guidance on presentation Reduced predictive value and usefulness of information to users Board added project 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 75

76 Other FASB Projects

77 Balance Sheet Classification of Debt Only matters if you present a Key Changes classified Balance Sheet Classification Principle Debt would be classified as noncurrent if either of the following criteria are met as of the balance sheet date: Liability is contractually due to be settled more than one year after the balance sheet date. Entity has contractual right to defer settlement of liability for at least one year after the balance sheet date. Waivers of Debt Covenant Violations The amendments would continue to require an entity to classify debt as noncurrent when there has been a debt covenant violation if the entity receives a waiver that meets certain conditions before the financial statements are issued. Separate Line Item Presentation Refinancing After the Balance Sheet Date The amendments would require separate presentation in a classified balance sheet for debt that is classified as noncurrent because of a waiver of a debt covenant violation obtained after the balance sheet date. The amendments would prohibit an entity from considering a subsequent refinancing when determining the classification of debt as of the balance sheet date. Subjective Acceleration Clause (SAC) The SAC would affect classification of debt only when it is triggered (no probability assessment). 77

78 Cloud Computing Arrangements: Commercial Computing Today Vendors may provide either of the following when a company has a commercial computing need: On-premise software software that resides on the company s systems A cloud computing solution internet-based software that resides on the vendor s or third-party s systems Cloud computing arrangements (CCAs) are becoming more common among software vendors 78

79 Today s Accounting EITF Issue addresses 79

80 EITF Consensus-for-exposure Implementation costs of CCAs that are service contracts would be accounted for in accordance with the guidance in Subtopic on internal-use software For example, configuration costs incurred during the application development stage of implementation would be capitalized, whereas costs incurred during the preliminary project and postimplementation stages would be expensed The amortization period of the capitalized implementation costs would include periods covered by renewal options of the CCA that are reasonably certain to be exercised The amortization of the capitalized implementation costs would be recorded in the same line item on the income statement as the fees for the CCA 80

81 Thank you! Jeffrey D. Mechanick Assistant Director Nonpublic Entities/Chairman, Not-for-Profit Advisory Committee FASB Cathy J. Clarke Chief Assurance Officer, CLA Not-for-Profit Advisory Committee Member, FASB (612) CLAconnect.com linkedin.com/company/ cliftonlarsonallen facebook.com/ cliftonlarsonallen twitter.com/claconnect