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© Elliott Davis, LLC © Elliott Davis, PLLC
FASB/GASB Update
Russ Madray Scholar-in-Residence
October 26, 2018
© Elliott Davis, LLC © Elliott Davis, PLLC
This material was used by Elliott Davis during an oral presentation; it is not a complete record of
the discussion. This presentation is for informational purposes and does not contain or convey
specific advice. It should not be used or relied upon in regard to any particular situation or
circumstances without first consulting the appropriate advisor. No part of the presentation may be
circulated, quoted, or reproduced for distribution without prior written approval from Elliott Davis.
Disclaimer
© Elliott Davis, LLC © Elliott Davis, PLLC
FASB Update • NFP financial statements
• Revenue recognition
• Leases
GASB Update • Leases
• Majority equity interests
Agenda
© Elliott Davis, LLC © Elliott Davis, PLLC
FASB Update
© Elliott Davis, LLC © Elliott Davis, PLLC
NFP Financial Statements
© Elliott Davis, LLC © Elliott Davis, PLLC
ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities
First change in more than 20 years
Will affect all NFPs
Major changes:
The FASB’s New Standard on Not-for-Profit Financial Statements
Net asset classification
Info about liquidity
Expense presentation
Statement of cash flows
© Elliott Davis, LLC © Elliott Davis, PLLC
Net Asset Classification
Current requirement – 3 classes
• Unrestricted
• Temporarily restricted
• Permanently restricted
New requirement – 2 classes
• Without donor restrictions
• With donor restrictions
Retains current requirements for information about nature and amounts of different types of donor-imposed restrictions
Also requires similar information about governing board designations
© Elliott Davis, LLC © Elliott Davis, PLLC
Now classified in net assets with donor restrictions, instead of current classification in unrestricted net assets
Also requires disclosure of • Aggregate amount by which funds are underwater
• Original gift amount
• Any governing board policy or decisions to spend, or not spend, from such funds
Underwater Endowments
Underwater = current fair value less than original gift amount (or amount required to be retained by donor or by law)
© Elliott Davis, LLC © Elliott Davis, PLLC
Reporting expirations of restrictions on gifts of cash or other assets to be used to acquire or construct a long-lived asset • Now required to use the placed-in-service approach (without specific
donor restrictions stating otherwise)
• Option to imply a time restriction and release the restriction over an asset’s useful life (the “over-time” approach) will no longer be permitted
Expiration of Restrictions
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Quantitative information either on the face of the statement of financial position or in the notes, and additional qualitative information in the notes as necessary, that communicates the availability of an NFP’s financial assets at the date of the statement of financial position to meet cash needs for general expenditures within one year of the date of the statement of financial position.
Information About Liquidity
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Liquidity Disclosure Example
Financial assets available within one year of the balance sheet date for general expenditure are as follows.
Cash and cash equivalents $ 4,575,000
Accounts and interest receivable 2,130,000
Contributions receivable 1,825,000
Short-term investments 1,400,000
Other investments appropriated for current use 10,804,000
$ 20,734,000
The System has certain board-designated and donor-restricted assets limited to use which are available for general expenditure within one year in the normal course of operations. Accordingly, these assets have been included in the information above. The System has other assets limited to use for donor-restricted purposes, debt service and for the professional and general liability captive insurance program. Additionally, certain other board-designated assets are designated for future capital expenditures and an operating reserve. These assets limited to use, which are more fully described in Notes ___ and ___ are not available for general expenditure within the next year and are not reflected in the amounts above. However, the board-designated amounts could be made available, if necessary.
As part of the System’s liquidity management plan, cash in excess of daily requirements is invested in short-term investments and money market funds. Occasionally, the board designates a portion of any operating surplus to an operating reserve, which was $1,200,000 as of December 31, 2018. This fund established by the board of directors may be drawn upon, if necessary, to meet unexpected liquidity needs.
Additionally, the System maintains a $5 million line of credit, as discussed in more detail in Note ___. As of December 31, 2018, $5 million remained available on the System’s line of credit.
© Elliott Davis, LLC © Elliott Davis, PLLC
Expense Presentation
All NFPs (not just voluntary health and welfare organizations) will provide information about their operating expenses by both nature and function
Enhanced disclosures about the methods used to allocate costs among functions
On face of the statement of activities
As a separate statement
In the notes to the financial statements
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Statement of Cash Flows
FASB’s original exposure draft would have required the direct method
New guidance allows NFPs to present either the direct or indirect method
Presentation or disclosure of the indirect method reconciliation is no longer required if the NFP uses the direct method
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Effective Date
Annual financial statements issued for fiscal years beginning after December 15, 2017
Interim periods within fiscal years beginning after December 15, 2018
Early application is permitted
Transition • For comparative years presented, apply all provisions, but can choose
to not present
• Analysis of expenses by nature and function
• Disclosures about liquidity and availability of resources
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Steps to Take Now
Familiarize yourself with all requirements in ASU 2016-14
Communicate with board about required changes
Revisit policies, procedures, and controls that may need to change to comply with ASU
Communicate with other stakeholders
Review disclosure requirements
Evaluate transition methods and options
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Revenue Recognition
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Background
ASU 2014-09, Revenue from Contracts with Customers
Issued in 2014
Replaces virtually all existing US GAAP guidance on revenue recognition
Virtually every industry is affected
Requires companies to make more estimates and use more judgment than under current guidance
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In scope • Contracts with customers
• Sale of some nonfinancial assets that are not an output of the company’s ordinary activities (e.g., property, plant and equipment, intangibles)
Not in scope • Leasing contracts
• Insurance contracts
• Financial instruments contracts
• Certain nonmonetary exchanges
• Certain put options on sale and repurchase agreements
• Guarantees within the scope of ASC 460
Note—contributions are not considered to be “contracts with custmers”
Scope
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Overview
Core principle • 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
Identify the contract with a customer
Identify the performance obligations
in the contract
Determine the
transaction price
Allocate the transaction price to the
performance obligations
in the contract
Recognize revenue
when (or as) a
performance obligation is
satisfied
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Disclosure Requirements
Many of these requirements are optional for non-public companies.
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Final (included in Revenue Recognition Guide): • Self-pay patient balances
• Applying a portfolio approach
• Presentation and disclosure
• Third-party settlements
• Risk-sharing arrangements
• Performance obligations
Being finalized: • Various issues related to CCRCs
• Accounting for contract costs
AICPA Healthcare Revenue Recognition Task Force
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Effective Date
Public entities • Annual reporting periods beginning after December 15, 2017,
including interim periods within that reporting period
Nonpublic entities • Annual reporting periods beginning after December 15, 2018, and
interim periods within annual periods beginning after December 15, 2019
Transition • Full retrospective
• Modified retrospective
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Steps to Take Now
Identify areas requiring estimates and judgments
Assess information systems
Evaluate contracts
Consider the impact on other areas
Communicate with stakeholders
Review disclosure requirements
Evaluate transition methods
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Leases
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As of the lease commencement date, lessee recognizes: • Liability for its lease obligation (initially measured at present value of
future lease payments)
• Asset for its right to use the underlying asset (ROU asset)
• Equal to the lease liability
• Adjusted for lease payments made at or before lease commencement, lease incentives, and any initial direct costs
Lessee Accounting
Lease Liability
Initial Direct Costs
Prepaid Lease
Payments
Lease Incentives
ROU Asset
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Lease would be classified as a finance lease if any of the following criteria are met: • Lease transfers ownership to lessee by end of lease term
• Bargain purchase option (lessee reasonably certain to exercise)
• Lease term is for major part of remaining economic life of underlying asset
• Present value of sum of lease payments and any guaranteed residual value equals or exceeds substantially all of fair value of underlying asset
• Underlying asset is of such a specialized nature it is expected to have no alternative use to the lessor at the end of the lease term
Classification – Lessee
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Interest expense calculated on lease liability
Amortization expense related to ROU asset
Reported as separate items on the income statement
Results in front-loading the expenses
Finance lease
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Allocate total lease payments, including initial direct costs, evenly over the lease term to calculate periodic straight-line expense
Interest expense calculated same as finance lease
Amortization expense is plug figure (difference between straight-line and interest)
Reported as a single item on the income statement—lease expense
Operating lease
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Lessee would recognize lease payments as expense over the lease term on a straight-line basis
Lessee would also be required to disclose certain information about the short-term lease
If lease term increases to more than 12 months, or if it is reasonably certain that the lessee will exercise an option to purchase the underlying asset, lessee would no longer apply the short-term lease exception
Short-Term Leases
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Effective Date
• Public business entities
• Effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years
• All other entities
• Effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020
• Transition • Apply ASU as of beginning of earliest period presented
• Optional—apply ASU at date of adoption
© Elliott Davis, LLC © Elliott Davis, PLLC
Steps to Take Now
Inventory all existing lease contracts
Evaluate other contracts that be or may contain a lease
Assess information systems
Consider the impact on other areas
Communicate with stakeholders
Review disclosure requirements
Evaluate policy and transition alternatives
Consider alternatives for future lease negotiations
© Elliott Davis, LLC © Elliott Davis, PLLC
GASB Update
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Leases
© Elliott Davis, LLC © Elliott Davis, PLLC
Provides guidance for lease contracts for nonfinancial assets • Vehicles
• Heavy equipment
• Buildings
Excludes nonexchange transactions, including donated assets, and leases of intangible assets
Also addresses accounting for • Lease terminations and modifications
• Sale-leaseback transactions
• Nonlease components embedded in lease contracts
• Leases with related parties
GASB 87, Leases
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Major changes: • Leases will be classified as “short-term,” “contracts that transfer
ownership,” and “all other”
• Leases greater than 12 months will have balance sheet impact on both lessee and lessor
• For all leases other than short-term, the lessee will recognize the intangible use asset, and the lessor will continue to depreciate and account for the lease asset
• Financial statement disclosures and schedules required for contracts that transfer ownership and non-short-term leases
• No disclosure requirement for short-term lease outflows
GASB 87, Leases
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A contract that conveys control of the right to use another entity’s nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction.
Definition of a “Lease”
Need to assess whether entity has both the ability and rights to use the asset
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Leases are currently classified as either “operating” or “capital,” based on a four-factor test
GASB 87 will sort lease agreements into three categories:
The four-factor test will be eliminated, as will the terminology of operating and capital leases
3 Categories of Leases
Short-term leases
Contracts that transfer ownership
All other leases
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A lease that has a maximum possible term of 12 months or less, including any options to extend, regardless of its probability of being exercised
Lessee should recognize short-term lease payments as outflows of resources (expenses) based on the payment provisions of the contract
For a lease that is cancelable by either the lessee or the lessor, maximum possible term is the noncancelable period, including any notice periods
Short-term Lease
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Ownership of the underlying asset transfers to the lessee by the end of the contract
Transaction should be reported as a financed purchase of the underlying asset by the lessee, or sale of the asset by the lessor
Contracts that Transfer Ownership
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Lessee government required to recognize lease liability and intangible asset representing lessee’s right to use leased asset
Lability is present value of payments covered by contract
Value reduced as payments are made over lease’s term
Asset equals initial measurement of liability
Lessee Accounting
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Lease liabilities considered long-term debt
Lease payments are capital financing outflows in the cash flow statement
Lessees will no longer report rent expense for today’s operating-type leases
Instead report interest expense on liability and amortization expense related to asset
Lessee Accounting
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Lessee also will report the following: • Amortization expense over shorter of term of lease or useful life of
underlying asset
• Interest expense on lease liability
• Note disclosures about lease
• General description of leasing arrangement
• Amount of lease assets recognized
• Schedule of future lease payments to be made
Lessee Accounting
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Lessor government required to recognize lease receivable and a deferred inflow of resources
Lessor will continue to report leased asset in its financial statements
Lease revenue will arise from amortizing deferred inflow of resources in a systematic and rational manner over lease term
Lessor also will report the following in its financial statements: • Interest revenue on receivable
• Note disclosures about the lease • General description of leasing arrangement
• Total amount of inflows of resources recognized from leases
Lessor Accounting
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New rules exclude leases associated with investment assets carried at fair value (e.g., investment rental property)
Will continue to be accounted for as they are today
Lessor Accounting
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Noncancelable portion of lease plus those periods lessee and lessor are reasonably certain will remain in lease, which includes: • Periods lessee or lessor is able to extend to lease and is reasonably
certain to do
• Periods when lessee or lessor is able to but is reasonably certain not to terminate lease
Fiscal funding/cancellation clauses should not be taken into consideration unless clause is reasonably certain of being exercised
Lease Term
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Right-of-use assets may amortize more quickly than the liabilities, negatively impacting net position
Lessees will report lease liabilities as long-term debt, heightening concerns about compliance with restrictive debt covenants
Lessees will report interest expense on the liability and amortization expense related to the asset, thus front-loading the expense recognition
In cash flow statements, lease payments will be classified as capital financing outflows by lessees
Key Impacts of the New Lease Model
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Effective for reporting periods beginning after December 15, 2019
Earlier application is encouraged
Transition • Leases should be recognized and measured using facts and
circumstances that exist at beginning of period of implementation
• Lessors should not restate assets underlying their existing sales-type or direct financing leases
• Any residual assets for those leases become carrying values of underlying assets
Effective Date
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Asset Retirement Obligations
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GASB defines an ARO as “a legally enforceable liability associated with the retirement of a tangible capital asset”
The capital asset must be permanently removed from service through its sale, abandonment, recycling or disposal and not just idled temporarily
GASB 83, Certain Asset Retirement Obligations
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AROs result from normal operations of a tangible capital asset, and include legally enforceable liabilities associated with the following: • Retirement of tangible capital assets
• Disposal of a replaced part that is a component of a tangible capital asset
• Environmental remediation associated with retirement of tangible capital assets that results from normal operations of those capital assets
• Obligations of a lessor in connection with a leased property that meets the criteria of an ARO
GASB 83, Certain Asset Retirement Obligations
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Scope Exclusions: • Obligations arising solely from a plan to sell or otherwise dispose of a
tangible capital asset
• Activities necessary to prepare a tangible capital asset for an alternative use
• Obligations for asbestos removal that result from the other-than-normal operation of a tangible capital asset (i.e., contamination obligations covered under GASB 49)
• Obligations associated with maintenance, rather than retirement, of a tangible capital asset
• Cost of a replacement part that is a component of a tangible capital asset
GASB 83, Certain Asset Retirement Obligations
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A government should recognize a liability for an ARO when the liability is incurred and reasonably estimable
Incurrence of a liability is manifested by the occurrence of both an external obligating event and an internal obligating event resulting from normal operations
Obligating event—its occurrence determines the timing for recognition of an ARO
Recognition of a Liability
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Approval of federal, state, or local laws or regulations
Creation of a legally binding contract
Issuance of a court judgment that imposes a legally enforceable liability on a government to retire a tangible capital asset
External Obligating Events
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For contamination-related AROs—the occurrence of contamination
For AROs not related to contamination: • Operation of the capital asset, if the liability is determined on asset
usage
• Putting the asset into operation, if the liability isn’t determined on asset usage
• Permanent abandonment (before operations commence)
• For acquired AROs, the acquisition itself
Internal Obligating Events
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Reporting periods beginning after June 15, 2018
Earlier application is encouraged
Effective Date
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Majority Equity Interests
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Old guidance based on whether intent of ownership was an investment or to provide service
New guidance states that a majority equity interest in a legally separate organization should be reported as an investment if the equity interest meets the definition of an investment
Defines a majority equity interest • A financial interest in a legally separate organization evidenced by the
ownership of shares of the organization’s stock or by otherwise having and explicit, measureable right to the net resources of the organization that is usually based on an investment of financial or capital resources by a government
GASB Statement 90, Majority Equity Interests
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Majority equity interest that meets definition of an investment should be measured using the equity method, unless it is held by • Special-purpose government engaged only in fiduciary activities
• Fiduciary funds
• Endowment or permanent fund
Those governments and funds should measure the majority equity interest at fair value
Majority Equity Interest
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Also requires that a component unit in which a government has a 100% equity interest account for its assets, deferred outflows of resources, liabilities, and deferred inflows of resources at acquisition value at the date the government acquired a 100% equity interest in the component unit
Transactions presented in flows statements of the component unit in that circumstance should include only transactions that occurred subsequent to the acquisition
Effective for reporting periods beginning after December 15, 2018
Earlier application encouraged
GASB Statement 90, Majority Equity Interests
© Elliott Davis, LLC © Elliott Davis, PLLC
Russ Madray
Scholar-in-Residence
Email: [email protected]
Phone: 864.370.5640
Elliott Davis provides comprehensive assurance, tax and consulting solutions to diverse businesses, organizations and individuals. With a network of forward-thinking professionals in major U.S. markets and alliance resources across the globe, the firm ranks among the top 40 and fastest-growing accounting firms in the U.S. Visit elliottdavis.com for more information.
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Locations
With a network of forward-thinking
professionals in major U.S. markets across
the southeast, and alliance resources
across the globe, Elliott Davis ranks
among the top forty and fastest-growing
accounting firms in the United States.
Where Would You Rather Be?
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Services
Since 1920, Elliott Davis has been focused on
helping improve the financial management of a
diverse client base by offering a comprehensive
array of services. What our people know, how
we process work and our vast network of
relationships all combine to deliver world-class
advice and practical solutions. To the right is a
summary overview of our service offerings.
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Mission & Values
Over time, we have consistently sought to maintain a culture that yields a positive impact on
our clients, our people and our communities. Culture is the tie that binds our firm together
and keeps us all pulling in the same direction. Our values guide us in how we work, how we
make decisions and what we do each day.
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Having a positive impact on our
communities is core to the Elliott Davis
mission. Each office takes pride in its
involvement with projects and
organizations on a local level.
Leadership and support of our
community is critical to the success
and quality of life of our clients and our
employees. At Elliott Davis, all firm
professionals are encouraged to
contribute time to not-for-profit
organizations as volunteers or leaders.
Commitment to Community
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Recognition
Elliott Davis has received numerous
honors and recognitions, a few of
which are pictured here. We are
particularly proud to have been ranked
in the top five best places to work
among large employers in South
Carolina (our headquarters location).
We have achieved this ranking in each
of the past ten years.
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Elliott Davis is a member of an international alliance
of accounting, tax and consulting service providers
via our affiliation with Moore Stephens. Moore
Stephens is one of the world's major networks with
more than 300 independent firms and 700 offices in
more than 100 countries.
International Resources
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