A&A UPDATE 2018 RECENTLY ISSUED PRONOUNCEMENTS 10/11/2018. ASU Intangibles Goodwill and Other Internal-Use Software (Subtopic )

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1 A&A UPDATE 2018 RECENTLY ISSUED PRONOUNCEMENTS Pronouncement ASU Intangibles Goodwill and Other Internal-Use Software (Subtopic ) Effective Date December 31, 2019 public; December 31, 2020 nonpublic ASU Compensation Retirement Benefits Defined Benefit Plans General (Subtopic ) ASU Fair Value Measurement (Topic 820) ASU Financial Services Insurance (Topic 944) ASU Leases (Topic 842): Targeted Improvements ASU Codification Improvements to Topic 842, Leases December 31, 2020 public; December 31, 2021 nonpublic December 31, 2019 December 31, 2020 public; December 31, 2021 nonpublic With adoption of ASU With adoption of ASU

2 RECENTLY ISSUED PRONOUNCEMENTS (CONT.) Pronouncement Effective Date ASU Codification Improvements Various - Immediately-December 31, 2018 ASU Not-For-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made ASU Compensation Stock Compensation (Topic 718) ASU Codification Improvements to Topic 942, Financial Services Depository and Lending ASU Income Taxes (Topic 740) June 30, 2018 public; December 31, 2018 nonpublic December 31, 2018 public; December 31, 2019 nonpublic Immediately Immediately 3 RECENTLY ISSUED PRONOUNCEMENTS (CONT.) Pronouncement ASU Investments Debt Securities (Topic 320) and Regulated Operations (Topic 980) ASU Technical Corrections and Improvements to Financial Instruments Overall (Subtopic ) Effective Date Immediately December 31, 2017 public; December 31, 2018 nonpublic ASU Income Statement Reporting Comprehensive Income (Topic 220) ASU Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842 December 31, 2018 With adoption of ASU

3 ASU INTANGIBLES GOODWILL AND OTHER INTERNAL-USE SOFTWARE (SUBTOPIC ) Scope Applies only to internal-use software that a customer obtains access to in a hosting arrangement if both of the following criteria are met: The customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty. It is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software. 5 INTERNAL-USE SOFTWARE Preliminary Application Development Post- Implementation Upgrades Expense Capitalize Expense Capitalize or Expense 6 3

4 INTERNAL-USE SOFTWARE The term of the hosting arrangement includes the noncancellable period of the arrangement plus periods covered by: An option to extend the arrangement if the customer is reasonably certain to exercise that option An option to terminate the arrangement if the customer is reasonably certain not to exercise the termination option An option to extend (or not to terminate) the arrangement in which exercise of the option is in the control of the vendor 7 ASU CLARIFYING THE SCOPE AND THE ACCOUNTING GUIDANCE FOR CONTRIBUTIONS RECEIVED AND CONTRIBUTIONS MADE Scope Applies to all entities (NFPs & business entities) that receive or make contributions Excludes transfers of assets from the government to business entities Applies to both contributions received by a recipient & contributions made by a resource provider The term used in presentation of financial statements is not a factor 8 4

5 CLARIFYING THE SCOPE AND THE ACCOUNTING GUIDANCE FOR CONTRIBUTIONS RECEIVED AND CONTRIBUTIONS MADE Issue 1: Clarifications on Exchange vs. Nonexchange The resource provider is not synonymous with the general public If the beneficiary of a grant or contract is a third party, judgment is required Furthering a resource provider s mission does not constitute commensurate value received Type of resource provider should not override the substance of the transaction 9 CLARIFYING THE SCOPE AND THE ACCOUNTING GUIDANCE FOR CONTRIBUTIONS RECEIVED AND CONTRIBUTIONS MADE Issue 2: Conditional vs. Unconditional Contributions Right of return/ release Barrier that must be overcome Donorimposed condition 10 5

6 CLARIFYING THE SCOPE AND THE ACCOUNTING GUIDANCE FOR CONTRIBUTIONS RECEIVED AND CONTRIBUTIONS MADE Right of Return/Release The agreement need not have exact wording of right of return/release & could be communicated in another document referenced by the agreement If not apparent from the agreement whether there is a right of return/release, it is presumed the agreement does not include a right or return/release 11 CLARIFYING THE SCOPE AND THE ACCOUNTING GUIDANCE FOR CONTRIBUTIONS RECEIVED AND CONTRIBUTIONS MADE Indicators to Determine a Barrier Indicators of barriers include, but are not limited to Inclusion of a measurable performance-related barrier or other measurable barrier Extent to which a stipulation limits discretion by the recipient on the conduct of an activity Extent to which a stipulation is related to the purpose of the agreement In cases of ambiguous donor stipulations, a contribution containing stipulations that are not clearly unconditional shall be presumed to be conditional 12 6

7 CLARIFYING THE SCOPE AND THE ACCOUNTING GUIDANCE FOR CONTRIBUTIONS RECEIVED AND CONTRIBUTIONS MADE Transition Approach Modified prospective Apply to all agreements Existing at the effective date (only apply to the portion of existing agreements not previously recognized) Entered into after the effective date No restatement of prior amounts recognized Retrospective application permitted 13 CLARIFYING THE SCOPE AND THE ACCOUNTING GUIDANCE FOR CONTRIBUTIONS RECEIVED AND CONTRIBUTIONS MADE Key takeaways NFPs need to read agreements in detail to determine whether exchange/nonexchange & conditional/unconditional Details matter, & judgment will be required Determine what transition approach to adopt Add conditional contribution footnote 14 7

8 ASU LEASES Joint project with IASB, but standards not converged Generally putting operating leases on the balance sheets of lessees Leaving lessor accounting substantially unchanged Updated definition of a lease Exchange of right to use underlying asset for consideration Involves an identified asset Lessee has right to control the use of the asset 15 PD2 LESSEE ACCOUNTING Classification as finance & operating leases Essentially same criteria as existing but without bright-line percentages Capital finance Both types recognize asset & liability Difference in expense recognition Finance interest expense on liability & amortization expense on asset Operating straight-line rent expense Short-term exception 16 8

9 Slide 16 PD2 What is the standard for the short-term exception? What if the lease auto-rolls every year? Form over function? Pierce, Derek, 10/10/2018

10 JOURNAL ENTRIES OPERATING LEASE At lease inception: Right of Use Asset $xxx Lease Liability $xxx Monthly entries: Lease Expense $xxx Cash $xxx Lease Liability $xxx Right of Use Asset $xxx 17 PD1 JOURNAL ENTRIES FINANCE LEASE At lease inception: Right of Use Asset $xxx Lease Liability $xxx Monthly entries: Interest Expense $xxx Lease Liability $xxx Cash $xxx Amortization Expense $xxx Right of Use Asset $xxx 18 9

11 Slide 18 PD1 Why is this "or depreciation" comment here? Is there an option to setup the asset as a "right of use" rather than the applicable type of fixed asset? Pierce, Derek, 10/10/2018

12 ACCOUNTING POLICY ELECTIONS Separation of consideration in the contract between lease and nonlease components Portfolio approach (e.g. classification, discount rate, lease term) Short-term lease exemption Materiality thresholds (capitalization policy) Discount rate (i.e. incremental borrowing rate vs. risk-free rate nonpublic entities only) 19 LESSOR ACCOUNTING Sales-type lease Recognize a net investment in the lease Derecognize the carrying value of the underlying asset Defer or expense initial direct costs Recognize any selling profit or selling loss immediately Direct Financing Lease Recognize a net investment in the lease Derecognize the carrying value of the underlying asset Defer initial direct costs and selling profit Do not recognize any selling profit at commencement Recognize any selling loss immediately Direct Financing Lease Defer initial direct costs Record deposit liability for any up front lease payments 20 10

13 LESSOR ACCOUNTING Subsequent measurement Sales-type and Direct Financing leases Reduce the net investment in the lease when lease payments received Increase the net investment in the lease for interest income earned Recognize interest income on the basis of the net investment in the lease at the implicit rate in the lease Recognize any impairment Operating lease Recognize any deferred rent receivable/ deposit liability Amortize capitalized initial direct costs Recognize lease income on a straight-line basis (or other basis). 21 KEY TAKEAWAYS Do you have enough information about your operating leases to implement this standard? Do you have any debt covenants that could be effected by setting up liabilities for operating leases? 22 11

14 ASU REVENUE RECOGNITION Five-step process for all revenues Contributions scoped out Other NFP revenues covered Clarification updates being issued Industry task forces providing input 23 REVENUE RECOGNITION PROCESS Identify Contract with a Customer Identify Performance Obligations Determine the Transaction Price Allocate the Transaction Price Recognize Revenue when/as a Performance Obligation is Satisfied 24 12

15 PORTFOLIO APPROACH Practical expedient Reasonably assumed to not materially differ from individual contract approach Lookbacks Outliers Different types of self-pay accounts 25 FINANCIAL STATEMENT PRESENTATION Current Guidance Patient service revenue $ xxxx Contractuall allowances and discounts (xxxx) Patient service revenue (net of contractual allowances and discounts) $ xxxx Provision for uncollectible accounts (xxx) Net patient service revenue less provision for uncollectible accounts xxxx Other xxxx Total unrestricted revenues, gains and other support xxxx not presented on financial statements New Guidance Patient service revenue $ xxxx Other xxxx Total unrestricted revenues, gains and other support xxxx Provision for bad debts will be an operating expense and will be significantly reduced

16 KEY TAKEAWAYS Application of this standard should not significantly change your bottom line. Questions to answer: How did you address each of the 5 steps in the revenue recognition process? Can you support the validity of your portfolios? Do you have access to the reporting needed to support the required revenue disaggregation disclosures? 27 ASU FINANCIAL STATEMENTS OF NOT-FOR-PROFIT ENTITIES Objective to update financial statement model Allow NFPs to better tell their story Project split into phases based on feedback received Phase 1 issued in August of 2016 Phase 2 will require more time to complete 28 14

17 FINANCIAL STATEMENTS OF NFPs PHASE 1 Net asset classes With/without donor restrictions Disclosure of board designations (amount, purpose & type) Nature & amount of donor restrictions Underwater endowments (to be reflected in net assets with donor restrictions) Expiration of capital restrictions Expenses Functional & natural reporting Investment return Disclosures about operating measures Liquidity disclosures (qualitative & quantitative) Cash flows choice of direct or indirect No indirect reconciliation if choose direct 29 TRANSITION Effective for financial statements for fiscal years beginning after December 15, 2017 (early adoption is allowed). If comparative financial statements are issued, certain information may be omitted for any years presented before adoption year: Analysis of expense by functional and natural classification Disclosures around liquidity and availability of resources 30 15

18 NET ASSET CLASSIFICATION SCHEME Current GAAP 3 categories Unrestricted Temporarily restricted Permanently restricted New standard 2 categories Without donor restrictions With donor restrictions 31 REQUIRED NET ASSET DISCLOSURES Without Donor Restrictions Amount and purpose of governing board designations With Donor Restrictions Composition of net assets at period s end How restrictions affect resource use Can be disclosed on face or in notes 32 16

19 EXAMPLE DISCLOSURE WITH DONOR RESTRICTIONS 33 EXAMPLE DISCLOSURE WITHOUT DONOR RESTRICTIONS 34 17

20 EXAMPLE DISCLOSURE RELEASE OF RESTRICTIONS 35 EXAMPLE DISCLOSURE - ENDOWMENTS 36 18

21 AVAILABLE RESOURCES AND LIQUIDITY INFORMATION Qualitative disclosures Strategy for addressing risks that may effect liquidity Policy for establishing liquidity reserves Information that communicates how NFP manages its liquid resources available to meet cash needs for general expenditures within one year of balance sheet date 37 AVAILABLE RESOURCES AND LIQUIDITY INFORMATION Quantitative disclosures Include information that communicates availability of NFP s financial assets at balance sheet date to meet cash needs within one year of balance sheet date Long-term obligations and commitments that could pose liquidity concerns in near future Can be on face of balance sheet or in notes

22 EXAMPLE DISCLOSURE - LIQUIDITY 39 CASH FLOW STATEMENT Operating activities can be presented using the direct or indirect method. If direct method is used, presentation of indirect reconciliation is no longer required

23 PRESENTATION OF EXPENSES Expenses have to be presented by natural classification and functional classification in one location Can be shown on the face of the financials or in the notes Expenses on statement of operations can be shown by either natural or functional classification New requirement to provide qualitative disclosure about methods used to allocate expenses attributable to more than one supporting function 41 EXAMPLE DISCLOSURE EXPENSES BY NATURE AND FUNCTION 42 21

24 PRESENTATION OF NET INVESTMENT RETURN Presented net of external and direct internal investment expenses No longer required to disclose expenses netted against investment return No longer required to display investment return components in endowment net assets rollforward 43 EXPIRATIONS OF RESTRICTIONS ON GIFTS OF LONG-TERM ASSETS Use placed-in-service approach for reporting expirations of restrictions Eliminates option to release donor-imposed restriction over estimated useful life 44 22

25 OPERATING MEASURES DISCLOSURES For NFPs that present self-defined operating measures that also present internal designations on the face of the financial statements Required to report types of internal transfers disaggregated and describes by type. 45 KEY TAKEAWAYS Do you have documentation of donor intent for endowment funds that may have been received many years ago? Do you have enough information to classify expenses by both nature and function? Do you have policies in place related to liquidity? 46 23

26 FINANCIAL STATEMENTS OF NFPs PHASE 2 Intermediate measure Whether to require one If so, how should it be measured? Potential alignment with potential project on financial performance reporting for businesses Realignment of items in the statement of cash flows Timing of Phase 2 TBD 47 ASU FINANCIAL INSTRUMENTS DISCLOSURE Some NFPs have to disclose fair value of financial instruments not measured at fair value if they have either $100 million in assets, or Any derivatives (including interest rate swaps) ASU eliminates this disclosure requirement for all NFPs Reminder can be early adopted 48 24

27 SAS 132 GOING CONCERN Lookout period One year from financial statement issuance date Substantial doubt Probable the entity will be unable to meet its obligations as they become due within lookout period Based on relevant conditions or events known or reasonably knowable at issuance date Consider only fully implemented management plans 49 KEY TAKEAWAYS It s a disclosure standard Fully implemented vs. future management plans Management representations & documentation 50 25

28 Derek R. Pierce, CPA, FHFMA Partner Michael K. Westerfield, CPA, FHFMA Senior Manager

29 The information contained in these slides is presented by professionals for your information only and is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered. 27