New Accounting Standards Implementation (ASU 2016-14)isccon.shelbysystems.com/wp-content/uploads/2018/...New Accounting Standards Implementation (ASU 2016-14) (Course #E915) Presented

New Accounting Standards Implementation (ASU 2016-14)

(Course #E915)

Presented by: Rodney Smith, CPA CFEPSK LLP Audit Partner

PresenterPresentation Notes©2017 Shelby Systems, Inc.Other brand and product names are trademarks or registered trademarks of the respective holders.

PREPARING FOR THE NEW STANDARDS

In this session you hear about these topics…• History of development and the content of the Accounting

Standards Update (ASU 2016-14) promulgated by the Financial Accounting Standards Board (FASB)

• Implementation considerations, including timeline• Impact of the new standards on your financial reporting

HISTORY

• The current nonprofit accounting standards have been in place with very few changes since about 1995. (Codified as Topic 958 much later)

• In 2011, the Financial Accounting Standards Board (FASB) launched a standards setting project and a research project based upon suggestions from the Not-for-Profit Advisory Committee (NAC).

PresenterPresentation NotesFinancial Accounting Standards Board (a/k/a The Accounting Gods in Norwalk CT) promulgates accounting standards. Nonprofit (a/k/a Not-for-profit) standards are basically added onto or noted as exceptions to accounting standards for commercial enterprises. Topic 958

NAC Key Recommendations

• Revisit current net asset classifications and how they may be relabeled or redefined, in conjunction with improving how liquidity is portrayed in a not-for-profit’s statement of financial position and related notes.

• Improve the statements of activities and cash flows to more clearly communicate financial performance.

PresenterPresentation NotesThe NAC consists of 15 to 20 members who demonstrate (a) a keen interest in and knowledge of financial accounting and reporting matters, (b) experience working within the NFP sector, (c) a commitment to improving financial reporting for users of financial statements, and (d) the ability to provide input on a wide variety of financial reporting matters.SEQUENCED = LIQUIDITYAn alternative view of expenses and cash flows that are not influenced by commercial business principles of performance

NAC Key Recommendations

• Streamline, where possible, existing not-for-profit specific disclosure requirements to improve their relevance and clarity.

IMPLEMENTATION

• On August 16, 2016, FASB issued ASU 2016-14 : Presentation of Financial Statements of Not-for-Profit Entities

• Effective for annual financial statements issued for fiscal years beginning after December 15, 2017

• 2018 for Calendar Year accounting period; otherwise, first fiscal year ending in 2019

IMPLEMENTATION

• Early adoption is permitted, but only for an annual fiscal period.

• If comparative financial statements are issued, then the update must be applied retrospectively, except for two provisions in the new standards – 1) analysis of expenses by natural classification , 2) disclosures about liquidity and availability of resources.

APPLICATION

• Applies to nonprofit organizations, including churches that issue financial statements in accordance with generally accepted accounting principles.

• Does not apply to organizations that generate financial statements for internal use only, but the new standards are still relevant.

MAIN PROVISIONS

• Net assets – two classes instead of three.• Expenses – by natural classification in addition to

functional classification• Investment returns – simply report net of expenses• Liquidity and availability of resources – qualitative

and quantitative information required• Operating cash flows – choose one presentation:

direct method or indirect method

TWO NET ASSET CLASSES

Without donor restrictions•Unrestricted is merely renamed

With donor restrictions•Temporarily restricted and

permanently restricted are combined

PresenterPresentation NotesExample designations: Operating Reserve, Building Repair & Replacement, Missions, School, Support for Auxiliary Ministry

NET ASSETS PRESENTATION

• Classes may be disaggregated on statements or notes but must be totaled if disaggregated on statement of financial position

• Underwater endowment funds classified completely within Net Assets with Donor Restrictions

• Disclosures – Subject to…– Specified purpose– Passage of time– Spending policy and appropriation– When a specific event occurs

EXPENSES

Functional classification•Programs and supporting services

Natural classification•Salaries, benefits, insurance,

utilities, depreciation, interest, etc…

EXPENSE ALLOCATIONS

The financial statements…shall disclose… • the relationship between functional

classification and natural classification for all expenses in an analysis that disaggregates functional expense classifications by their natural expense classifications…

• a description of the methods used to allocate costs among program and support functions…

EXPENSE REPORTING OPTIONS

•Statement of Functional Expenses1

•Schedule in Footnotes2

•Detailed in Statement of Activities3

BEFORE AND AFTER: Functional Expense Allocation Disclosures

Current optional example (before):The costs of providing various programs havebeen summarized on a functional basis in thestatement of activities. Accordingly, certain costshave been allocated among the programs andsupporting services benefited.

BEFORE AND AFTER: Functional Expense Allocation Disclosures

ASU 2016-14 example (after):The financial statements report certain categories ofexpenses that are attributable to more than oneprogram or supporting function. Therefore, theseexpenses require allocation on a reasonable basisthat is consistently applied. The expenses that areallocated include depreciation, interest, and officeand occupancy, which are allocated on a square-footage basis, as well as salaries and benefits, whichare allocated on the basis of estimates of time andeffort.

BEFORE: Activities

Temporarily PermanentlyUnrestricted Restricted Restricted Total

Total support and revenues 6,021,569 (697,855) 96,707 5,420,421

Program expensesChurch ministries 2,313,633 - - 2,313,633 Outreach and missions 1,085,761 - - 1,085,761 School 855,765 - - 855,765

Total program expenses 4,255,159 - - 4,255,159

Supporting servicesGeneral and administrative 960,916 - - 960,916 Fundraising 95,780 - - 95,780

Total supporting services 1,056,696 - - 1,056,696

Total expenses 5,311,855 - - 5,311,855

Change in net assets 709,714 (697,855) 96,707 108,566

SoFP

Page 2

COMMUNITY CHURCH

Statement of Financial Position

December 31, 2015

ASSETS

Cash and cash equivalents$ 586,582

Prepaid expenses123,366

Certificates of deposit500,810

Assets restricted for capital expansion43,397

Property and equipment, net15,116,134

Investments1,158,816

Total Assets$ 17,529,105

LIABILITIES AND NET ASSETS

Liabilities

Accounts payable$ 104,092

Accrued expenses51,682

Deferred revenue8,672

Other liabilities6,030

Note payable1,622,643

Total liabilities1,793,119

Net Assets

Unrestricted

Undesignated13,910,407

Board designated313,674

Total unrestricted14,224,081

Temporarily restricted375,658

Permanently restricted1,136,247

Total net assets15,735,986

Total Liabilities and Net Assets$ 17,529,105

-

&L&"Times New Roman,Italic"&11The accompanying notes are an integral part of these consolidated financial statements.

Activities (2)

Page 3

COMMUNITY CHURCH

Statement of Activities

Year Ended December 31, 2015

TemporarilyPermanently

UnrestrictedRestrictedRestrictedTotal

Support and revenues

Tithes and offerings$ 3,221,149$ 1,242,340$ -$ 4,463,489

Program income and fees658,936--658,936

Tuition revenue179,730--179,730

Net investment and interest income-21,55996,707118,266

Net assets released from restrictions1,961,754(1,961,754)--



Total support and revenues6,021,569(697,855)96,7075,420,4212,874,271

Program expenses

Church ministries2,313,633--2,313,633

Outreach and missions1,085,761--1,085,761

School855,765--855,765

Total program expenses4,255,159--4,255,159

Supporting services

General and administrative960,916--960,916

Fundraising95,780--95,780

Total supporting services1,056,696--1,056,696

Total expenses5,311,855--5,311,855

Change in net assets709,714(697,855)96,707108,566

Net assets at beginning of year13,355,2071,073,5131,039,54015,468,260

Net assets at end of year$ 14,064,921$ 375,658$ 1,136,247$ 15,576,826

159,160--159,160

&L&"Times New Roman,Italic"&11See independent accountants' review report.The accompanying notes are an integral part of these financial statements.

Carol.Nichols:Plug to get to total TRNA from SS-1-1

Activities

Page 3

COMMUNITY CHURCH












Program expenses

Ministry3,251,584--3,251,584

Evangelism323,592--323,592

Worship325,685--325,685

Discipleship113,633--113,633

Fellowship----

School176,642--176,642

Designated expenses267,431--267,431


Supporting services

General and administrative1,583,016--1,583,016

Fundraising----


Total expenses6,041,583--6,041,583




----



SoFE

Page 4

COMMUNITY CHURCH

Statement of Functional Expenses


Program ServicesSupporting Services

ChurchOutreach andChurchFund

MinistriesMissionsSchoolAdministrationRaisingTotal

Salaries and wages$ 1,277,451$ 341,690$ 435,680$ 294,922$ 42,804$ 2,392,547

Employee benefits472,657126,425161,202109,12115,837885,2420.37

Professional development8,8592,65514,38814,074-39,9760.37

Insurance54,88316,77711,58940,375187123,8110.37

Interest expense20,3076,2074,28814,939-45,7410.37

Office expenses7,5142,3889,96412,6092,45834,9330.37

Curriculum14,3672,66987,691--104,7270.37

Printing5,31632,4816,1556,73314,28864,9730.37

Supplies74,56071,3324,13427,875695178,5960.37

Contract services28,587-12,00064,515-105,1020.37

Professional fees1,5651,4594,20021,50012,00040,7240.37

Food, dining and kitchen54,0963,80931,446-3,55692,9070.37

Missionary support-164,519---164,5190.37

Cooperative giving-207,542---207,5420.37

Local mission support-57,9931,655--59,6480.37

Repairs and maintenance8,5601,3654,13457,054-71,1130.37

Utilities121,95521,65934,65087,8322,467268,5630.37

Depreciation162,95624,79132,589209,3671,488431,1910.37

Total$ 2,313,633$ 1,085,761$ 855,765$ 960,916$ 95,780$ 5,311,855

801,617336,243445,116- 0(448,747)(450,598)

Cash Flow

Page 5

COMMUNITY CHURCH

Statement of Cash Flows


Cash flows from operating activities:

Change in net assets$ 267,726

Adjustments to reconcile change in net assets to net cash

and cash equivalents provided by operating activities:

Depreciation755,574

Loss on disposal of property and equipment1,010

Contributions restricted for capital expansion(916,864)

(Increase) decrease in assets:

Accounts receivable-


Increase (decrease) in liabilities:

Accounts payable64,501


Deferred revenue(2,897)


Net cash and cash equivalents provided by operating activities196,778

Cash flows from investing activities:

Change in assets restricted for Church expansion798,569

Purchases and maturities of certificates of deposit, net(50,810)

Proceeds from disposal of property and equipment-

Purchases of property and equipment(1,109,579)

Net cash and cash equivalents used in investing activities(361,820)

Cash flows from financing activities:

Payments on note payable(477,357)

Contributions restricted for capital expansion916,864

Net cash and cash equivalents provided by financing activities439,507

Net change in cash and cash equivalents274,465

Cash and cash equivalents at beginning of year431,393

Cash and cash equivalents at end of year$ 705,858

Supplemental disclosure:

Cash paid for interest and expensed$ 77,258

Noncash investing and financing activity:

Acquisition of property and equipment$ 3,013,227

Less amount paid in cash(913,227)

Note payable conveyed to seller$ 2,100,000


AFTER: Activities

Without WithRestrictions Restrictions Total

Total support and revenues 6,021,569 (601,148) 5,420,421

Program expensesChurch ministries 2,313,633 - 2,313,633 Outreach and missions 1,085,761 - 1,085,761 School 855,765 - 855,765

Total program expenses 4,255,159 - 4,255,159

Supporting servicesGeneral and administrative 960,916 - 960,916 Fundraising 95,780 - 95,780

Total supporting services 1,056,696 - 1,056,696

Total expenses 5,311,855 - 5,311,855

Change in net assets 709,714 (601,148) 108,566

SoFP

Page 2

COMMUNITY CHURCH


December 31, 2015

ASSETS









Liabilities







Net Assets

Unrestricted








-


Activities (2)

Page 3

COMMUNITY CHURCH











WithoutWith

RestrictionsRestrictionsTotal

Total support and revenues6,021,569(601,148)-5,420,4212,874,271

Program expenses

Church ministries2,313,633--2,313,633

Outreach and missions1,085,761--1,085,761

School855,765--855,765


Supporting services

General and administrative960,916--960,916

Fundraising95,780--95,780


Total expenses5,311,855--5,311,855

Change in net assets709,714(601,148)-108,566



159,160(96,707)96,707159,160



Activities

Page 3

COMMUNITY CHURCH












Program expenses

Ministry3,251,584--3,251,584

Evangelism323,592--323,592

Worship325,685--325,685


Fellowship----

School176,642--176,642



Supporting services


Fundraising----


Total expenses6,041,583--6,041,583




----



SoFE

Page 4

COMMUNITY CHURCH




ChurchOutreach andChurchFund

MinistriesMissionsSchoolAdministrationRaisingTotal




Insurance54,88316,77711,58940,375187123,8110.37


Office expenses7,5142,3889,96412,6092,45834,9330.37

Curriculum14,3672,66987,691--104,7270.37

Printing5,31632,4816,1556,73314,28864,9730.37

Supplies74,56071,3324,13427,875695178,5960.37








Utilities121,95521,65934,65087,8322,467268,5630.37

Depreciation162,95624,79132,589209,3671,488431,1910.37

Total$ 2,313,633$ 1,085,761$ 855,765$ 960,916$ 95,780$ 5,311,855

801,617336,243445,116- 0(448,747)(450,598)

Cash Flow

Page 5

COMMUNITY CHURCH







Depreciation755,574
































AFTER: Functional Expense Allocation

Church Outreach and General and FundMinistries Missions School Administrative Raising Total

Salaries and wages 1,277,451$ 341,690$ 435,680$ 294,922$ 42,804$ 2,392,547$ Employee benefits 472,657 126,425 161,202 109,121 15,837 885,242 Professional development 8,859 2,655 14,388 14,074 - 39,976 Insurance 54,883 16,777 11,589 40,375 187 123,811 Interest expense 20,307 6,207 4,288 14,939 - 45,741 Office expenses 7,514 2,388 9,964 12,609 2,458 34,933 Curriculum 14,367 2,669 87,691 - - 104,727 Printing 5,316 32,481 6,155 6,733 14,288 64,973 Supplies 74,560 71,332 4,134 27,875 695 178,596 Contract services 28,587 - 12,000 64,515 - 105,102 Professional fees 1,565 1,459 4,200 21,500 12,000 40,724 Food, dining and kitchen 54,096 3,809 31,446 - 3,556 92,907 Missionary support - 164,519 - - - 164,519 Cooperative giving - 207,542 - - - 207,542 Local mission support - 57,993 1,655 - - 59,648 Repairs and maintenance 8,560 1,365 4,134 57,054 - 71,113 Utilities 121,955 21,659 34,650 87,832 2,467 268,563 Depreciation 162,956 24,791 32,589 209,367 1,488 431,191 Total 2,313,633$ 1,085,761$ 855,765$ 960,916$ 95,780$ 5,311,855$

Program Services Supporting Services

SoFP

Page 2

COMMUNITY CHURCH


December 31, 2015

ASSETS









Liabilities







Net Assets

Unrestricted








-


Activities

Page 3

COMMUNITY CHURCH












Program expenses

Ministry3,251,584--3,251,584

Evangelism323,592--323,592

Worship325,685--325,685


Fellowship----

School176,642--176,642



Supporting services


Fundraising----


Total expenses6,041,583--6,041,583




----



SoFE

Page 4

COMMUNITY CHURCH




ChurchOutreach andGeneral andFund

MinistriesMissionsSchoolAdministrativeRaisingTotal




Insurance54,88316,77711,58940,375187123,8110.37


Office expenses7,5142,3889,96412,6092,45834,9330.37

Curriculum14,3672,66987,691--104,7270.37

Printing5,31632,4816,1556,73314,28864,9730.37

Supplies74,56071,3324,13427,875695178,5960.37








Utilities121,95521,65934,65087,8322,467268,5630.37

Depreciation162,95624,79132,589209,3671,488431,1910.37

Total$ 2,313,633$ 1,085,761$ 855,765$ 960,916$ 95,780$ 5,311,855

801,617336,243445,116- 0(448,747)(450,598)

Cash Flow

Page 5

COMMUNITY CHURCH







Depreciation755,574
































EXPENSE REPORTING CONSIDERATIONS

• Code multiple debits at time of accounts payable, cash disbursement and / or general journal entry?

• Export natural classifications to a formula-driven MS Excel workbook for functional allocation?

• Chart of accounts revisions – a certain digit in the account code for a natural expense could relate to functional expense column in the “matrix”?

• Utilize MS Excel pivot tables?

EXPENSE REPORTING CONSIDERATIONS

• Coding multiple debits at time of accounts payable, cash disbursement and / or general journal entry, would be very cumbersome – not necessary.

• Export natural classifications to a formula-driven MS Excel workbook for functional allocation – expected to be most common method.

• Chart of accounts revisions – a certain digit in the account code for a natural expense could relate to functional expense column in the “matrix” – possibly a time saver

• Utilize MS Excel pivot tables – for advanced Excel users• Limit the number of programs reported for simplicity

INVESTMENT ACTIVITIES

• Investment returns only need to be reported in the aggregate and net of expenses.

• Disclosure of expenses is no longer required.• Net investment returns may be allocated

between operating activities and non-operating activities, if an intermediate measure of operations is presented.

DISCLOSURES ABOUT LIQUIDITY AND AVAILABILITY OF RESOURCES

• Qualitative information that is useful in assessing an entity’s liquidity…

• Quantitative information about financial assets available within one year of the statement of financial position date for general expenditure, i.e., cash, receivables, short-term investments, etc…

• Also disclose external limits imposed by donors, laws and contracts with others, as well as internal limits imposed by governing board decisions

LIQUIDITY AND AVAILABILITY OF RESOURCESSample Disclosure

3 – Liquidity and Availability of ResourcesThe Church operates under a balanced budget for activities supported byunrestricted tithes and offerings. Its Finance Committee (the “Board”) isresponsible for monitoring the liquidity necessary to meet the Church’s operatingneeds, and meets periodically throughout the year to evaluate the actual results offinancial operations versus the budget. Church management, in accordance withChurch policy and/or in collaboration with the Board, also appropriates resourcesfrom donor-restricted and Board-designated accounts as needed.The Church holds an investment portfolio comprised of a perpetual endowmentand Board-designated funds purposed for the support of mission efforts. (SeeNotes 4, 5 and 8.)Additionally, the Church maintains several Board-designated and donor-restricted ministry funds purposed for various other activities consistent with the mission of the Church (See Notes 9 and 10).

LIQUIDITY AND AVAILABILITY OF RESOURCESSample Disclosure (continued)

Financial assets available for general expenditure, that is, without donorrestrictions limiting their use or without requiring specific action of the Board,within one year of the date of the statement of financial position are comprised ofthe following:

Cash and cash equivalents 1,107,436$ Investments 781,800

1,889,236 Donor-imposed restrictions:

Endowment funds (335,880) Other donor restrictions (394,236)

Board designations:Missions (418,427) Other (179,217)

Financial assets available to meet generalexpenditure needs within one year 561,476$

Sheet1

Cash and cash equivalents$ 1,107,436

Investments781,800

1,889,236

Donor-imposed restrictions:

Endowment funds(335,880)

Other donor restrictions(394,236)

Board designations:

Missions(418,427)

Other(179,217)

Financial assets available to meet general

expenditure needs within one year$ 561,476

2017


Tuiton receivable, net19,773

Investments-

454,822

Board designations:

Maintenance fund(200,000)

Financial assets available to meet general

expenditures needs within one year$ 254,822

OPERATING CASH FLOWS

• Indirect method is recommended under current standards.

• If direct method is presented, then reconciliation to indirect method is required.

• The new standards allow the choice of either the indirect method or direct method.

• No reconciliation is required if direct method is chosen.

OPERATING CASH FLOWS

DIRECT METHOD:Cash Flows From Operating Activities:

Tithes and offerings 5,790,782$ Program service fees 285,800 Interest income 62 Payments for ministry activities (898,250) Payments to employees and for supporting services (3,505,378) Interest paid (200,206)

Net cash and cash equivalents provided by operating activities 1,472,810

INDIRECT METHOD:Reconciliation of change in net assets to net cash and cash equivalents provided by operating activities:

Change in net assets 863,132$ Depreciation and amortization expense 596,515 (Increase) decrease in assets: Prepaid expenses and deposits 792 Increase (decrease) in liabilities: Accounts payable and accrued expenses 12,371

Net cash and cash equivalents provided by operating activities 1,472,810

Sheet1

DIRECT METHOD:

Cash Flows From Operating Activities:

Tithes and offerings$ 5,790,782

Program service fees285,800

Interest income62

Payments for ministry activities(898,250)

Payments to employees and for supporting services(3,505,378)

Interest paid(200,206)

Net cash and cash equivalents provided by operating activities1,472,810

INDIRECT METHOD:

Reconciliation of change in net assets to net cash and cash equivalents

provided by operating activities:


Depreciation and amortization expense596,515


Prepaid expenses and deposits792


Accounts payable and accrued expenses12,371

Net cash and cash equivalents provided by operating activities1,472,810

PHASE 1 TRANSITION

• Assuming no early adoption, for example, if 2017 financial statements are presented in comparison to 2018, then 2017 would have to be restated to conform.

• Two exceptions. The following could be omitted:– Analysis of expenses by both functional and natural

classifications– Disclosures about liquidity and availability of resources

IMPACT ON CHURCHES

• Consider internal vs. external reporting needs.• If you have an annual audit, review or

compilation, discuss expectations, implementation date and fee adjustments with your CPA firm.

• This could be a catalyst to make changes to your chart of accounts and even modify (simplify) accounting policies.

Rodney Smith, CPA CFEPSK LLP Audit Partner

[email protected]

As a partner with PSK LLP, Rodney Smith, CPA serves churches and religious organizations

across the nation. Prior to joining the firm in 2004, Rodney garnered 16 of years of experience as a Controller/CFO in the private sector for an entrepreneurial group of companies. Currently, his practice emphasis is in the area of nonprofit

auditing and consulting. This includes fraud prevention and best practices for policies and

procedures, particularly for churches and ministry organizations.

mailto:[email protected]

New Accounting Standards Implementation (ASU 2016-14)�(Course #E915)PREPARING FOR THE NEW STANDARDSHISTORYNAC Key RecommendationsNAC Key RecommendationsIMPLEMENTATIONIMPLEMENTATIONAPPLICATIONMAIN PROVISIONSTwo Net asset classesNET ASSETS PRESENTATIONExpensesEXPENSE ALLOCATIONSExpense reporting optionsBEFORE AND AFTER: Functional Expense Allocation DisclosuresBEFORE AND AFTER: Functional Expense Allocation DisclosuresBEFORE: ActivitiesAFTER: ActivitiesAFTER: ActivitiesAFTER: Functional Expense AllocationEXPENSE REPORTING CONSIDERATIONSEXPENSE REPORTING CONSIDERATIONSINVESTMENT ACTIVITIESDISCLOSURES ABOUT LIQUIDITY AND AVAILABILITY OF RESOURCESLIQUIDITY AND AVAILABILITY OF RESOURCES�Sample DisclosureLIQUIDITY AND AVAILABILITY OF RESOURCES�Sample Disclosure (continued)OPERATING CASH FLOWSOPERATING CASH FLOWSPHASE 1 TRANSITIONIMPACT ON CHURCHESRodney Smith, CPA CFE�PSK LLP Audit Partner�[email protected]��As a partner with PSK LLP, Rodney Smith, CPA serves churches and religious organizations across the nation. Prior to joining the firm in 2004, Rodney garnered 16 of years of experience as a Controller/CFO in the private sector for an entrepreneurial group of companies. Currently, his practice emphasis is in the area of nonprofit auditing and consulting. This includes fraud prevention and best practices for policies and procedures, particularly for churches and ministry organizations. ��

Documents

New Accounting Standards Implementation (ASU 2016-14)isccon.shelbysystems.com/wp-content/uploads/2018/...New Accounting Standards Implementation (ASU 2016-14) (Course #E915) Presented