Overhaul of the AICPA Audit and Accounting Guide Not-for-Profit Entities

Transcription

1 Overhaul of the AICPA Audit and Accounting Guide Not-for-Profit Entities SUSAN C. STEWART, CPA, CIA DIRECTOR, NATIONAL PROFESSIONAL STANDARDS GROUP MCGLADREY LLP

2 Expected Issuance of Guide The AICPA is expected to issue a comprehensive revision of the Audit and Accounting Guide Not-for- Profit Entities in the spring of 2013 Financial Reporting Executive Committee (FinREC) Not-for-Profit Entities Expert Panel Not-for-Profit Guide Task Force Final approval for issuance was given 11/26/12 First revision, other than annual conforming changes, since the Guide was released in 1996

3 Presenter: Susan C. Stewart, CPA, CIA Director, National Professional Standards Group Member of AICPA NFP Expert Panel and Audit Guide Task Force University of Michigan graduate University of Minnesota CFO program College Football Fan!!!

4 Source of New Guide Content Considered over 100 questions that had been asked by members who called the AICPA Help Line Authoritative guidance from FASB Codification Non-authoritative guidance from FinREC conclusions Incorporated relevant nonauthoritative AICPA literature NFP-related Technical Questions and Answers (TIS) section 6140 AICPA White Paper on Fair Value Measurement Alternative investments TIS section

5 Chapter 1, Introduction Health care entity definition conformed with AICPA Audit and Accounting Guide Health Care Entities Scope issues Does not include health care entities GAAP financial statements Accrual basis, not special-purpose frameworks Audits, not reviews or compilations

6 Chapter 2, General Auditing Guidance Conformed to the Clarity project Similar content to prior Guide Audit planning Risk assessment and design of testing Evaluation of misstatements Audit communications Going concern Group audits Other guide chapters have NFP-specific suggested audit procedures relating to the chapter s topic

7 Chapter 3, Financial Statements and General Financial Reporting Matters Statement of financial position Liquidity and the effect of restrictions on liquidity Statement of activities Prior-period errors Changes in accounting principles Reporting items that would be included in other comprehensive income of a business entity

8 Chapter 3, Financial Statements and General Financial Reporting Matters Statement of cash flows Chart of common cash flows and their classification ASU for financial assets sold immediately Statement of functional expenses FinREC encouraging presentation by all NFPs that are supported by the general public Expanded identification of related parties and transactions with related parties

9 Chapter 3, Financial Statements and General Financial Reporting Matters Expanded coverage of interests in related entities If the objective of the relationship is to accomplish the purpose or mission for which the NFP exists or to serve the NFP s administrative purposes LLPs, LLCs, partnerships, equity-method investees Consolidations Classification of net assets Subsidiaries that use industry-specific guidance

10 Chapter 4, Cash, Cash Equivalents, and Investments Combination of chapters 4 and 8 of former Guide Restrictions, designations, and similar limitations may prevent items from being cash equivalents Classification in statement of financial position Centralized cash management arrangements Certificates of deposit Investment expenses

11 Chapter 4, Cash, Cash Equivalents, and Investments Expanded coverage--interests in related entities (aka alternative investments) if the objective is to invest in the entity for investment return Disclose declines in fair value after fiscal year-end Investment pools, including those managed by others Disclosures Suggested audit procedures

12 Chapter 4, Cash, Cash Equivalents, and Investments Endowments Classification of net assets under UPMIFA Effect of governing body appropriations on release of restrictions Calculation and classifications should be done on a fund-byfund basis, not on a portfolio basis Suggested audit procedures for endowments

13 Chapter 5, Contributions Received and Agency Transactions Increased focus on core recognition principles Difficulty in measuring contribution is not justification for not recognizing the gift Clarification of explicit and implicit restrictions Resources must be capable of providing economic benefit permanently for there to be a permanent restriction FinREC guidance for meaning of remote condition Additional guidance on fair value measurement

14 Chapter 5, Contributions Received and Agency Transactions Is the transfer a contribution or an exchange? Flowchart When elements of both are present, divide the transaction in two, measuring exchange first Examples Bargain purchase Membership dues Naming opportunities Donor status Special events

15 Chapter 5, Contributions Received and Agency Transactions New sections on reporting and valuing noncash gifts Gifts in kind FinREC guidance for determining whether the NFP is acting as an agent or is the recipient of a gift Fundraising and informational materials, advertising, media time or media space Use of property and equipment Guarantees of indebtedness Loans with below- market interest rates Contributed services

16 Chapter 5, Contributions Received and Agency Transactions Promises to give FinREC conclusion on when to imply time restrictions that expire when payments are due Recognition of conditional promises to give when information about conditions being met comes to light after the fiscal year s end Measurement Net realizable value for promises due in less than one year AICPA White Paper for promises dues in one year or more

17 Chapter 5, Contributions Received and Agency Transactions Bequests Classification of contribution revenue Promises to give payable upon the donor s death Fundraising activities Internal fee charged against restricted gifts Fees netted by fundraiser before remitting gifts Agency Nondiscretionary assistance programs Clarification about financially interrelated entity

18 Chapter 6, Split Interest Agreements and Beneficial Interests in Trust New coverage of life interests in real estate Implementation guidance Distinguishing revocable rights from irrevocable rights Determining whether NFP is the trustee Purchase of annuity contract to make payments to the beneficiary FinREC recommendation to use fair value for assets and liabilities if NFP is trustee of a splitinterest agreement

19 Chapter 6, Split Interest Agreements and Beneficial Interests in Trust Beneficial interest in a trust held by another entity What if NFP is unable to obtain information to measure the beneficial interest FinREC recommendation for disclosures Measurement of split-interest liabilities Software that determines tax deductibility may not be appropriate for determining fair value AICPA White Paper conclusions Insurance annuity contracts for certain gift annuities Present value techniques for all other agreements

20 Chapter 7, Other Assets Expanded discussion of prepaid and deferred costs Inventory Inventory valuation Gross or net presentation of sales of inventory Acting as an agent in sales of commodities for monetization Goodwill and intangible assets Impairment ASU and ASU

21 Chapter 7, Other Assets Collections Accounting for items not added to a collection Effect of restrictions on valuation of collection items Depreciation and impairment of capitalized collections Separate reporting in statement of activities for transactions involving collection items that were not capitalized

22 Chapter 8, Programmatic Investments NEW Programmatic investments are any investment by an NFP that meets the following two criteria: Its primary purpose is to further the tax exempt objectives of the NFP. The production of income or the appreciation of the asset is not a significant purpose (that is, an investor seeking a market return would not enter into the investment). Similar to program-related investment, IRS Sec. 4944(c).

23 Chapter 8, Programmatic Investments NEW Core Considerations Determine when the initial transaction occurs whether the investment is programmatic If there is a contribution element, report it as contribution expense Use GAAP for similar financial instruments, except for the contribution element, if any Significance of the investments and the quantitative and qualitative risks determine the type of financial statement presentation and the extent of disclosures

24 Chapter 8, Programmatic Investments NEW For programmatic loans, look to one of two areas of GAAP FASB ASC 310 and Interest rate incorporates risk that some payments may not be collected Impute interest income, then recognize impairment expense for uncollectible portion Inherent contribution Entirely a loan, entirely a contribution, or part loan and part contribution Determine if contribution portion is conditional or unconditional Measure loan at present value of most likely cash flows

25 Chapter 8, Programmatic Investments NEW Programmatic equity interests By definition, they are interests in entities that provide goods or services that accomplish the purpose or mission for which the NFP exists or that serve the NFP s administrative purposes. Follow the guidance in chapter 3, using Exhibit 3-2 Test to identify impairment

26 Chapter 8, Programmatic Investments NEW Programmatic guarantees of other s indebtedness Initially recognize liability at fair value unless contingent liability is greater Reduce liability as risk is reduced Disclosures Loans See FASB ASC Equity See FASB or Guarantees See FASB ASC FinREC recommends additional disclosures

27 Chapter 9, Property and Equipment Use of PP&E owned by others Right to use property without making lease payments or making payments that are significantly below market rates Inherent contribution unless the agreement includes other rights or privileges of a commensurate value If used in exchange transaction in which the resource provider retains legal title during the term of the arrangement, report a contribution if it is probable that the NFP will be permitted to keep the assets when the arrangement terminates Capitalized interest of tax-exempt debt

28 Chapter 10, Debt and Other Liabilities New section on tax-exempt (municipal bond) debt based on the AICPA Audit and Accounting Guide Health Care Entities Expanded discussion of credit enhancements, debt extinguishments, debt modifications, and classification Fair value measurement of liabilities Multiemployer pension or postretirement benefits plans

29 Chapter 11, Net Assets and Reclassifications of Net Assets NFP s fiduciary responsibility to meet donor restrictions Expiration of restrictions Using restricted contributions first Restrictions on long-lived assets If NFP has policy of implying time restrictions on gifts of longlived assets, those implied time restrictions expire over the useful lives of the acquired assets In the absence of donor stipulations specifying how long donated assets must be used or an NFP's policy of implying time restrictions, restrictions expire when the assets are placed in service

30 Chapter 11, Net Assets and Reclassifications of Net Assets Expiration of restrictions on promises to give By specifying future payment dates donors indicate that their gift is to support activities in each period in which a payment is scheduled Time restrictions lapse when the receivable is due; gift becomes available for the donor-specified purpose If gift is for the construction or purchase of a specific longlived asset, the donor supports activities of the period in which that asset is constructed or placed in service, even though the payment dates extend beyond that period

31 Chapter 11, Net Assets and Reclassifications of Net Assets NFPs are encouraged to disclose detailed information about the restrictions that have been met Failure to meet a donor s restriction may require accrual of a liability or a contingency disclosure Changing classification of net assets reported in a prior year is a correction of an error Example net asset classification for reporting the noncontrolling interest in a for-profit subsidiary

32 Chapter 12, Revenues and Receivables from Exchange Transactions Broad guidance on concepts of revenue recognition Revenues from exchange transactions are reported as increases in unrestricted net assets even if there are legal limitations on the uses of the revenue arising from contracts or other agreements Membership dues recognized over the period of membership Special rules for nonrefundable initiation and life membership fees Disclosures about financing transactions such as loans receivable and employee receivables

33 Chapter 13, Expenses, Gains and Losses Functional classification of expenses Determining major programs Most meaningful when major programs correlate with descriptions of the mission and programs used in the NFP s fundraising materials, programmatic promotional materials, and other public information Classification of costs of sales Classification of costs of special events Allocation of overhead is an interprogram transaction that should be reported as a reduction of expense of the program providing the services

34 Chapter 13, Expenses, Gains and Losses Fundraising costs Unusual for an NFP to have contributions but have minimal or no fundraising expense Examples provided Fundraising brochures and promotional items are expensed when used, not when purchased Fees charged by professional fundraisers, federated fundraisers and similar are reported as expenses even if netted by fundraiser before remitting gifts Costs of soliciting contributed services

35 Chapter 13, Expenses, Gains and Losses Contributions made FinREC recommends that contributions to other NFPs be separately reported Distributions to financially interrelated NFPs are functionally classified to the extent possible. The portion that cannot be allocated to functions is treated as a separate supporting service. An NFP that contributes use of facilities to another recognizes a payable and an expense

36 Chapter 14, Reports of Independent Auditors Updated for the Clarity Project Example Auditors Reports Comparative statements or Comparative information Unqualified opinion Supplementary information Special-purpose frameworks Compliance audits Prescribed forms

37 Chapter 15, Tax and Regulatory Considerations Greatly expanded discussion about legal and regulatory environment Maintaining the NFP s tax-exempt status Intermediate sanctions Automatic excess benefit transactions Lobbying Political campaign activities Prohibited tax shelter transactions

38 Chapter 15, Tax and Regulatory Considerations Internal Revenue Service Filing requirements Unrelated business income Alternative investments Employment taxes Private foundation excise tax FASB ASC 740 Income tax positions Deferred tax assets and liabilities

39 Chapter 15, Tax and Regulatory Considerations State laws and regulations Charitable solicitation laws State gaming regulations UPMIFA Securities regulation, including annuity contracts Sarbanes-Oxley and governance Anti-Terrorist financing guidelines

40 Chapter 16, Fund Accounting Few changes Clarification for converting fund balances to net asset classes Current funds Plant funds Loan funds Endowment funds Annuity funds

41 Questions? Now is the time!

42 Thank you!