Not-for-Profit Conference A&A Update for NFPs

Transcription

1 Not-for-Profit Conference A&A Update for NFPs James Schmutte July 24, 2014 This session focuses on recent and developing activities of the four standard setters (FASB, AICPA, OMB and GAO) that impact nonprofit accounting and auditing. Due to time constraints, only limited overviews will be presented. 1

2 FASB Activities Updating the Codification updates issued updates issued updates issued updates issued updates issued updates issued 4 2

3 FASB Accounting Standards Updates ASU , Clarifying Scope of Disclosures about Offsetting Assets and Liabilities ASU , Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ASU , Clarifying the Scope and Applicability of a Particular Disclosure to Nonpublic Entities ASU , Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date FASB Accounting Standards Updates ASU , Parent s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity ASU , Services Received from Personnel of an Affiliate ASU , Liquidation Basis of Accounting 3

4 FASB Accounting Standards Updates ASU No , Investments Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Project ASU No , Intangibles Goodwill and Other: Accounting for Goodwill (a consensus of the PCC) ASU No , Derivatives and Hedging: Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps Simplified Hedge Accounting Approach (a consensus of the PCC) 7 FASB Accounting Standards Updates ASU No , Receivables Troubled Debt Restructurings by Creditors: Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure ASU No , Service Concession Arrangements ASU No , Technical Corrections and Improvements Related to Glossary Terms 8 4

5 FASB Accounting Standards Updates ASU No , Consolidation: Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements (a consensus of the PCC) ASU no , Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity FASB Accounting Standards Updates ASU No , Revenue from Contracts with Customers ASU No , Development Stage Entities: Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation ASU No , Transfers and Servicing: Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures 5

6 FASB Accounting Standards Updates ASU No , Compensation Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period Update Revenue from Contracts with Customers 6

7 What s Important What s Can Be Overwhelming NFP Revenue Questions What is nature of the revenue Contribution (unilateral and unconditional) Unrestricted Temporarily restricted Permanently restricted Exchange transaction When to recognize the revenue Contribution when received Exchange transaction when earned ASU

8 5-Step Revenue Model For Exchange Transactions 1. Identify the contract with a customer 2. Identify the separate performance obligations in the contract 3. Determine the transaction price 4. Allocate the transaction price to the separate performance obligations 5. Recognize revenue when each separate performance obligation is satisfied. 15 Step 1: Identify the Contract With the Customer The contract must meet all of the following criteria: Have commercial substance, Approved by each party so that each party is committed to fulfill its contractual obligations, Able to identify each party s enforceable rights and obligations regarding the goods or services to be transferred, Able to identify the terms and manner of payment for the goods or services to be transferred Combining multiple contracts 16 Contact modifications 8

9 Step 2: Identify the Separate Performance Obligations A single contract may include one or more performance obligations What is a performance obligation: Regularly sell the goods or services separately Customer can benefit from the good or service on its own or with other resources readily available to customer sequence of delivery can be important Several performance obligations may be considered a single performance under certain conditions 17 Step 3: Determine the Transaction Price The transaction price is the amount of consideration that the entity receives, or expects to receive, from a customer in exchange for transferring the goods or services Items for consideration: Variable consideration expected or most likely Collectability report as a line item allowance Time-value of money beyond one year of delivery Non-cash consideration at fair value Consideration paid to a customer 18 9

10 Step 4: Allocate the Transaction Price to the Separate Performance Obligations Allocate the transaction price to the separate performance obligations in proportion to their standalone selling prices A residual approach may be used when there is significant variability or uncertainty in the selling price May allocate some aspect of transaction price to specific performance obligations 19 Step 5: Recognize Revenue as Each Performance Obligation is Satisfied Recognize revenue when the performance obligation is satisfied (when the customer obtains control) Customer made obtain control At a point in time Over time Output methods Input methods 20 10

11 Disclosures Effective Date Public entities (and some NFPs) For annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period Nonpublic entities (and the bulk of NFPs) For annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, Earlier adoption permitted within parameters 11

12 FASB Projects That Have NFP Implications: Leases Financial Instruments FASB NFP Advisory Committee Proposed Leases (Revised) 343 Pages 24 12

13 Classification of Leases Classification is primarily based on nature of the underlying asset Type A not property Type B - property Classification is determined at commencement of the lease Initial lease classification are not reassessed Short-term leases ( 12 months) an accounting policy choice Lease Classification Exception Tests Exception Exception 13

14 Lessee Accounting Lessee Accounting At the date of inception of the lease measure and recognize: The liability to make lease payments at the present value of the lease payments The right-of-use asset at the amount of the liability to make lease payments, plus any initial direct costs incurred by the lessee Exception - lessee elects to apply the recognition exemption for short-term leases (lease term 12 months or less) 28 14

15 Type A Leases (Not Property) Subsequently measure The lease liability: amortize effective interest The right-of-use asset: amortize on a systematic basis that reflects the pattern in which the lessee expects to consume the right-of-use asset s future economic benefits In each period separately report interest on lease liability and amortization of rightof-use asset Type B Leases (Property) Subsequently measure The lease liability: amortize effective interest The right-of-use asset: amortize cost in each period so that the lessee would recognize the total lease cost on a straight-line basis over the lease term In each period present a single lease cost combining the interest on the lease liability with the amortization of the right of use asset 15

16 Type A Other Than Property Lease - Report Separately Type B Property Lease - Report Combined Comparison of Expense Patterns Most Likely Lessee Classifications Exception Tests Exception Exception 16

17 Financial Instruments Financial Instruments 2013 Joint Proposals February 166 pages April 345 pages 17

18 FASB presentation AAA 2013 annual conference Categorization of Financial Assets Financial Instruments March 2014 Proposals Abandoned February 166 pages April 345 pages 18

19 March 2014 Modified Current Model Proposed Debt Securities Held-to-Maturity (AC) Available for Sale (FV-OCI) Trading (FV-NI) Equity Securities Trading (FV-NI) Effective Date The Board will establish the effective date of the proposed requirements, including any appropriate deferral for some or all nonpublic entities, when it issues the final amendments. 19

20 FASB Not-For-Profit Advisory Committee FASB Not-For-Profit Advisory Committee Established in members Develop recommendations to FASB for improving financial reporting for NFPs Areas currently being considered Net asset classifications Financial performance Reporting expenses Reporting cash flows Liquidity 20

21 Change in Net Asset Classifications Current GAAP model Unrestricted net assets Temporarily restricted net assets Permanently restricted net assets Proposed model Net assets without donor restriction Net assets with donor restriction Expanded disclosures Amount and purpose of board designations Nature and amount of donor restrictions Financial Performance Operating Measure Require the presentation of an intermediate measure of operations (business-oriented healthcare providers continue as is) Mission dimension Availability of resources dimension Flexibility in reporting One-statement presentation Two-statement presentation 42 21

22 Reporting Expenses Require NFPs to report analysis of expenses by their nature and function in one location Statement of activities Separate statement Schedule within the notes Report investment revenue net of related expenses on the face of statement of activities Disclose amount of expense in the notes Reporting Cash Flows Require the use of the direct method of reporting cash flows from operations Eliminate requirement to reconcile change in net assets to net cash flow Changes in cash flow classifications Purchases of P&E operating activity Contributions to purchase long-lived assets operating activity Cash dividends and interest income investing activity Cash paid for interest expense financing activity 22

23 Liquidity Liquidity vs. availability resources Alternatives being discussed Classified statement of financial position Distinguishing assets limited as to use Disclosures about nature, timing, amount, and effects on liquidity of externally imposed restrictions Time Line Exposure draft Q Possible 6 month comment period ASU update second half 2015 Effective date -? 23

24 AICPA Activities Updated Audit & Accounting Guide 24

25 Overview Last major revision was in 1996 Not just for auditors but a useful tool for NFP s accountants Incorporates authoritative and nonauthoritative guidance for GAAP based financial reporting Incorporates decision-trees and tables to help interpret and apply professional standards New or Expanded Guidance Accounting for NFP s relationship with other entities (22 types of relationships analyzed) Use of fair value measures Accounting for non-cash contributions Contributed promotional and advertising materials Below-market interest rate and forgivable loans Administrative costs of restricted contributions - communication requirement Programmatic investments 25

26 Reporting of Expenses Encourages reporting expenses by nature and function for all NFPs supported by the general public General public support - receive 20-30% or more of total revenue and support from general public Proposed Changes to Compilations AR 50 association with financial statements AR 70 preparation of financial statements AR 80 - compilation of financial statements 52 26

27 It all started in 2012 Revision Interpretation Member should not assume management responsibilities Client must agree to Assume all management responsibilities Designate an individual with suitable SKE to oversee Member must assess and be satisfied that such individual is able to perform oversight Evaluate the adequacy and results of services Accept responsibility for results of servcies Interpretation No Nonattest Services Allowed nonattest services Preparing reconciliations for management s evaluation Performing network maintenance Preparation of financial statements (effective Dec. 14) Cash-to-accrual adjustments(effective Dec. 14) Internal audit services If service is not prohibited, must comply with Interpretation requirements 27

28 The Current Dilemma: A Conflict Between Standards 55 SSARS Proposal AR 50 association with financial statements AR 70 preparation of financial statements AR 80 - compilation of financial statements 28

29 Proposed SSARS: AR70 Preparation of Financial Statements Preparation of financial statements is a nonattest service Applies when accountant will not be compiling, reviewing or auditing the statements Accountant is not required to Verify the accuracy or completeness of the information provided by management Gather evidence to express an opinion or conclusion on the financial statements Report on the financial statements 57 Proposed SSARS: AR80 Compilation Engagements Compilation remains an attest service but is not an assurance service Basically same performance standards as AR 80 Changes: Engagement letter (with expanded content) signed by management and accountant New report language May request that management include a reference on each page of the financial statements to the accountant s written report 58 29

30 Standards Related To Accountant Prepared Statements Accountant Prepared Statements with No Further Services SSARS Various Bookkeeping Activities Trial Balance Accountant Compiled Statements SSARS May Be Performed by Client or Accountant Accountant Prepared Statements To Be Audited or Reviewed Ethics OMB Activites 30

31 Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards Super Circular or Omni Circular Issued December 26, 2013 Eight Circulars Combined Administrative Requirements Circular A 102 Circular A 110 Circular A 89 Cost Principles Circular A 21 Circular A 87 Circular A CFR Part 200 Audit Requirements Circular A 133 Circular A 50 31

32 Whose Affected By the Changes Federal Agencies - Pre-award policies Non-Federal Entities - Post-award administration Non-Federal Entities - Cost principles and recovery of indirect costs External Auditors - Audit requirements Structure of the Circular Subpart A (200.xx): Acronyms and Definitions Subpart B (200.1xx): General Provisions Subpart C (200.2xx): Pre-Federal Award Requirements & Contents of Federal Awards Subpart D (200.3xx): Post-Federal Award Requirements Subpart E (200.4xx): Cost Principles Subpart F (200.5xx): Audit Requirements Eleven appendices 32

33 Single Audit Changes Changed thresholds Single audit requirement threshold increased to $750,000 Type A/B threshold to increased to $750,000 Type B program threshold for risk assessment changed to 25% of the Type A/B threshold Perform risk assessment of Type B programs up to 25% of number of Type A low risk programs Questioned cost threshold increased to $25,000 (known or likely) Single Audit Changes Changes in low-risk auditee designation Changed audit coverage Major programs for testing include: all non-low risk Type A and all high risk Type B programs Required percentage of audit coverage for testing decreased to 40% (20% for low risk auditees) of federal awards expended 33

34 Single Audit Changes Changed major program determination Update the criteria for high-risk Type A programs in the most recent period the program Failed to receive an unqualified opinion, Had a material weakness in internal control, Had questioned costs exceeding five percent of the program s expenditures. Perform risk assessment on Type B programs until high-risk Type B programs have been identified up to at least ¼ the number of low-risk Type A programs Single Audit Changes No change in compliance requirements subject to testing Compliance Supplement Applicable requirements significant to major programs 34

35 Effective Dates Federal Agencies December 26, 2014 Non-Federal Entities New awards and additional funding to existing awards made after December 26, 2014 Audit Requirements fiscal years beginning on/after December 26, 2014 GAO Activities 35

36 Government Auditing Standards 2011 Revision Effective for financial audits and attestation engagements performed for periods ending on or after December 15, 2012 Major Changes in the 2011 Yellow Book Revision General standards Adopted a threats/safeguards conceptual approach for independence Nonattest services expanded Expanded the list of nonattest services requirements Expanded consideration and documentation requirements Financial audits Consolidated standards into single chapter Incorporate new AICPA auditing standards 36

37 Threats to Auditor s Independence Self-interest threat Self-review threat Bias threat Familiarity threat Undue influence threat Management participation threat Structural threat Categories of Safeguards (Per the AICPA s Framework) Safeguards created by the profession, legislation, or regulation Safeguards implemented by the attest client Safeguards implemented by the firm 37

38 Independence Consideration Documentation Requirements Threats to independence that require safeguards and application of related safeguards Safeguards required in case of structural threat (internal/governmental auditor issue) Consideration of managements ability to oversee nonaudit service Auditor s understanding with entity regarding performance of nonaudit service 38

39 AICPA Professional Ethics Division Over 2-year period 546 investigations of which 188 related to government and NFP entities Areas of deficiency Single audit issues Auditor reporting Financial statement deficiencies Underlying causes Lack of experience and CPE Lack of proper quality control review COSO Internal Control Framework 39

40 Internal Control- Integrated Framework First published in 1992 Gained wider acceptance following financial control failures of early 2000 s Most widely used framework in the US Also widely used around the world COSO Around the World 40

41 COSO Internal Control Integrated Framework Summary of Update Codification of 17 principles embedded in the original Framework 41

42 Effective Date December 15, 2014 Thank You May the Balance of Your Day Be Both Enjoyable and Informative 42