PowerPoint PresentationBDO 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.
NOT-FOR-PROFIT AUDITING AND ACCOUNTING UPDATE
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Presenters
Carla DeMartini NFP – Audit Quality Director 212-885-7303 cdemartini@bdo.com
15,2018. (Conduit Debt Obligors will be one year earlier)
Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made • Effective Date: Nonpublic entities, Fiscal years beginning after December
15,2018. (Conduit Debt Obligors will be one year earlier)
FASB Projects: Exposure Draft - Not-for-Profit Entities (Topic 958): Updating the Definition of Collections • Effective Date: Upon Issuance of final update
Accounting pronouncements
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Key Provisions of ASU 2016-14
Net Asset Classification Updated net asset classification scheme to two classes, changes
to underwater endowment accounting, enhanced disclosures
Liquidity & Availability Quantitative & qualitative
nature, and an analysis showing the relationship between function
and nature
Statement of Cash Flows
Continue to allow direct or indirect method for operating cash flows; indirect reconciliation no longer
required for direct method
external and direct internal investment expenses, no longer
required to disclose netted expenses
Effective Date: Fiscal years beginning after 12/15/2017
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Effective Date: For fiscal years beginning after 12/15/2017 Interim financials the following year • Calendar year ending 12/31/18
• Fiscal year ending 6/30/19
designations *
Current GAAP
Proposed GAAP
Note: Shaded lines are required to be presented.
Source: ASU 958
Net assets: Without donor restrictions (Note DD) 92,600 84,570 With donor restrictions (Note B) 193,490 186,070 Total net assets 286,090 270,640
Total liabilities and net assets $ 296,720 $ 282,980
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Source: ASU 958-205-55-14
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Source: ASU 958-205-55-14
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Additional Disclosures to Consider Related to Net Assets
Information about the nature and amounts of different types of donor-imposed restrictions should be reported either on the face of the statements or in the notes. Separate line items that distinguish between the different types of restrictions may be used such as:
• Assets, such as land or works of art, donated with stipulations that they be used for a specified purpose, be preserved, and not be sold.
• Assets donated with stipulations that they be invested to provide a permanent source of income.
• Support of particular operating activities. • Investment for a specified term. • Use in a specified future period. • Acquisition of long-lived assets.
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2,190,000$ Without donor restrictions
Net assets 27,190,000$
(in thousands)
5,210
4,560
92,600
84,570
193,490
186,070
$ 296,720
$ 282,980
150,000
$ 2,190,000
$ 1,000,000
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• 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
Expiration of Capital Restrictions
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) unless there is a donor explicit stipulation of a time period for the use of assets
Reclassify any amounts from net assets with donor restrictions to net assets without donor restrictions for such long-lived assets that have been placed in service as of the beginning of the period of adoption (thus eliminating the current option to release the donor-imposed restriction over the estimated useful life of the acquired asset).
Approach for reporting expirations on gifts of capital assets: Does your organization use the placed-in-service approach? If not, your organization will have to adopt it, taking into account any donor explicit stipulations
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Liquidity
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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 financial assets at the
statement of financial position date to meet cash needs for general expenditures within one year (on
the face and/or in the notes)
Examples from early adopters demonstrate three ways to provide the required information
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Source: ASU 958-210-55-8
Source: ASU 958-210-55-8
Note T (Continued)
NFP A’s endowment funds consist of donor-restricted endowments and a quasi-endowment. Income from donor-restricted endowments is restricted for specific purposes and, therefore, is not available for general expenditure. As described in Note Y, the quasi-endowment has a spending rate of 5 percent. $1.65 million of appropriations from the quasi-endowment will be available within the next 12 months.
As part of NFP A’s liquidity management, it has a policy to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due. In addition, NFP A invests cash in excess of daily requirements in short-term investments. To help manage unanticipated liquidity needs, NFP A has committed lines of credit in the amount of $20 million, which it could draw upon. Additionally, NFP A has a quasi-endowment of $33 million. Although NFP A does not intend to spend from its quasi-endowment other than amounts appropriated for general expenditure as part of its annual budget approval and appropriation process, amounts from its quasi-endowment could be made available if necessary. However, both the quasi- endowment and donor-restricted endowments contain investments with lock-up provisions that would reduce the total investments that could be made available (see Note X for disclosures about investments).
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Quantitative Disclosure of Financial Asset Availability
Financial assets, at year end* 234,410$
Less those unavailable for general expenditures within one year, due to: Contractual or donor-imposed restrictions:
Restricted by donor with time or purpose restrictions (11,940) Subject to apropriation and satisfaction of donor restrictions** (174,700) Investments held in annuity trust (4,500)
Board designations: Quasi-endowment fund, primarily for long-term investing** (36,600) Amounts set aside for liquidity reserve (1,300)
Financial assets available to meet cash needs for general expenditures within one year 5,370$
* Total assets, less nonfinancial assets (e.g., PP&E, inventory, prepaids)
** Excludes amounts that have been appropriated for next 12 months that do not have purpose restrictions
Source: ASU 958-205-55-21
(in thousands)
5,210
4,560
92,600
84,570
193,490
186,070
$ 296,720
$ 282,980
-
-
$ -
-
1,500
4,500
3,000
$ 234,410
*
(11,940)
(174,700)
(4,500)
(36,600)
(1,300)
Financial assets available to meet cash needs for general expenditures within one year
$ 5,370
* Total assets, less nonfinancial assets (e.g., PP&E, inventory, prepaids)
** Excludes amounts that have been appropriated for next 12 months that do not have purpose restrictions
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Expenses
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Expense Reporting
Report expenses, either on the face of financial statements or in the notes, by:
• Function * • Natural classification • Analysis (disaggregate function by nature) • Cannot be presented as supplemental information * currently required in GAAP
NFPs are now required to provide qualitative disclosures about methods used to allocate costs among program activities and supporting services
ASU 2016-14 also provides enhanced guidance on allocations from management and general (M&G) expenses
• Key concept: direct conduct or direct supervision
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Expense Reporting
Additional Information
• If expenses are reported in other line items within the statement of activities (e.g., salaries are included in costs of goods sold) they should be included in the functional reporting schedule by their natural classification.
• External and direct internal investment expenses that are netted against investment return should not be included in the functional expense analysis.
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Expenses By Both Nature and Function
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“The costs of oversight and management usually include the salaries
and expenses of the governing board, the chief executive officer of
the NFP, and the supporting staff. If such staff spend a portion of
their time directly conducting or supervising program services or
categories of other supporting services, however, their salaries and
expenses shall be allocated among those functions.” (958-720-45-8)
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“Activities that represent direct conduct or direct supervision of
program or other supporting activities require allocation from
management and general activities. Additionally, certain costs benefit
more than one function and, therefore, shall be allocated. For
example, information technology generally can be identified as
benefiting various functions, such as management and general (for
example, accounting and financial reporting and human resources),
fundraising, and program delivery. Therefore, information technology
costs generally would be allocated among the functions receiving
direct benefit.” (958-720-45-2A)
Example Disclosure for Expense Allocation Disclosure
NOTE X. METHODS USED FOR ALLOCATION OF EXPENSES FROM MANAGEMENT AND GENERAL ACTIVITIES (ASU 958-720-55-176)
The financial statements report certain categories of expenses that are attributable to one or more program or supporting functions of the Organization. Those expenses include depreciation and amortization, the president’s office, communications department, and information technology department. Depreciation is allocated based on square footage, the president’s office is allocated based on estimates of time and effort, certain costs of the communications department are allocated based on estimates of time and effort, and the information technology department is allocated based on estimates of time and costs of specific technology utilized.
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Reporting of Investment Return
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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Direct internal investment expenses involve the direct conduct or direct supervision of the strategic and tactical activities involved in generating investment return including: • Salaries, benefits, travel, and other costs associated with the officer and
staff responsible for the development and execution of investment strategy.
• Allocable costs associated with internal investment management and supervising, selecting, and monitoring of external investment management firms.
Direct internal investment expenses do not include items that are not associated with generating investment return. For example, the costs associated with unitization and other such aspects of endowment management would not be allocated.
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Implementation Issues – Reporting of Investment Return
Only the net amount of the investment return related to total return investing is required to be presented in the statement of activities.
Programmatic investing, or any financial activity that directly carries out a nonprofit’s mission or purpose, such as a loan made to lower-income individuals to promote home ownership is not included in this net presentation.
To comply with this presentation, organizations need to fully understand the definitions of these terms and then consider how to appropriately and accurately capture this information.
Accounting for investment expenses and the related allocation of costs is a process that organizations will have to develop to properly present these investment costs under the provisions of the ASU. The complexity will depend on the type of organization and the amount and nature of their investments.
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Cash Flow Statement
Continue to allow free choice between the Direct Method and the Indirect Method • However the Indirect Reconciliation will no longer be required if the NFP
chooses to use the Direct Method
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Revenue Recognition (Topic 606)
• Objective: To develop a single, principle-based revenue standard for U.S. GAAP and IFRS
• The revenue standard aims to improve accounting for contracts with customers by: o Providing a robust framework for addressing revenue issues as they arise o Increasing comparability across industries and capital markets o Requiring better disclosure
Substantially converged with IFRS on major provisions
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Scope
• All contracts with customers, except o Lease contracts o Insurance contracts o Financial instruments o Guarantees o Non-monetary exchanges in the same line of business to facilitate sales to
customers
• Contracts not with customers are excluded: o Contributions o Collaborative arrangements
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• Core Principle:
• Steps to apply the 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
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
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• Qualitative and quantitative disaggregation of revenue into categories that depict how revenue and cash flows are affected by economic factors
Remaining performance obligations
• 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
application
Existing and new contracts under legacy standard for CY (2018)
Transition dates for non-public entities are extended one year later than the dates above
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Revenue Recognition – Implementation Issues
• Transition Resource Group (TRG) has discussed 108 implementation issues o None still open and no more meetings currently planned o Technical Inquiry Service available
• Follow-up ASUs issued: o 2015-14: deferred effective date by one year o 2016-08: principal vs. agent considerations o 2016-10: identifying performance obligations; licenses of intellectual property o 2016-12: narrow-scope improvements and practical expedients o 2016-20: technical corrections and improvements o 2017-05: asset derecognition and partial sales of nonfinancial assets
• Related FASB project: Grants and Contracts to NFPs (discussed in the next section) • AICPA nearing completion of their work on applying Rev. Rec. guidance to various
industries
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Revenue Recognition – Transition Practical Expedients
• No restatement required for contracts that begin and are completed within the same annual reporting period
• Completed contracts that have variable consideration: o Use transaction price at completion o No estimation required
• No restatement required for contract modifications that occur before the beginning of the earliest period presented
• Modified retrospective approach may be applied to all contracts or completed contracts only
Significant judgment needed
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Ways to Prepare for and Implement the New Revenue Recognition Standard
To make sure that your organization is adequately prepared for implementation of the new revenue recognition standard, you should consider taking the following seven proactive steps:
Become familiar with the new standard, discuss the new standard with your accounting advisors and evaluate the impact the standard will have on all facets of your organization’s revenue streams.
Inventory all current revenue streams and evaluate whether there are differences between current practices and the new standard. Organizations should also consider the potential effect of these differences on their financial statements.
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Ways to Prepare for and Implement the New Revenue Recognition Standard
Evaluate whether there are differences between current practices and the new standard on how you address contract modifications.
Reconsider whether revenue will be recognized over time or at a point in time based on both the new criteria and specific guidance for licenses or other multi- year contracts. Systems, processes and controls may need to be updated as a result of the new criteria and any changes in the timing of revenue recognition.
Historically, many nonprofits have not tracked costs to acquire a contract, namely because they have been expensed as incurred. To maintain compliance with the new standard, nonprofits will need to consider necessary resources for accumulating costs incurred that need to be capitalized.
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Ways to Prepare for and Implement the New Revenue Recognition Standard
Identify data gaps between what is presently available and what will be needed for the required disclosures in the new standard.
Nonprofits may want to consider preparing mock-up financial statements to understand the impact of the new standard, as well as begin the education process of their boards and other financial committee members.
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Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made
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Scope
• Applies to all entities (NFPs and business entities) that receive or make contributions unless otherwise indicated.
• Excludes transfers of assets from the government to business entities. • Applies to both contributions received by a recipient and contributions made by
a resource provider. • The term used in the presentation of financial statements to label revenue (for
example, contribution, grant, donation) that is accounted for within the Scope of Subtopic 958-605 is not a factor for determining whether an agreement is within the scope of that guidance.
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Long-standing diversity in practice in classifying grants and contracts, particularly from governmental entities
Issue 1: Reciprocal Versus Nonreciprocal Issue 2: Conditional Versus Unconditional
ASU 2014-09, Revenue from Contracts with Customers, including related disclosures, heightened the issue
Raised question as to whether grants and contracts are in scope of that guidance (reciprocal or nonreciprocal)
Project added to FASB’s Technical Agenda to improve and clarify existing guidance
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4 8
Specified Third Parties
EXCHANGE NONEXCHANGE Specified Third Parties
Government/Resource Provider is a 3rd Party Payer on Behalf of an Identified Customer*
Follow Topic 606 (or other, such as Leases)
Current Practice
Clarification
Follow Topic 958-605 *The revenue recognized would actually be the underlying contract’s patient service revenue, tuition revenue, etc. **A focus on whether or not there is a “performance obligation” could even ultimately include some contracts where the general public is the primary beneficiary.
Continue to monitor GASB and IPSASB
projects in this area**
The inclusion of a measurable performance-related barrier or other measurable barrier.
Whether a stipulation is related to the purpose of the agreement.
The extent to which a stipulation limits discretion by the recipient.
To determine what is a barrier, an NFP would consider indicators, which would include, but are not limited to, the following:
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No
guidance.
Conditional - Recognize revenue when condition is met
N o
Ye s
Nonreciprocal transaction. Apply contribution (non-exchange) guidance.
*Includes third-party payments on behalf of identified customers. These do not create new revenue.
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• Modified Prospective o Apply to all agreements:
Existing at the effective date (only apply to the portion of existing agreements not previously recognized)
Entered into after the effective date • No restatement of prior amounts recognized • Retrospective Application Permitted
A
B
Effective Date
The effective date is the same as the new Revenue Recognition standard (Topic 606),
but allows for early implementation. Annual periods beginning after
June 15, 2018, including interim periods:
• Public Business Entities • NFP that has issued, or is a
conduit bond obligor for, securities that are traded,
listed, or quoted on exchange or an over-the-counter market
Annual periods beginning after December 15, 2018, and interim
periods beginning after December 15, 2019:
• All other entities
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FASB Projects: Exposure Draft - Not-for-Profit Entities (Topic 958): Updating the Definition of Collections (File Reference No. 2018-250)
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SCOPE
Purpose: To clarify and improve the accounting guidance for collections and to eliminate diversity by clarifying the definition of collections. Who is affected? Accounting for collections is primarily for certain NFP entities that hold collections, which are primarily museums; botanical gardens; libraries; aquariums; arboretums; historic sites; planetariums; zoos; art galleries; nature, science, and technology centers; and similar educational, research, and public service organizations that have those divisions. However, this proposed ASU would apply to all entities, including business entities, that maintain collections. Effective Date: This proposed Update would be effective upon issuance for all entities. The proposed final Update would be applied on a prospective basis. Additionally, retrospective application would be permitted.
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SCOPE
Provisions:
The proposed Update would modify the definition of the term collections. GAAP currently states: “that an entity need not recognize contributions of works of art, historical treasures, and similar assets if the donated items are added to collections and meet three conditions”.
• One of condition states that an entity must be subject to an organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections.
The proposed amendment would modify that condition to allow the proceeds to be used to support the direct care of existing collections in addition to the current requirement that proceeds from sales of collection items be used to acquire other items for collections.
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SCOPE
Provisions:
The proposed ASU would allow the use of proceeds from deaccessioned collection items to be used towards the direct care of the collection that directly aligns with many entities’ missions to specifically maintain their collections.
TITLE57
Resources
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Resources • BDO’s Institute for Nonprofit Excellence Resource Center for our FASB Financial
Reporting Guidance page for information on ASU 2016-14 that includes:
podcasts and videos articles and blog posts Links to FASB Resources https://www.bdo.com/resource-centers/institute-for-nonprofit-excellence/fasb- financial-reporting
https://www.bdo.com/resource-centers/ institute-for-nonprofit-excellence/book-promo
https://www.bdo.com/resource-centers/institute-for-nonprofit-excellence/book-promo
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Questions?
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Presenters
Key Provisions of ASU 2016-14
Effective Date
Net Assets
Net Assets
Example of Effect on Statement of Activities - Columnar Format
Example of Effect on Statement of Activities - Columnar Format
Additional Disclosures to Consider Related to Net Assets
Net Asset Disclosure Example
Quantitative and Qualitative Liquidity and Availability of Resources Disclosure Example
Quantitative and Qualitative Liquidity and Availability of Resources Disclosure Example
Quantitative Disclosure of Financial Asset Availability
Expenses
Management and General Expenses
Example Disclosure for Expense Allocation Disclosure
Investment Return
Cash Flow Statement
Cash Flow Statement
Revenue Recognition (Topic 606)
Revenue Recognition – Transition
Revenue Recognition – Transition Practical Expedients
Ways to Prepare for and Implement the New Revenue Recognition Standard
Ways to Prepare for and Implement the New Revenue Recognition Standard
Ways to Prepare for and Implement the New Revenue Recognition Standard
Revenue Recognition of Grants and Contracts by NFP EntitiesClarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made
Scope
Issue 1: Reciprocal (Exchange) vs. Nonreciprocal (Nonexchange/Contribution) TransactionsWho Receives the Benefit?
Indicators to Determine a Barrier
NFP Revenue Recognition Decision Process
Transition Approach
Effective Date
FASB Projects: Exposure Draft - Not-for-Profit Entities (Topic 958): Updating the Definition of Collections (File Reference No. 2018-250)
SCOPE
SCOPE
SCOPE
Resources
Resources
Resources