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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 of the international BDO network of
independent member firms. BDO is the brand name for the BDO
network and for each of the BDO Member Firms.
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 of the international BDO network of
independent member firms. BDO is the brand name for the BDO
network and for each of the BDO Member Firms.
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 of the international BDO network of
independent member firms. BDO is the brand name for the BDO
network and for each of the BDO Member Firms.
Accounting & Auditing Update for
Nonprofit Organizations
October 17, 2016
CP of NYS Annual Conference Jeremy Meisel & Matthew Becker
Senior Managers, BDO USA, LLP
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Presenters
Jeremy Meisel, CPA
Senior Manager
Greater New York Nonprofit Industry Group
Email: [email protected]
Phone: (212) 885-8016
Matthew Becker, CPA
Senior Manager
Greater New York Nonprofit Industry Group
Email: [email protected]
Phone: (212) 885-7403
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Learning Objectives
• Learn about new Accounting Standards Updates applicable to non-profit
organizations
• Discuss the requirements on the new financial reporting framework for
nonprofit organizations
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Agenda
Financial Statements of NFP Entities
• Net Assets
• Underwater Endowment
• Expiration of Restriction Related to Long-lived Assets
• Expense Reporting
• Investment Income and Expense Reporting
• Liquidity Disclosure
• Cash Flow Statement
• Operating Measure
• Transition
• Effective Date
Recently Issued Standards (ASUs)
• Revenue Recognition (Topic 606)
• Leases (Topic 842)
• Financial Instruments: Recognition and Measurement (Topic 825-10)
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 of the international BDO network of
independent member firms. BDO is the brand name for the BDO
network and for each of the BDO Member Firms.
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 of the international BDO network of
independent member firms. BDO is the brand name for the BDO
network and for each of the BDO Member Firms.
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 of the international BDO network of
independent member firms. BDO is the brand name for the BDO
network and for each of the BDO Member Firms.
Financial Statements of Not-for-Profit
Entities
5
ACCOUNTING STANDARDS UPDATE (“ASU”) 2016-14—NOT-FOR-PROFIT ENTITIES
(TOPIC 958): PRESENTATION OF FINANCIAL STATEMENTS OF NOT-FOR-PROFIT ENTITIES
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• 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”
NFP Financial Statements Project—Key Objectives (recommended by FASB’s NFP Advisory Committee (NAC))
6
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Nonprofit Financial Reporting Project - Poll
7
Page 8
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Nonprofit Financial Reporting Project - Poll
8
Page 9
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Nonprofit Financial Reporting Project - Poll
9
Page 10
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Nonprofit Financial Reporting Project - Poll
10
Page 11
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Nonprofit Financial Reporting Project - Poll
11
Page 12
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Nonprofit Financial Reporting Project - Poll
12
Page 13
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Nonprofit Financial Reporting Project - Poll
13
Page 14
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Nonprofit Financial Reporting Project - Poll
14
Page 15
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Phase 2: need to decide
whether to wait to
deliberate at same time as
the Financial Performance
Reporting project for
business entities
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Unrestricted Temp.
Restricted Perm.
Restricted
Phase 1
Net Assets
16
Without Donor Restrictions
With Donor Restrictions
Amount, purpose, and type of board
designations *
Nature and amount of donor restrictions
Current
GAAP
Proposed
GAAP
Disclosures
+
* New disclosure requirement
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• Entities will no longer distinguish between temporary and
permanent restrictions on the face of the statements.
• In addition, the net asset classification of underwater
amounts of donor-restricted endowment funds will be
classified as part of net assets with donor
restrictions. Additional disclosures related to these
underwater endowment funds are required.
• The new standard retains the current requirements to
provide information about the nature and amounts of
different types of donor-imposed restrictions and the need
to highlight how these restrictions affect the use of the
resources and their impact on liquidity.
Net Assets
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“Underwater” Endowments
18
• To be reflected in net assets with donor restrictions rather than in net assets without donor restrictions
Revised net asset classification
• 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.
Enhanced disclosures
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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)
Expiration of Capital Restrictions
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• 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
Expense Reporting
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Reporting of Investment Returns
21
•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
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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)
Liquidity and Availability
22
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• Allow free choice between the Direct Method
and the Indirect Method
• Indirect reconciliation no longer required for
Direct Method
Cash Flow Statement
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• 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)
Operating Measure: Improved Disclosures
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Effective Date: For fiscal years beginning after 12/15/2017 (e.g., FY
2018-19 for Higher Eds)
• 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: 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
Effective Date, Early Adoption, and Transition
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Choose to early adopt in FY 2015-16
• Apply all provisions to FY 2015-16
• If choose to present comparative financials for FY 2014-
15, apply all provisions to FY 2014-15, except can
choose not to present:
(1) Analysis of expenses by nature and function, and/or
(2) Disclosures around liquidity and availability of resources
Example of Early Adoption
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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) Presenting one class of restricted net assets (consolidating
temporarily and permanently restricted)
(2) Underwater endowment accounting
(3) Eliminated disclosures of investment return components and
netted expenses
(4) Eliminated requirement to provide indirect reconciliation if
using direct method for operating cash flows
Important Notes
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End of Comment Period on Exposure
Draft
August 2015
October 28, 2015
Board Meeting Decision to split
project into Phase 1 and Phase 2
Board Meetings Redeliberations on topics in Phase 1
December 2015 –
March 2016
Summer 2016
Goal to
Issue ASU on Phase 1
Project Timeline: Next Steps
28
Begin redeliberations
on Phase 2
2nd half of
2016??
FY 2018-19
Effective date of ASU on Phase 1 (Fiscal years
beginning after 12/15/2017)
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Project Timeline: Next Steps
29
Page 30
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Project Timeline: Next Steps
30
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Recently Issued Standards (ASUs)
• Revenue Recognition (Topic 606)
• Leases (Topic 842)
• Financial Instruments: Recognition and Measurement (Subtopic 825-10)
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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
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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:
• Contributions
• Collaborative arrangements
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Final U.S. GAAP Model – Recognition
Core Principle:
Steps to apply the core principle:
1. Identify
the
contract(s)
with the
customer
2. Identify
the
performance
obligations
3. Determine
the transaction
price
5. Recognize
revenue when
(or as) a
performance
obligation is
satisfied
4. Allocate
the
transaction
price
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
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35
• Qualitative and quantitative* disaggregation of
revenue into categories that depict how revenue and
cash flows are affected by economic factors
Remaining performance
obligations
Interim requirements
Information about
contract balances
• Quantitative disclosures *
• 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 *
Disaggregation of
revenue
Final U.S. GAAP Model – Disclosure
* for public entities only
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Transition, Effective Date and Early Application
36
Effective dates:
- Public entities: annual reporting periods after 12/15/2017 (including interim period)
- Nonpublic 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)
PY2
(2016)
PY1
(2017)
CY
(2018)
CY Footnotes
Retrospective
(with optional practical
expedients)
Cum
ula
tive
catc
h-u
p
Rev rec under new standard
Cumulative effect at date
of application
Rev rec under legacy
standard
Cum
ula
tive
catc
h-u
p
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 has
not been recognized under legacy revenue guidance
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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 2014-09, 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
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Example 1
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Example 2
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Leases (Topic 842)
40
A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration
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Lessee Model
41
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
All leases (more than 12 months) are recognized on the lessee’s
balance sheet
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Lessee Accounting Overview
42
Financing
Operating
Right-of-use asset
Lease liability
Amortization expense
Interest expense
Cash paid for principal and
interest payments
Right-of-use asset
Lease liability
Single lease expense on a straight-line basis
Cash paid for lease payments
Income Statement Cash Flow Statement Balance Sheet
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Lessor Accounting Overview
43
Net investment in
the lease
Interest income and any profit on the lease
Cash received for lease payments
Continue to recognize
underlying asset
Lease income, typically on a straight-line basis
Cash received for lease payments
Sales-
Type /
Direct
Financing
Operating
Income Statement Cash Flow Statement Balance Sheet
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Leases – Effective Date
44
• Fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (CY 2019; FY 2019-20)
Public Companies*
• Fiscal years beginning after December 15, 2019 and interim periods beginning after December 15, 2020 (CY 2020; FY 2020-21)
All Other Organizations
• Permitted for all organizations
Early Application
* “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 Here as Revenue Recognition Standard)
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Accounting for Financial Instruments – Recognition and Measurement
ASU 2016-01; Topic 825) Disclosures: FV of Financial Instruments not recognized at FV in Balance Sheet
ASU 2016-01 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 CY 2019 (FY 2019-20). This
provision may be early adopted for all financial statements not yet issued.
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Questions?
46