Annual Nonprofit Accounting and Auditing Update

Transcription

1 Annual Nonprofit Accounting and Auditing Update July 21, 2016 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 ofnfp the Accounting and Auditing Update BDO KNOWLEDGE Webinar Series Annual international BDO network of independent member firms. Page 1

2 PRESENTER Tammy Ricciardella, CPA Director, Assurance Department BDO Institute for Nonprofit Excellence Phone: Page 2

3 AGENDA Recently Issued Accounting Standards Update - Revenue Recognition (Topic 606) - Leases (Topic 842) - Financial Instruments: Recognition and Measurement (Topic ) - Going Concern (Topic 205) - Discontinued Operations (Topic 205 and 360) - Consolidation (Topic 810) Financial Statements of NFP Entities Other Active Projects: - Accounting for Financial Instruments Credit Losses - Disclosure Framework - Simplification Initiative - Disclosure for Investments in Certain Entities that Calculate NAV per Share - Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments - Statement of Cash Flows: Restricted Cash - Goodwill - Identifiable Intangible Assets Questions? Page 3

4 RECENTLY ISSUED ACCOUNTING STANDARDS UPDATES (ASU) Page 4

5 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 5

6 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 by definition: Contributions Collaborative arrangements Page 6

7 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 7

8 FINAL U.S. GAAP MODEL RECOGNITION 8 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 Remaining performance obligations 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 * Quantitative disclosures * Interim requirements * for public entities only Page 8

9 FASB RECENT STANDARD SETTING (following Discussions with TRG) Identifying Performance Obligations and Licensing 1 Principal versus Agent (Reporting Revenue Gross versus Net) 2 Narrow-Scope Improvements and Practical Expedients 3 Performance Obligations Distinct in the context of the contract Immaterial promises Shipping and handling Licensing Nature of license: over time vs. point in time Scope of constraint on sales-based and usage-based royalties Principal or Agent Good or Service or a Right to a Good or Service 1 ASU (issued April 2016) 2 ASU (issued March 2016) 3 ASU (issued May 2016) Narrow-Scope Improvements Noncash consideration Collectibility Completed contracts at transition Practical Expedients Contract modifications at transition Sales tax presentation (net) Page 9 8

10 TRANSITION, EFFECTIVE DATE AND EARLY APPLICATION Retrospective (with optional practical expedients) Cumulative catch-up PY2 (2016) PY1 (2017) Rev rec under new standard CY (2018) CY Footnotes Cumulative effect at date of application Rev rec under legacy standard Cumulative catch-up Existing* and new contracts under new standard Existing and new contracts disclosed under legacy standard for CY (2018) *contracts for which all (or substantially all) of the revenue Effective dates: has not been recognized under legacy revenue guidance - Public business entities and certain nonprofit organizations: annual reporting periods after 12/15/2017 (including interim period) - All other 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 10

11 GRANTS AND CONTRACTS Unique NFP guidance on contributions, but long-standing diversity in practice in classifying grants and contracts, particularly from governmental entities 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 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 11

12 GRANTS AND CONTRACTS The Board directed the staff to further explore an approach requiring that a notfor-profit entity (NFP) consider a grant (or similar contract) a reciprocal transaction if a resource provider, in making the grant (or similar contract), either (1) directly receives goods or services of commensurate value or (2) fulfills a known and explicit obligation to provide goods or services to others. If it is unclear whether the resource provider is fulfilling such an obligation by means of the grant (or similar contract), that ambiguity would be indicative of a nonreciprocal transaction. Page 12

13 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 13

14 LESSEE MODEL All leases (more than 12 months) are recognized on the lessee s balance sheet Current U.S. GAAP (IFRS) IASB FASB Capital (Finance) Leases Type A 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 14

15 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 15

16 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 16

17 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 17

18 FINANCIAL INSTRUMENTS RECOGNITION AND MEASUREMENT ASU ; TOPIC 825) DISCLOSURES: FV OF FINANCIAL INSTRUMENTS NOT RECOGNIZED AT FV IN BALANCE SHEET Makes various improvements related to financial instruments. ASU extends to all entities other than Public Business Entities the exemption from having to disclose this information Thus, no NFPs or private companies would have to provide these disclosures Currently, NFPs with more than $100 million in assets or with any derivatives (e.g., interest rate swaps) provide these disclosures ASU is effective for NFPs and private companies for fiscal years beginning after 12/15/18 (so calendar year (CY) 2019 (FY )). This provision may be early adopted by these entities for all financial statements not yet issued as early as fiscal years beginning after 12/15/17. Page 18

19 GOING CONCERN (TOPIC 205)(ASU ) ADDRESSES MANAGEMENT S RESPONSIBILITY Summary of Provisions Single threshold model similar in principle to current auditing standards (AU 341). Disclosures required when there is substantial doubt, or when substantial doubt has been alleviated primarily by management plans. Substantial doubt exists when it is probable that entity will not meet obligations for a period of one year from the financial statement issuance date. Applies to both public and nonpublic entities. Effective prospectively for annual periods ending after December 15, 2016 (FY 2016/2017 annual period). Early adoption permitted. Page 19

20 DISCONTINUED OPERATIONS (TOPIC 205 AND 360) Primary objectives of project: (1) Respond to stakeholder concerns that too many disposals of assets qualify for discontinued operations presentation; (2) Enhance convergence with IFRS. Henceforth, disc-ops presentation would be limited to those disposals involving major strategic shifts (e.g., separate major lines of business or major geographic areas of operations). Other disposals would merely be disclosed. Also eliminates the no significant continuing involvement criterion. Effective for disposals beginning in FY PBEs and NFPs: apply prospectively for interim periods/annual periods within Others: apply prospectively for annual 2015, interim periods beginning Early adoption is permitted Page 20

21 CONSOLIDATION (TOPIC 810) Specific Considerations for Not-for-Profits Current Guidance in Topic 810 Amendment Separate accounting model for limited partnerships and similar legal entities (810-20). Includes a presumption that a general partner (GP) controls and thus consolidates the limited partnership. Substantive kick-out or participating rights must exist to overcome the presumption. Eliminates the separate accounting model. Eliminates the presumption of control by a GP. Adds for limited partnerships and similar legal entities that: They may qualify as Voting Entities if partners have substantive kick-out or participating rights over GP An LP with a controlling financial interest consolidates Page 21 Effective for CY 2017 (FY ); Project recently added to provide clarity for NFPs

22 FINANCIAL STATEMENTS OF NOT-FOR-PROFIT ENTITIES Tentative Board Decisions Page 22

23 NFP FINANCIAL STATEMENTS PROJECT KEY OBJECTIVES (RECOMMENDED BY FASB S NFP ADVISORY COMMITTEE (NAC)) Update, not overhaul, the current model Improve net asset classification scheme Improve information in financial statements and notes about: - Financial performance - Cash flows - Liquidity Better enable NFPs to tell their financial story Page 23

24 Phase 2: Need to decide whether to wait to deliberate at same time as the Financial Performance Reporting project for business entities. Page 24

25 PHASE 1 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 25

26 UNDERWATER ENDOWMENTS Revised net asset classification To be reflected in net assets with donor restrictions rather than in net assets without donor restrictions Enhanced disclosures In addition to aggregate amounts by which funds are underwater (current GAAP), also disclose aggregate of original gift amounts (or level required by donor or law) for such funds, fair value, and any governing board policy or decision to reduce or not spend from such funds. Page 26

27 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 27

28 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 required to provide disclosures about methods used to allocate costs among program and support functions Page 28

29 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 29

30 LIQUIDITY AND AVAILABILITY 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 current financial assets at the balance sheet date to meet cash needs for general expenditures (on the face and/or in the notes) Page 30

31 CASH FLOW STATEMENT Allow free choice between the Direct Method and the Indirect Method Indirect reconciliation no longer required for Direct Method Page 31

32 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 32

33 EFFECTIVE DATE, EARLY ADOPTION, AND TRANSITION Effective Date: For fiscal years beginning after 12/15/2017 (so calendar year 2018 or fiscal year 2019) - 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 in the year of adoption: 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 33

34 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 Page 34

35 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) Present one class of restricted net assets (consolidating temporarily and permanently restricted) (2) Follow revised underwater endowment accounting (3) Eliminate disclosures of investment return components and netted expenses (4) Eliminate requirement to provide indirect reconciliation if using direct method for operating cash flows Page 35

36 PROJECT TIMELINE: NEXT STEPS End of Comment Period on Exposure Draft August 2015 Board Meetings Redeliberations on topics in Phase 1 December 2015 March 2016 Begin redeliberations on Phase 2 2 nd half of 2016?? October 28, 2015 Summer 2016 FY Page 36 Board Meeting Decision to split project into Phase 1 and Phase 2 Goal to Issue ASU on Phase 1 Effective date of ASU on Phase 1 (Fiscal years beginning after 12/15/2017)

37 OTHER ACTIVE PROJECTS Page 37

38 ACCOUNTING FOR FINANCIAL INSTRUMENTS CREDIT LOSSES (ASU ) Contributions (pledges) receivable are excluded Trade receivables and student loans (and other programmatic loans) receivable are included Page 38

39 CECL OVERVIEW 39 Each reporting date, allowance equals estimate of all contractual cash flows not expected to be collected over life of financial asset Reflects management expectations based on past events, current conditions, and reasonable and supportable forecasts Includes changes in estimate of expected credit losses resulting from, but not limited to, changes in: Credit risk of assets held by an entity Conditions since previous reporting date Reasonable & supportable forecasts about the future Expected credit loss model reflects more forwardlooking information Provides enhanced disclosures compared to current GAAP Page 39

40 ACCOUNTING FOR FINANCIAL INSTRUMENTS CREDIT LOSSES EFFECTIVE DATE Public Business Entities that file with the SEC effective for fiscal years beginning after December 15, 2019 and interim periods within these years. Other Public Business Entities fiscal years beginning after December 15, 2020 and interim periods within these years. Other entities including NFPs and EBPs fiscal years beginning after December 15, 2020 and interim periods for fiscal years beginning after December 15, Entities can early adopt with interim and fiscal years beginning after December 15, Page 40

41 DISCLOSURE FRAMEWORK Phase I: Board s Decision Process Exposure Draft Redeliberations Phase II: Entity s Decision Process Purpose of the notes General limitations Relevance Costs Certain forward-looking information Information that could be appropriate for inclusion in notes Considerations for interim reporting Guidance on applying materiality Applied individually and in the aggregate Legal concept Quantitative and qualitative Omission of immaterial disclosure is not an accounting error Comment period for exposure draft ended December 8 th Page 41

42 DISCLOSURE FRAMEWORK NEXT STEPS Analyze comment letters regarding the Entity s decision process Utilize field study results, proposed framework and other feedback to change disclosure requirements - Defined Benefit Pension Plans - Income Taxes - Fair Value Measurement - Inventory Address disclosures for interim periods Coordinate with SEC on disclosure reform Redeliberate Board s decision process after topic specific reviews are completed Page 42

43 SIMPLIFICATION INITIATIVE Debt Classification - exposure draft estimated to be issued Q Debt Issuance Costs - final ASU available (ASU ) Equity Method of Accounting Elimination of retroactive method (ASU ) Difference in basis (in initial deliberations stage) Cloud Computing Costs Account for fees paid in these arrangements (ASU ) Inventory Clarification that measurement should be at lower of cost and net realizable value (ASU ) Simplification Initiative will cover an array of other issues as well. Page 43 43

44 DISCLOSURE FOR INVESTMENTS IN CERTAIN ENTITIES THAT CALCULATE NAV PER SHARE (ASU ) No longer require investments for which fair value is measured at net asset value (NAV) (or its equivalent) using the practical expedient to be categorized in the fair value hierarchy Still must disclose information on these investments to help users understand the nature and risk of these investments. Effective for public business entities for years beginning after December 15, 2015 (CY 2016/FY 2017) Effective for all others for years beginning after December 15, 2016 (CY 2017/FY 2018) Page 44

45 STATEMENT OF CASH FLOWS: CLASSIFICATION OF CERTAIN CASH RECEIPTS AND CASH PAYMENTS (FINAL STANDARD EXPECTED Q3 OF 2016) 1. Debt prepayment or debt 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 insurance settlement policies 6. Distributions received from equity method investees 7. Beneficial interests in securitization transactions 8. Predominant cash receipts and cash payments 9. Restricted cash* (removed from here and addressed in EITF Issue No. 16-A) * Sub-issue: amounts moved between unrestricted and restricted cash accounts; amounts deposited and paid directly from restricted cash accounts Page 45

46 STATEMENT OF CASH FLOWS (TOPIC 230): RESTRICTED CASH (ED ISSUED APRIL 2016) Addresses diversity in presentation of restricted cash Proposes that restricted cash and cash equivalents should be included with cash and cash equivalents in the reconciliation of beginning to ending presentation of cash and cash equivalents. Page 46

47 GOODWILL (MOSTLY HEALTHCARE NFPS) (ED ISSUED IN MAY 2016) The objective of this project is to simplify the subsequent measurement of goodwill for PBEs and NFPs. ED proposes to eliminate step 2 of current goodwill impairment testing which includes determining the implied fair value of goodwill and comparing it with he carrying amount of that goodwill. The ED instead proposes that the annual goodwill impairment test be performed by comparing the fair value of a reporting unit with its carrying amount. Future phases of this project will consider whether to make additional changes to the subsequent accounting for goodwill, including permitting or requiring: - Amortization of goodwill over its useful life not to exceed a maximum number of years - And further changes to the impairment testing methodology Page 47

48 IDENTIFIABLE INTANGIBLE ASSETS (MOSTLY HEALTHCARE NFPS) FASB has a project on its agenda for PBEs and NFPs concerning identifiable intangible assets acquired in a business combination Have explored whether to extend the PCC alternative in ASU (or variations thereon) to such entities No changes have been made at this stage. Decided to try to work with the IASB/ international community to improve the accounting here, especially concerning customer relationship intangibles. Page 48

49 DATA COLLECTION FORM UNIFORM GUIDANCE AUDITS The data collection form for audits performed under Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) has been issued and is available on the Federal Audit Clearinghouse (FAC) website. This new form is for audits with year ends after December 25, 2015 that have been performed in accordance with the Uniform Guidance. The link to the FAC home page is: To access the DCF go to Submit an Audit. Page 49

50 DATA COLLECTION FORM UNIFORM GUIDANCE AUDITS OMB issued the following announcement regarding the due date of these forms on the FAC: The Office of Management and Budget (OMB) has determined that any Uniform Guidance single audit submissions due prior to September 19, 2016, will now be due to the FAC on September 19, This extension only applies to the actual submission to the FAC. The audit itself must be completed and reports issued within the timeframe specified in the Uniform Guidance. Submissions of single audits performed under OMB Circular A-133 must continue to follow the deadlines prescribed in OMB Circular A-133. Page 50

51 QUESTIONS? Page 51