2016 Nonprofit Accounting and Auditing Update Trent Foster Nonprofit Accountin… · in which fair value is assessed through the NAV per share ... as a direct reduction from the carrying

1

Nonprofit Accounting and Auditing Update2016

Today’s Presenters

Trent Foster, CPAEngagement PartnerWeaver’s Education & Nonprofit Leader

Dallas Dugger, CPAAudit ManagerNonprofit Practice

2

NFP Accounting Update Learning Objectives

Upon completion of this section you will be able to:

Identify current accounting standards that effect NFPs and what new or updated standards are on the horizon

Understand the status of the Financial Statement Project

4

Part 1

Nonprofit Accounting Standards

3

Recently Issued Standards (ASUs)

• Fair Value Measurement (Topic 820)

• Debt Issuance Costs

• Extraordinary Items (Subtopic 225‐20)

• Going Concern (Topic 205)

• Consolidation (Topic 810)

• Revenue Recognition (Topic 606)

• Leases (Topic 842)

5

Fair Value Measurement (Topic 820)

4

Recently Issued Standards

ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)

FASB eliminates requirement to categorize certain investments in the fair value hierarchy.

7



8

In May 2015, the FASB issued ASU 2015-07 which exempts investments measured using the net asset value (NAV) practical expedient in ASC 820, Fair Value Measurement, from categorization within the fair value hierarchy and related disclosures.

Instead, entities are required to separately disclose the information required under ASC 820 for assets measured using the NAV practical expedient. Entities are also required to show the carrying amount of investments measured using the NAV practical expedient as a reconciling item between the total amount of investments categorized within the fair value hierarchy and total investments measured at fair value on the face of the financial statements (specifically, the balance sheet).


5


The guidance requires retrospective application and is effective for public entities for fiscal years starting after December 15, 2015

The amendments will be effective for all other entities for fiscal years starting after December 15, 2016

December YE = 12/31/16 - 12/31/17

Summer YE =(May-Aug) Summer ‘17 - Summer ‘18

Early application is allowed

9Fair Value Measurement (Topic 820)

Effective Dates:


Entities should apply the amendments retrospectively to all periods offered

Using the amendments retrospectively requires an investment in which fair value is assessed through the NAV per share practical expedient be eliminated from the fair value hierarchy in all periods presented in financial statements.


6





Level 1 Level 2 Level 3 TotalFinancial assets:

Investments:Mutual funds 1,644,237$ -$ -$ 1,644,237$ Corporate stocks and bonds 535,979 26,504 - 562,483 Government bonds - 92,997 - 92,997 Municipal obligations - 84,407 - 84,407 Money market funds - 718,203 - 718,203 Unit investment trusts - 196,858 - 196,858 Real estate - 24,248 - 24,248 Investments carried at NAV - 3,019,401 - 3,019,401 Alternative Investments - - 988,364 988,364

Total investments 2,180,216$ 4,162,618$ 988,364$ 7,331,198$

Current Guidance

Level 1 Level 2 Level 3 TotalFinancial assets:

Investments:Mutual funds 1,644,237$ -$ -$ 1,644,237$ Corporate stocks and bonds 535,979 26,504 - 562,483 Government bonds - 92,997 - 92,997 Municipal obligations - 84,407 - 84,407 Money market funds - 718,203 - 718,203 Unit investment trusts - 196,858 - 196,858 Real estate - 24,248 - 24,248

2,180,216 1,143,217 - 3,323,433 Investments carried at NAV 4,007,765

Total investments 2,180,216$ 1,143,217$ -$ 7,331,198$

Implemented ASU 2015-07


7


Removing those investments from the fair value hierarchy not only eliminates the diversity in practice resulting from the way in which investments measured at NAV per share (or its equivalent) with future redemption dates are classified, but also ensures that all investments categorized in the fair value hierarchy are classified using a consistent approach.

Investments that calculate NAV per share (or its equivalent), but for which the practical expedient is not applied will continue to be included in the fair value hierarchy.


Debt Issuance Costs

8


Simplifying the Presentation of Debt Issuance Costs

In April 2015, the FASB issued ASU 2015-15 to simplify the presentation of debt issuance costs related to a recognized debt liability. Going forward, such amounts will be presented as a direct reduction from the carrying value of the debt liability, consistent with debt discounts. The recognition guidance for debt issuance costs is not affected by this ASU.

15Debt Issuance Costs

ASU 2015-15, 03, Interest — Imputation of Interest (Subtopic 835-30)


The guidance requires retrospective application and is effective for fiscal years beginning after December 15, 2015

Must be applied beginning calendar year 2016 or fiscal year 2017

Although not required, early adoption is permitted


Effective Dates for ALL Entities:

9



Why was ASU 2015-15 issued?

To simplify requirements: having different balance sheet presentation requirements for debt issuance costs and debt discount and premium creates unnecessary complexity

What is the impact of ASU 2015-03?

Requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.



Recognition and measurement guidance unchanged

The new guidance is limited to simplifying the presentation of debt issuance costs. The recognition and measurement guidance for debt issuance costs is not affected. Therefore, these costs will continue to be amortized as interest expense using the effective interest method.

10



EXAMPLE:

On December 31, 201X, an entity issues a noninterest bearing debt security due in two years, with a face amount of $1,250,000, to an investor for $1,152,030.

On the same date, the entity incurs and pays issuance costs of $50,000 to parties other than the investor.



Presentation of debt issuance costs on December 31, 201X, under the existing standard, and under the new standard are as follows:

Existing Standard New Standard

Debt issuance costs (asset) $50,000 $0

Noninterest bearing note $1,250,000 $1,250,000

Less unamortized discount based on imputed interest rate of 5%

$97,970 $97,970

Less unamortized debt issuance costs

N/A $50,000

Note payable, net $1,152,030 $1,102,030

11

Extraordinary Items (Subtopic 225-20)


22

Extraordinary Items (Subtopic 225-20)Eliminated concept of “extraordinary items”

What you need to know: FASB issued final guidance that simplifies income statement

presentation by eliminating extraordinary items

Because an event or transaction rarely meets the criteria to be classified as an extraordinary item, we believe the ASU will not have a significant effect on financial reporting

12


23Extraordinary Items (Subtopic 225-20)

In January of 2015, the FASB issued ASU 2015-01 which eliminates the need for entities to evaluate whether transactions or events are both unusual in nature andinfrequently occurring. Entities will continue to evaluate whether items are unusual in nature or infrequent in their occurrence for presentation and disclosure purposes

Early adoption is permitted


24Extraordinary Items (Subtopic 225-20)

This ASU is effective in annual periods, beginning after 15 December 2015. Early adoption is permitted; however, adoption must occur at the beginning of an annual period. An entity can elect to apply the guidance prospectively or retrospectively. Entities that elect prospective application are required to disclose both the nature and amount of an item included in income from continuing operations after adoption that relates to an adjustment of an item previously classified and presented as an extraordinary item before adoption.

If retroactively, must provide a change in accounting principles disclosures as required under ASC 250, Accounting Changes and Error Corrections

Effective Dates and Transition:

13

Going Concern (Topic 205)


26Going Concern (Topic 205)

Summary of Provisions

Moves this assessment from the auditing standards to the accounting standards — management has responsibility to perform this now

Single threshold model (similar in principle to current accounting standard)

Disclosures required when there is substantial doubt, or when substantial doubt has been alleviated primarily by management plans

ASU 2014-15 Going Concern (Topic 205)

14



Summary of Provisions, continued

Substantial doubt exists when it is probable that an entity will not meet it's obligations for a period of one year from the financial statement issuance date

• (The evaluation should examine both qualitative and quantitative information about relevant conditions and events. This information includes the organization’s current financial condition, conditional and unconditional obligations due or anticipated within one year, and the funds necessary to maintain operations.)

Applies to both public and nonpublic entities

Effective for annual periods ending after December 15, 2016 (calendar year 2016 and fiscal year 2017).

Early adoption permitted

ASU 2014-15 Going Concern (Topic 205)



The amendments require management to assess an entity's ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards

Provides a definition of the term substantial doubt

Requires an evaluation every reporting period

Provides principles for considering the mitigating effect of management's plans,

Requires certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans,

Requires an express statement and other disclosures when substantial doubt is not alleviated

Requires an assessment for a period of one year after the date that the financial statements issued (or available to be issued)

15

Consolidation (Topic 810)


What you need to know: Reporting entities involved with limited partnerships or similar

entities will have to re-evaluate these entities for consolidation

In some cases, consolidation conclusions will change. In other cases, a reporting entity will need to provide additional disclosures if an entity that currently isn’t considered a variable interest entity (VIE) is considered a VIE under the new guidance.

Under the new guidance, a general partner will not consolidate a partnership or similar entity under the voting model

30

ASU 2015-02 Consolidation

16


31Consolidation (Topic 810)

Implications for NFPs


32Consolidation (Topic 810)

For public business entities, effective for fiscal years, beginning after December 15, 2015

Calendar year 2016 and fiscal year 2017

The amendments will be effective for all other entities for fiscal years starting after December 15, 2016,

Calendar year 2017 and fiscal year 2018

Early adoption is permitted

Effective Dates:

17

Revenue Recognition (Topic 606)


Objective: to create a single principles-based revenue standard for US GAAP & 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

34

Revenue Recognition (ASU 2014-09, 2015-14)

18

This applies to: 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:

Contributions

Investment Income35



36



19


37Revenue Recognition (Topic 606)

Public entities: annual reporting periods beginning after 12/15/2017 (calendar year 2018 or fiscal year 2019)

Nonpublic entities: one year later (annual reporting periods beginning after 12/15/2018) — (calendar year 2019 or fiscal year 2020)

Early application option — no earlier than original public company effective date (annual reporting periods beginning after 12/15/2017)

ASU 2015-14 established these effective dates:

Leases (Topic 842)

20


What you need to know:The Financial Accounting Standards Board (FASB) has issued its long-awaited update revising the proper treatment of leases under U.S. Generally Accepted Accounting Principles (GAAP).

Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), will affect companies that lease:

real estate

vehicles

construction and manufacturing equipment

other assets

39

Leases (ASU 2016-02)

Background:According to the FASB, most lease obligations today aren’t recognized on the balance sheet, and transactions often are structured to achieve off-balance-sheet treatment.

A 2005 U.S. Securities and Exchange Commission (SEC) report estimated that SEC registrant companies held approximately $1.25 trillion in off-balance-sheet lease obligations.

As a result of these obligations being left off balance sheets, users of financial statements can’t easily compare companies that own their productive assets with those that lease their productive assets.

40


Leases (Topic 842)

21

These changes result from a joint project of the FASB and IASB to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information. Key components of the new model include:

Lessee accounting model

U.S. GAAP would take a dual approach (Type A and Type B), somewhat similar to current capital and operating leases, respectively. However, right of use assets and liabilities would be recognized for both Type A and Type B leases.

IFRS would take a single approach (Type A). Some exceptions are anticipated for short term leases (less than 12 months).

41


Leases (Topic 842)

Key components of the new model also include:

Lessor accounting model — Lessor would determine Type A or Type B approach based on whether substantially all of the risks and rewards of the asset transfer

Under U.S. GAAP, lessor would not recognize any selling profit or revenue at the inception of a Type A lease that does not transfer control of the underlying asset to the lessee

Portfolio — Lessees and lessors would be allowed to apply guidance at a portfolio level

Lease term — Consider options to extend or not to terminate, as well as options to purchase in determination of lease term when it is reasonably assured that the lessee will exercise the option(s)

42


Leases (Topic 842)

22

Public business — effective date is fiscal years beginning after December 15, 2018 (calendar year 2019, fiscal year 2020)

For all other entities, one year later calendar year 2020, fiscal year 2021

Early application of the ASU is permitted

43


Leases (Topic 842)

Effective dates:

A lease is a contract (or part of a contract) that conveys the right to control the use of an identified asset (the underlying asset) for a period of time in exchange for consideration.

44


Leases (Topic 842)

23

All leases (more than 12 months) are recognized on the lessee’s balance sheet

45


Leases (Topic 842)

Lessee Accounting

46


Leases (Topic 842)

24

Lessor Accounting

47


Leases (Topic 842)

Act Now Because of this standard’s long gestation period, many companies have taken a wait-and-see approach to tackling the lease accounting changes.

However, now that the new standard has been released, businesses would be wise to begin their preparations immediately, particularly if they have extensive lease portfolios.

48


Leases (Topic 842)

25

49

Part 2

Understanding the NFP Financial Statement Project

NFP Financial Statements Project

What is it? Update, not overhaul, the current NFP reporting

model

Largest overhaul of NFP financial statements in over 20 years

Includes no changes to measurement and only impacts disclosures and presentation

All three financial statements received an overhaul

50

26

Presentation of Financial Statements of Not-for-Profit Entities ASU

The proposed amendments would change several of the requirements for financial statements.

Net asset classification

Liquidity information

Statement of cash flows presentation

Statement of activities presentation

51


Certain amendments would add new requirements orreplace existing requirements, and others would remove existing requirements or provide greater flexibility in complying with the requirements.

ASU 2016-14 was issued in August 2016 and is over 270 pages

Received over 250 letters

52

27


53

Respondent Type

Preparer ‐ 135

Auditors ‐ 90

Users ‐ 12

Individuals andothers ‐ 23Academics ‐ 4

54

Who Responded


28

0

5

10

15

20

25

30

35

40

Health andWelfare

Foundations HigherEducation

Health Care Other NFPs

55


Respondents by Industry

Goals: Improve net asset classification

Improve information in financial statements and notes about:

Financial performance

Cash Flow

Liquidity

Better enable NFPs to tell their financial story

56


29

Better serve the needs of financial statement users

FASB is looking to create clarity and uniformity in reporting across the financial statements of various NFPs and make them more comparable

Provide donors and lenders with liquidity information so they could better assess the financial health of the NFPs they are interested in supporting

57


OVERALL COMMON THEMES

Support for Board’s overall objective to update current model

Desire by many to maintain as much consistency as possible between NFPs and For‐Profit reporting requirements

Comparability within industries (NFPs and similar For‐Profit entities) may be more important than comparability between dissimilar NFPs, especially for more “business‐like” NFPs

Most users come from For‐Profit background58


30

59

Last updated on April 22, 2016Would be effective for financial statements for fiscal years beginning after December 15, 2017 therefore Calendar YE ‘18 and Fiscal YE ’19.

The Board also decided to permit early adoption subject to the designated transition method.

NFP Financial Statements Project TIMELINE

Example of Early AdoptionChoose to early adopt in FY 2017

Apply all provisions to FY ‘17

If you choose to present comparative FS for FY ‘16, apply all provisions to FY ‘16 and ‘17, except you can choose not to present:

Analysis of expense by nature and function

Disclosures around liquidity of resources

60

NFP Financial Statements Project TIMELINE

31

61


Original Exposure Draft included:

Direct method cash flows (indirect would be optional), with certain realignments

Expenses: nature-by-function (choice of location), with related disclosure

Reporting of “underwater” endowments, with enhanced disclosure

New required disclosures:

Board designations

Information useful for assessing liquidity

62


32

63

Under the current financial reporting model, not-for-profit financial statements present net assets in three categories:

Unrestricted net assets

Temporarily restricted net assets

Permanently restricted net assets

64

NFP Financial Statements Project Changes to Net Asset Classification

33

Issues The line between temporarily and

permanently restricted net assets has become blurred

Changes brought forth by UPMIFA and State/Federal regulations have added complexity

65


SolutionNonprofits will be required to:

Present on the face of the statement of financial position amounts for two classes of net assets

net assets with donor restrictions

net assets without donor restrictions

rather than for the currently required three classes.

The three existing net asset classes (permanently restricted, temporarily restricted, and unrestricted) would be replaced with two net asset classes (net assets with donor restrictions and net assets without donor restrictions)

66


34

67


Changes to Net Asset Classification

SolutionThe exposure draft continues to require footnote disclosures that elaborate on the nature and amounts of donor-imposed restrictions on net assets.

It also requires similar disclosures about designations of net assets by the organization’s governing board, which can also significantly impact operations.

68


35

Overall support for combining two classes of net assets

Suggest changes provide simplicity, may increase user understandability

Those who disagree:

Argue permanent restrictions are fundamentally different from temporary restrictions, should remain on face of statement

Express concern that: users may not read notes, important distinctions may become lost/blurred in notes

69


Feedback Received — Net Asset Classification

Changes to Net Asset Classification: Underwater Endowment Funds

70


IssueAccounting for underwater endowments is confusing to the users of the financial statements.

Currently, the amount required to be retained permanently is presented as permanently restricted net assets, and the shortfall of the fair market value below this amount is presented as a reduction of unrestricted net assets

36

Underwater Endowments

71


Overall support for classifying the underwater amounts of endowment funds within net assets with donor restrictions rather than net assets without donor restrictions.

Overall support for disclosure of NFP’s policy on spending from underwater endowment funds together with aggregate gross amounts for such funds (FV versus amount required to be maintained).

72


Feedback Received — Underwater Endowments

37

Changes to Net Asset Classification: Assets Placed-in-service

73


Issue: Currently organizations have the option to release net assets over the useful life of the acquired asset or when placed in service.

• Gifts of cash restricted for acquisition or construction of PP&E

– NFPs would be required to use the placed-in-serviceapproach (no more implied time restrictions)

Expiration of Capital Restrictions

Overall support to require reporting of expirations of donor restrictions on gifts of cash or other assets used to acquire/ construct PP&E using placed-in-service approach.

Most who disagree acknowledge placed-in-service approach is more widely used, but would prefer that both placed-in-service and implied time restriction approaches remain as options

74


Feedback Received — Net Asset Classification

38

75

NFP Financial Statements Project Changes to the Statement of Functional Expenses

All NFPs would be required to report expenses by both their nature and function. Currently, only voluntary health and welfare organizations have such a requirement. The proposal would allow flexibility to present expenses by function and by nature on the face of the statement of activities, as a separate statement, or within the notes.

New/more detailed footnote disclosures: Going to be required to disclose in detail the methodologies that the Organization uses to allocate its costs between program services and supporting services.

Reporting of Expenses

76


39

Overall support for all NFPs to report analysis of operating expenses by both function and nature in single location (generally in notes)

Suggest it aids in user understanding and comparability across industries

Some who disagree: Express concern that cost of requiring such analysis for all NFPs

would exceed benefits, especially for NFPs that are small or receive little in contributions/ public support

• Many such respondents do agree that expenses by nature should be required in addition to (or instead of) expenses by function for all NFPs, but disagree about requiring analysis for all NFPs

Express concern with lack of consistency between Form 990 and proposed GAAP analysis

Prefer that reporting of expenses by both function and nature remain optional 77


Feedback Received — Reporting of Expenses

Investment Returns

78


40

Overall agreement that disclosure of all investment expenses is unnecessary but disagreement that disclosure of internal salaries and benefits netted against investment return should be required.

Some who disagree prefer all investment expenses disclosed for transparency

Most, however, agree that disclosure of all investment expenses is unnecessary, including internal salaries and benefits

• Disclosing salaries and benefits could result in identification of salaries of specific employees

• Internal salaries likely immaterial for many NFPs• Wouldn’t give complete picture of salaries and benefits

anyway, because of other “missing” amounts (e.g., salaries and benefits capitalized in inventory)

79


Feedback Received — Investment Returns

Liquidity The Board decided that an entity should define the time horizon it uses to manage its liquidity (for example, 30, 60, or 90 days) and disclose the following information:

1. Quantitative information about: a) The total amount of financial assetsb) Amounts that are not available to meet cash needs within the time

horizon because of (1) external limits and (2) internal actions of a governing board

c) The total amount of financial liabilities that are due within that time horizon

2. Qualitative information about how the entity manages its liquidity. For example, an entity might disclose: a) Its strategy for addressing entity-wide risks that may affect liquidity,

including its use of lines of creditb) Its policy for establishing liquidity reservesc) Its basis for determining the time horizon used for managing liquidity

80


41

Mixed feedback for proposed disclosures of information about liquidity.

More support for qualitative disclosures than quantitative disclosures.

Some who disagree express concern that:

• “Time horizon” concept is vague and question how to choose one time horizon when multiple horizons and revenue streams exist.

• Information will be outdated by time financial statements are issued.• Business entities not required to provide information proposed for NFPs.• Extensive disclosures reduce usefulness, and many users don’t read

notes.• Disclosures too subjective, would result in inconsistent approaches

among NFPs, reducing comparability.• Expected incremental benefits may not be greater than perceived

cost of additional disclosures.

81


Feedback Received — Liquidity

Common Suggested Alternatives:

Require classified balance sheet

Require separate presentation on balance sheet of assets whose use is limited

The Board directed the staff to explore an approach that would require, like the proposal, qualitative information about how the NFP manages its liquidity and liquidity risks, but provide alternative ways of presenting quantitative information. This approach would emphasize information about assets that are liquid and available at the balance sheet date.

82


Feedback Received — Liquidity

42

Changes to the Statement of Cash Flow

Issue

To some readers of the financial statements, the statement of cash flows remains a mystery.

83


Cash Flow Statement

Solution

Require Direct Method for operating cash flows

Require reconciliation to indirect method

Should indirect method still be required for certain NFPs?

84


43

Mixed feedback for requiring direct method of presenting operating cash flows

Most acknowledge that direct method is more understandable than indirect method

Most workshop participants and several respondents that have adopted direct method support requiring it and no longer requiring indirect method

• They generally indicate that benefits exceed incremental implementation costs as well as ongoing costs

85


Feedback Received — Cash Flow Statement

HoweverMost oppose requiring direct method at this time for differing

reasons:

• Current requirements should not be changed until requirements change for business entities

– For now, NFPs should have option to present either direct or indirect method

» Some of these respondents may not understand that indirect method is currently required for all entities even if not presented on face of cash flow statement

• Concern that incremental benefits of switching to direct method would not justify costs

• Neither method is clearly superior to other• Users will continue to underutilize statement of cash flows

regardless of method presented86



44

Overall mixed feedback on whether to retain indirect methodMany believe no necessary information would be lost if

indirect method no longer required

• However, many of these respondents and others prefer to retain reconciliation of operating cash flow to total change in net assets

The Board decided not to require NFPs to use the direct method of presenting operating cash flows, but instead to continue to allow them to use either the direct method or indirect method. Further, the Board decided to no longer require the indirect reconciliation if an NFP chooses to use the direct method.

87



Allow free choice between the Direct Method and the Indirect method

Indirect reconciliation no longer required for direct method

88


Cash Flow Statement: Outcome

45

Phase II

Includes other proposed changes that are likely to require more time to resolve

Operating Measures

Cash Flow Realignment

89


Enhanced disclosures about what is included in operations for those that utilize an operating measure

Required disclosures would include those related to governing board designations, appropriations, and similar transfers

90

NFP Financial Statements Project Operating Measures

46

Operating Measures

91


Feedback Received — Operating Measures

Mixed feedback for required intermediate measures of operations

Many agree with requiring intermediate measures of operations, but disagree with the measures proposed. Some specifically express a desire for either:

• Clarification of definition of “mission” and what should or should not be included in operations

• More flexibility for NFPs to determine their own definition for operations and what to include in operations

• Requiring single intermediate measure of operations instead of two measures

92


47

Feedback Received — Operating Measures

Many who disagree note one or more of the following:

Separating activity into operating and non-operating would not increase comparability because of significant differences in operating activities among different types of NFPs

Management would have ability to manipulate classification of resources

Two intermediate measures of operations would increase financial statement complexity

NFP financial reporting should remain consistent with (flexible as) For-Profit financial reporting

• Some of these respondents have suggested pursuing a different type of intermediate measure, somewhat analogous to net income/ the health care performance indicator, for now

93


Feedback Received — Operating Measures Overall disagreement that interest expense and fees and related expenses

incurred are not directed at carrying out NFP’s purpose and, thus, should not be classified as operating activities.

Auditors & academics have more mixed views, while most others disagree

Many that agree suggest acquiring debt may help NFP carry out its mission, but NFP not in business of acquiring or disposing of debt. Thus, interest expense not an operating activity, but a financing activity.

Many that disagree:• Express concern that NFPs with lending/financing directly tied to mission

would be precluded from classifying interest expense as operating• Suggest interest expense is direct cost of doing business and belongs in

operating• Express concern that proposal would reduce comparability with for-

profits• Suggest classification should be determined by what assets are being

financed by the borrowing (working capital versus “bricks and mortar”)

94


48

Presentation of TransfersBalances aims of comparability and flexibility. NFP would present:

1. Operating measure before transfers (reflects all current, legally available amounts generated/used during operations)

2. All internal transfers (decisions to designate otherwise available amounts as unavailable, or vice versa) in a discrete section, but before the operating measure after transfers.

At a minimum, present aggregated line items of transfers from & transfers to operating activities

Provide details in a note if not on the face

95


Feedback Received — Presentation of Transfers Overall disagreement concerning

presentation of all internal transfers on the face of the Statement of Activities.

Some concern that:• It’s inappropriate to

include impact of internal events in operating results

• Management would have ability to manipulate classification of resources

• Transfers make Statement of Activities too complex

Many suggest disclosure of transfers in notes to financial statements

96


Some Suggested Alternatives: Report program service

income and expenses in operating, and contributions and investing activity below operating, with roll-forward note disclosures about internal transfers

Limit presentation of board decisions on face of statement to those related to designations for/ appropriations from endowment funds

49

Gifts of PP&E

97


Overall disagreement with notion that gifts of PP&E or cash to acquire/ construct PP&E are “operating” revenues and support

Many would prefer such gifts be recorded directly in non-operating:

• Concern for added volatility to (first) intermediate measure of operations

• Capital-related gifts not operating activities• Capital-related gifts not available for the current period,

unless monetizedMany disagree because they disagree with transfer model

98


Feedback Received — Gifts of PP&E

50

Cash Flow Statement Organization

Re-categorize certain items to better align operating cash flows with the operating measuresFrom Investing/Financing to Operating:

• Purchases of and proceeds on sale of long-lived assets (e.g., PP&E; capitalized and noncapitalized collections)

• Cash gifts restricted for long-lived assetsFrom Operating to Investing/Financing:

• Cash from interest and dividends• Interest paid

99


Cash Flow Statement Organization

100


51

Overall disagreement with proposed alignment of line items presented in cash flow statement with proposed operating classification for activities statement to increase understandability

Especially regarding PP&E-related cash inflows/ outflows

Most who disagree prefer current requirements to remain same until requirements change for business entities

• Inconsistency between NFP and for-profit reporting would create confusion for users who also operate in for-profit environment

101


Feedback Received — Cash Flow Statement Organization

Thank You!

Documents

2016 Nonprofit Accounting and Auditing Update Trent Foster Nonprofit Accountin… · in which fair value is assessed through the NAV per share ... as a direct reduction from the carrying