Accounting Update: What s Now, New and Next. Convergence 2014 By Amy Michie, CPA and Bill Moss, CPA

Transcription

1 Accounting Update: What s Now, New and Next Convergence 2014 By Amy Michie, CPA and Bill Moss, CPA

2 FASB Pronouncements FASB Developments Relevant AICPA Technical Practice Updates FASB NFP Advisory Committee (NAC) Updates OMB A-133 Update

3 Clarifications/disclosures on Fair Value Measurement (ASU and ASU ) Multiemployer Plan Compensation, Retirement Benefits, Employer s Participation (ASU ) Classification of Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows (ASU ) Obligations Resulting from Joint and Several Liability (ASU ) Services Received from Personnel of an Affiliate (ASU ) Liquidation Basis of Accounting (ASU ) Definition of Public Business Entity (ASU ) Reporting of Discontinued Operations (ASU )

4 Disclosure requirements Amounts, and reasons for, significant transfers between Levels 1 and 2, Same for Level 3 Policy for when to recognize transfers into and out of the Levels Purchases, sales, issuances, and settlements in the reconciliation disclosure of Level 3 measurements For Level 2 and Level 3 measurements, information about inputs and valuation techniques Presentation by class of assets and liabilities and major categories

5 Disaggregation by major security type Consider: Shared Activity/Business Sector Vintage Geographic Concentration Credit Quality Economic Characteristics Management may exercise judgment based on nature and risk of the investments

6 Continued development of FASB and IASB working to align their guidelines The amendment focuses on new disclosures Currently effective for all Not-for-Profits Disclosures should be applied prospectively

7 Nonpublic entities Transfers between level 1 and 2 are no longer required to be disclosed All transfers in and out of level 3 require disclosure (not just significant)

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9 Fair value measurement for the following types of transactions: Unconditional promises to give cash or other financial assets Beneficial interests in trusts Split interest agreements Addresses, among other things, the following: Valuation approaches and techniques variations of the income approach probability-weighted cash flows single set of cash flows model that uses a risk-adjusted discount rate

10 Addresses, among other things, the following: Appropriate valuation technique based on facts and circumstances; also considerations for related inputs to valuation model Determination of appropriate present value discount rate Use of market inputs when valuing split-interest obligations, actuarial data and prices for annuity contracts The unit-of-account for unconditional promises to give that are expected to be collected in one year or more and for beneficial interests in a trust Disclosure considerations

11 ASU addresses concerns from various users of financial statements on the lack of transparency about an employer s participation in a multiemployer pension plan. Additional quantitative and qualitative disclosures about participation in a multiemployer plan Separately for pension and other post-retirement plans Does not change current recognition and measurement Effective for all Not-for-Profits for fiscal years ending after December 15, Should be applied retrospectively for all periods presented. The Update requires local chapters of not-for-profit entities that participate in their national organization s single-employer defined benefit pension plan to provide the name of the plan in which the employer participates.

12 Significant multiemployer plans in which the employer participates The name of the plan(s) and identifying number(s) Level of participation in the plan(s) The financial health of the significant multiemployer plans, including an indication of the funded status The nature of the employer s commitments to the plan(s)

13 A description of the nature of the plan benefits A qualitative description of the extent to which the employer could be responsible for the obligations of the plan, including benefits earned by employees during employment with another employer Other quantitative information, to the extent available, as of the most recent date available, to help users understand the financial information about the plan, such as total plan assets, actuarial present value of accumulated plan benefits, and total contributions received by the plan

14 To address the diversity in practice classification of cash receipts from sale of certain donated financial assets in the statement of cash flows such as securities of not-for-profits. Some classify in the statement of cash flows as investing cash inflows. Others as: operating cash inflows OR financing cash inflows, consistent with their treatment of inflows arising from cash contributions.

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16 Effective prospectively for fiscal years beginning after June 15, Retrospective application to all prior periods presented upon the date of adoption is permitted. Early adoption from the beginning of the fiscal year of adoption is permitted. For fiscal years beginning before Oct. 22, 2012, early adoption is permitted only if a not-for-profit s financial statements for those fiscal years and interim periods within those years have not yet been made available for issuance.

17 Addresses the diversity in accounting for certain obligations resulting from joint and several liability arrangements. ASU generally requires an organization to measure such obligations for which the total amount of the obligation is fixed at the reporting date as the sum of the amount the organization agreed to pay on the basis of its arrangement among its co-obligors, and any additional amount the organization expects to pay on behalf of its co-obligors. ASY does not apply to obligations accounted for under certain specific ASC topics that would otherwise fall within its scope; for example ASC 460 on guarantees. For NFPs, ASU is effective for fiscal years ending after December 15, 2014.

18 Contributed services received from personnel of an affiliate that directly benefit the recipient not-for-profit shall be measured by the recipient not-for-profit at the cost recognized by the affiliate in providing those services. EXCEPT: If recording at cost recognized by the affiliate will significantly overstate or understate the value of the service received, the recipient not-for-profit may elect to recognize that service at either of the following: The cost recognized by the affiliate for the personnel providing that service The fair value of that service

19 Fiscal years beginning after June 15, 2014, with early adoption permitted Prospective adoption OR Modified retrospective application is permitted (all prior periods presented upon the date of adoption should be adjusted, but no adjustment to beginning net assets of the earliest period is permitted)

20 Defines and adds the term public business entity to the FASB ASC Master Within that definition, NFPs within the scope of FASB ASC 958 are not business entities and thus cannot be classified as public business entities The new definition used to- Specify scope of future accounting and reporting Identity types of entities excluded from the Scope of the Private Company Decision- Making Framework project ASU issued December 2013 No effective date to be phased into new standards

21 ASU change the requirements for reporting discontinued operations in Subtopic How does it apply to NFPs? Discontinued operations include a component of a nonprofit activity A nonprofit activity that, on acquisition, meets the criteria in paragraph E to be classified as held-for-sale also is a discontinued operation A nonprofit activity set of activities and assets capable of being conducted and managed for the purpose of providing benefits as a fulfillment of an entity s purpose or mission. The ASU requires an entity to present assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections of the statement of financial position. Additional disclosure requirements. Effective prospectively for APBA December 15, 2014 Th

22 Project: Financial Statements of Not-for-Profit Entities Objective: Re-examine existing standards for financial statement presentation by NFPs, focusing on improving: Net asset classification requirements Information in financial statements and notes about - liquidity financial performance cash flows

23 Project: Financial Statements of Not-for-Profit Entities Current status: Summary of decisions reached to date (March 12, 2014) Tentatively - define intermediate measure of operations on the basis of: Mission Availability Tentatively - require direct method of reporting on SCF Remove reconciliation of change in net asset to net cash flows from operating activities (indirect method) Revisions of cash flow categories Replace three classes of net assets with two classes Net assets with donor-imposed restrictions Net assets without such restrictions

24 Project: Financial Statements of Not-for-Profit Entities Next Steps: Continue research on ways to improve information about liquidity. Improving NFP specific note disclosures. An exposure draft is scheduled for second half of 2014

25 Project: Accounting for Government Assistance The Board added the project to its technical agenda at its January 29, 2014 meeting The FASB s objective is to develop disclosure requirements about government assistance that improves the content, quality and comparability of financial information and financial statements

26 Project: Going Concern The FASB s proposed approach describes how management should evaluate going concern uncertainties and what information should be provided in the footnotes to the financial statements. It introduces new definitions/disclosure thresholds The Board decided not to require the proposed early-warning disclosures with scalable reporting requirements that allow disclosures to evolve as the level of financial strain increases/decreases. The following are steps to follow in evaluating the going concern assumption and extent of additional disclosures. determine if the entity is required to use the liquidation basis of accounting. determine whether going concern disclosures are necessary (and at what level).

27 Project: Going Concern Required going concern disclosures: Principal conditions/event(s) that give rise to inability to meet obligations. Management s plans to address the entity s potential inability to meet is obligations. Unintended Consequences: Disclosing sensitive information that would cut-off access to loans and lead to a self-fulfilling prophecy of demise. Relevant Conditions and Events which challenge the going concern assumption Sources of liquidity, including available liquid funds and available sources to credit. Macro-economic factors Funds necessary to maintain operations in the ordinary course of business significantly reduced, negative trends. Conditional/unconditional obligations due or anticipated within 24 months after the financial statement date.

28 TIS Section / Certificates of Deposit and Fair Value Measurements and Disclosures" Certificates of Deposit do not typically meet the definition of a security are not at fair value should not be included in the fair value table. Certain circumstances where certificates could meet the definition of a security (negotiable certificates of deposit) then the provision of ASC 820 would apply. TIS Section "Balance Sheet Classification of Certificates of Deposit" Certificates of deposit with original maturities of 90 days or less may be considered cash and cash equivalents If the original maturity is greater than 90 days they would not be included in cash and cash equivalents Instead could be classified as "investments other"

29 TIS Section "Contributions of Certain Nonfinancial Assets, Such as Fundraising Material, Informational Material, or Advertising, Including Media Time or Space for Public Service Announcements or Other Purposes" Provides guidance - when to recognize contribution revenue for certain media services provided. TIS Section "Multiyear Unconditional Promises to Give Measurement Objective and the Effect of Changes in Interest Rates" NPO election of fair value option for promises to give subsequent measurement should be made using updated interest rates for discounting. Otherwise, the discount rate utilized should not be modified in future years.

30 Not-for-Profit Advisory Committee (NAC) FASB Update Lease Accounting Revenue Recognition Going Concern

31 Created by FASB/FAF in October 2009 as resource for FASB in obtaining input from the Not-for-Profit sector on: Existing guidance Current and proposed technical agenda projects Longer-term issues affecting Not-for-Profits Current committee consists of 18 members and 2 observers Not-for-Profit financial officers, professors, auditors, foundation and other donors, creditor, watchdog agency, charities regulator, attorney Also created Not-for-Profit Resource Group to inform work of NAC & staff (approximately 150 members)also, created Not-for-Profit Resource Group to inform work of NAC and staff (about 150 members)

32 Initial NAC areas for improving Not-for-Profit financial reporting for consideration by FASB, include: 1. Improve current net asset classification requirements in conjunction with improving how liquidity is portrayed in an NPO s statement of financial position and related notes. 2. Improve statements of activities and cash flows to more clearly communicate financial performance 1. better disaggregation and classification of information within the statement of activities 2. better cohesiveness between the statements.

33 3. Develop framework for an NPO s directors and management to provide commentary and analysis about the organization s financial health, operations, and liquidity. (The Board voted on January 29, 2014 to remove this item from their agenda) 4. Definition of Nonpublic Entity re-examine definition of nonpublic entity. Completed project December 23, 2013 with the issuance of ASU Review existing NPO-specific disclosure requirements to streamline where possible and otherwise improve their relevance and understandability. Additionally, the NAC identified some educational efforts that could be carried out by the FASB staff, the NAC, or other organizations (e.g., the AICPA).

34 Projects in process Lease accounting Revenue recognition Not For Profit Financial Statements Going Concern

35 Major proposed changes No "operating leases" Lessee obligations recognized on statement of financial position, with a corresponding "right-of-use" asset, for substantially all leases Interest expense on debt using the interest method, rather than straight-line lease expense (Front-loads expenses related to leases) Amortization of right-to-use asset (generally on a straight-line basis) Lessor records receivable and either removes the leased asset (de-recognition) records deferred revenue (performance obligation), depending on facts

36 No proposed effective date Comment period ended December 15, 2010, Revised Exposure Draft released May 16, 2013, with comments due by the third quarter of 2013 New model would apply to all leases within the scope of proposed guidance - no grandfathering

37 Effect on the statement of financial position: could affect ratios used in debt covenants Total assets and total liabilities increased by a similar amount Effect on the statement of activities: Expense for lease payments replaced by amortization of the right-to-use asset and front-loaded interest expense Annual change in net assets will be impacted

38 The proposed standards would affect entities that either: enter into a contract to sell nonfinancial assets (for example, real estate and equipment). enter into a contract to sell goods or services that are an output of an entity s ordinary activities. The basic steps required to apply the proposed standards are: Identify the contract(s) with a customer Identify the performance obligation(s) in the contract Determine the transaction price Allocate the transaction price among the performance obligation(s) Recognize revenue as each performance obligation is satisfied.

39 Potential NFP Implications Open questions about how NPO s would apply the principles to their unique revenues: Grants and contracts (contribution vs. exchange) Contracts that provide on-going services vs. product delivery (NPO cost reimbursements) Tuition revenue NPO contracts for projects that are not profitable Reconsidering the completed contract approach

40 Late December, 2013, the OMB issued Final Grant Reform Rules in a document titled, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards Affects over $600 billion in annual federal grants provided Increase efficiency & effectiveness Streamlining related circulars & guidance Effective Dates Administrative requirements and cost principles for all new awards and additional funding to existing awards (funding increments) made after December 26, 2014 Audit requirements in Subpart F FYBA 12/26/14 (single audit 12/31/15 year ends)

41 Structure Contents A Acronyms and Definitions ( ) B General Provisions ( ) C Pre-Federal Award Requirements and Contents of Federal Awards ( ) D Post-Federal Award Requirements ( ) Origin All circulars All circulars A-110 and A89 A-110 and A102 E Cost Principles ( ) A-21, A-87, and A-122 F Audit Requirements ( ) A-133 Appendices

42 Key Changes: Subpart D Highlights More explicit internal control requirement for auditees. Suggests best practices by referring to the following IC sources: Standards for Internal Control in the Federal Government issued by the Comptroller General of the United States (Green Book) Internal Control Integrated Framework, issued by Committee of Sponsoring Organizations of the Treadway Commission (COSO) updated May 14, 2013 Procurement ( ) Five procurement methods for non-federal entities other than States Sub-recipient Monitoring and Management ( through ) New guidance adds more prominence to these requirements and expands upon them i.e. Section explicit about what information needs to be included by a passthrough entity in its sub-awards at the time the sub-award is made

43 Key Changes: Subpart E Highlights Indirect costs ( ) Negotiated rates Elect to charge a 10% de minimus indirect cost rate indefinitely One-time extension of a current negotiated indirect cost rates for a period up to four years Raising single audit threshold from $500,000 to $750,000

44 Key Changes: Subpart F Highlights Single audit threshold raised from $500,000 to $750,000 Changes to the major program determination process Step 1 Type A/B program determination revised from $300,000 to $750,000 Status of Proposed Reduction of Types of Compliance Requirements from the current 14 requirements to potentially 6 COFAR recommends further public outreach No substantial changes to the number of compliance requirements is expected in the 2014 Compliance Supplement but possibly in the 2015 Compliance Supplement.

45 Data Collection Form: 2013 newly revised data collection form released January 2014 Used for audits of fiscal periods ending in 2013, 2014 or 2015 See Federal Audit Clearinghouse website for new form and instructions ault.aspx

46 Key Resources at FASB webcast series Projects Nonpublic entities resources Codification Key Resources at Auditee resource center

47 Questions?