WELCOME TO THE AUDITING AND ACCOUNTING ... - Western PA HFMAwphfma.org/wp-content/uploads/2018/01/Part-1... · Arnett Carbis Tootham ‐HFMA Accounting & Auditing Update 2018 1/26/2018

Arnett Carbis Tootham ‐ HFMA Accounting & Auditing Update 2018

1/26/2018

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WELCOME TO THE AUDITING AND ACCOUNTING

UPDATE

JANUARY 26, 2018


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Welcome and inTroducTion

https://youtu.be/rblYSKz_VnI

You say goodbye and I say hello

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HFMA A&A UpdaTe

Presented by:

Michael F. Garczynski, CPA, CGMA Jordan P. Pitzer, CPAPartner – Health Care Services Supervisor – Health Care ServicesArnett Carbis Toothman LLP Arnett Carbis Toothman LLP


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AccounTing STandards UpdaTe

ASU 2013‐12: Definition of a Public Business Entity

ASU No. 2016‐18: Statement of Cash Flows (Topic 230):

Restricted Cash

ASU 2017‐07: Compensation – Retirement Benefits

ASU 2017‐06: Plan Accounting: Defined Benefit Pension Plans

ASU 2017‐04: Intangibles – Goodwill and Other

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AccounTing STandards UpdaTe

ASU 2014‐09: Revenue from Contracts with Customers

ASU 2016‐02: Leases

ASU 2016‐01: Financial Instruments

ASU 2016‐13: Credit Losses

ASU 2016‐14: Presentation of Financial Statements of Not‐

for‐Profit Entities

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ASU 2013-12: DefiniTion of a Public Business EnTiTy

Amends ASC Master Glossary – One definition of “public business entity” for future use in U.S. GAAPDoes not affect existing U.S. GAAP requirementsUsed by FASB, PCC, and EITF for scope of future financial accounting and reporting guidanceUsed to identify types of business entities excluded from scope of private company decision‐making framework

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ASU 2013-12: DefiniTion of a Public Business EnTiTy

Public Business EntityA public business entity is a business entity meeting any one of the criteria below. Neither a not‐for‐profit entity nor an employee benefit plan is a business entity. a. It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial

statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).

b. It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.

c. It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.

d. It 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.

e. It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods). An entity must meet both of these conditions to meet this criterion.

An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.

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ASU No. 2016-18: STaTemenT of Cash

Flows (Topic 230): ResTricTed CashKey provisions:

The FASB issued final guidance to clarify how entities should present restricted cash and restricted cash equivalents in the statement of cash flows. The guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows.

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Flows (Topic 230): ResTricTed Cash


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Flows (Topic 230): ResTricTed Cash


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Flows (Topic 230): ResTricTed CashRetrospective applicationEffective dates: Public business entities

Years beginning after December 15, 2017Calendar YE – December 31, 2018Fiscal YE – June 30, 2019

All other entitiesYears beginning after December 31, 2018Calendar YE – December 31, 2019Fiscal YE – June 30, 2020

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ASU No. 2017-07: CompensaTion -ReTiremenT BenefiTs

ASU No. 2017‐07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, was issued in March 2017 to address diversity in presenting periodic pension and postretirement benefit costUpdate also addresses stakeholder feedback concerning appropriateness of presenting service cost along with other components of net benefit costs: Components of expense have different drivers, impacting their

predictabilityUpdate applies to all employers, including not‐for‐profits, that offer defined benefit and post‐retirement benefit plans accounted for under Topic 715

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Key Provisions of ASU No. 2017-07

Entities will present defined benefit and post‐retirement benefit cost as follows: Service costs are to be presented in the same line item(s) as

other compensation costs arising from services rendered by pertinent employees

Only service cost would be eligible for capitalization under applicable accounting guidance (i.e., inventory or PP&E)

Other components of net benefit costs to be presented outside of income from operations: If other components are presented in a separate line item, it

should be labeled as such Entity should disclose the line where other components are

presented if not presented separately

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EffecTive daTe of ASU No. 2017-07 and TransiTion

ASU No. 2017‐07 is effective as follows: Public entities – Fiscal years beginning after December 15, 2017,

including interim periods Non‐public entities – Fiscal years beginning after December 15,

2018, and interim periods one year later Early adoption permittedTransition approach for ASU No. 2017‐07: Separate presentation of service cost will be applied retrospectively Capitalization of service cost to be applied prospectively Practical expedient

Entities can use such cost information appearing in benefit plan footnote for disaggregation if having difficulty obtaining data for prior period presentation

Entity should disclose use of the practical expedient

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ASU No. 2017-06: Plan AccounTing: Defined BenefiT Pension Plans

Update issued in February 2017Addresses stakeholder concerns about adequacy of disclosures related to investments in master trusts by employee benefit plansApplies to investments in master trusts by the following plans: Defined benefit pension plans (Topic 960) Defined contribution benefit plans (Topic 962) Health and welfare benefit plans (Topic 965)Master trust defined as follows: Trusts for which a regulated financial institution, such as a bank,

serves as a trustee or custodian, and in which assets of more than one plan, sponsored by a single or group of employers under common control, are held

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Required Disclosures Under ASU No. 2017-06

For each master trust in which a plan holds an interest, assets are presented as a single line item in the following: Statement of net assets available for benefits Statement of changes in net assets available for benefitsFor Topic 960 and 962 plans with divided ownership interest in the master trust, plans must disclose the following: Dollar amount of their interest by general investment type Master trust’s balance by each type of investment (currently

required)Disclose master trust’s other assets and liability balances and the dollar value of the plan’s interest in each of those balancesEliminate redundant disclosures found in 401(h) plan

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EffecTive DaTe and TransiTionof ASU No. 2017-06

Update is effective for fiscal years beginning after December 15, 2018Early adoption is permittedUpdate should be applied on a retrospective basis to all plan financial statements for each year presented

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ASU No. 2017-04: InTangibles -Goodwill and OTher

Update issued as part of FASB’s simplification initiativeFor entities, including not‐for‐profits, which have not already adopted ASU No. 2014‐02 (the PCC alternative with regard to goodwill impairment and amortization), this Update eliminates the need for the Step 2 test when testing for impairment: Step 2 test, if applicable, requires reallocation of reporting unit’s fair

value of assets and liabilities, including goodwill, at the impairment testing measurement date, with subsequent comparison of resultant goodwill to current carrying value of the goodwill

Goodwill impairment will be determined at the reporting unit level and be the difference between the reporting unit’s carrying value and its fair value, determined at the measurement date, up to the amount of goodwill recorded by the reporting unit

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OTher Provisions and EffecTiveDaTe of ASU No. 2017-04

Requirement for entity to test for goodwill impairment when reporting unit has zero or negative carrying value is eliminatedUpdate to be applied prospectively, as follows: Public entities which are SEC registrants – Goodwill

impairment tests performed in fiscal years beginning after December 15, 2019

Non‐SEC registrant public entities – Such tests performed in fiscal years beginning after December 15, 2020

Private entities – Such tests performed in fiscal years beginning after December 15, 2021

Early adoption permitted for impairment tests performed after January 1, 2017

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ASU 2014-09: Revenue from ConTracTs wiTh CusTomers

Effective Dates Public business entities, certain not‐for‐profit entities*, and certain

employee benefit plans Years beginning after December 15, 2017Calendar YE – December 31, 2018Fiscal YE – June 30, 2019

*Certain not‐for‐profit entities are those that have issued or are a conduit bond obligor for securities that are traded, listed, or quoted on an exchange or an over‐the‐counter market.

All other entitiesYears beginning after December 15, 2018 Calendar YE – December 31, 2019Fiscal YE – June 30, 2020

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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.

Five‐step model:

Identify the contract with a customer

(Step 1)

Identify the separate

performance obligations in the contract

(Step 2)

Determine the

transaction price

(Step 3)

Allocate thetransaction price to the

separateperformance obligations

(Step 4)

Recognizerevenue when (or as) each performance obligation is

satisfied (Step 5)

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ASU 2014-09: Revenue from ConTracTs wiThCusTomers

IDENTIFIED REVENUE RECOGNITION IMPLEMENTATION ISSUES

# Implementation Issue1 Consideration of the following regarding self‐pay balances

Application of step 1 (determine if there is a contract) and step 3 (determine the transaction price) for health care services provided to self‐pay patients, including uninsured patient balances and self‐pay patient balances arising from co‐payments and deductibles. This implementation issue will discuss evaluating whether a contract exists and what (including consideration of implicit price concessions) the transaction price is to arrangements for health care services provided to self‐pay patients and balances arising from co‐payments and deductibles.

2 Application of the portfolio approach to contracts with patients3 Identifying and satisfying the performance obligation(s) and recognizing the monthly/periodic fees and nonrefundable

entrance fees under Type A or “life care” contracts for continuing care retirement communities4 Recognizing a CCRC’s performance obligation(s) to provide future services and use of facilities to residents5 Significant financing component ‐ CCRC contracts and patient and third‐party payor amounts in arrears6 Disclosure requirements7 Accounting for contract costs8 Consideration of FASB ASC 606, Revenue from Contracts with Customers, for third‐party settlement estimates

9 Bundled Payments

10 Performance Obligations

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AICPA Health Care Revenue Recognition Task Force Implementation Issues Finalized

Issue 8‐1: Application of Step 1 and Step 3 to Self‐Pay PatientsIssue 8‐2: Application of the Portfolio Approach to Contracts with PatientsIssue 8‐6: Presentation and Disclosure

Out for ExposureIssue 8‐8: Third‐Party SettlementsIssue 8‐9: Bundled PaymentsIssue 8‐10: Performance Obligations

Submitted to FinRECIssue 8‐3: CCRC – Entrance Fees Under Type A Or “Life Care” Contracts Issue 8‐4: CCRC – Recognizing Future Services And Use Of FacilitiesIssue 8‐5: CCRC – Significant Financing ComponentIssue 8‐7: Accounting for Contract Costs

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Health Care Revenue Recognition Implementation Issue 8‐1: Application to Self‐Pay Patient Accounts

Implicit price concession – Uninsured patient with uninsured discount Self‐pay patient charges: $40,000 Provider has a self‐pay discount policy that provides a 75% discount off charges to

uninsured patients Expected collections based on historical experience: 10% ($1,000) Charity care still does not qualify for recognition as revenue

Charges 40,000$ Charges 40,000$ Discount (30,000)$ Explicit price concession (30,000)$ NPSR before bad debt 10,000$ Implicit price concession (9,000)$

Bad Debt (9,000)$ NPSR 1,000$

NPSR 1,000$ Bad Debt ‐$

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Health Care Revenue Recognition ImplementationIssue 8‐2: Application of the PortfolioApproach

Key take‐aways: Contracts must have “similar characteristics” in order to be grouped together. Potential

considerations in grouping contracts include:Type of service (inpatient, outpatient, skilled nursing, elective, non‐elective, etc.)Type of payor (insurance/managed care, governmental payors, uninsured)Type of patient responsibility (uninsured self‐pay, co‐pay/deductible after insurance, high deductible/coinsurance)Whether contracts are entered into at or near the same time

Portfolio data must be sufficient (historical trends) and homogeneous (similar payment rates/methodologies)

Portfolio approach may be appropriate for some, but not all, of a health care provider’s patient populationIf portfolio approach is not applied, new revenue model would be applied on a contract‐by‐contract basis

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Health Care Revenue Recognition ImplementationIssue 8‐6: Presentation and Disclosure

An entity shall disclose qualitative and quantitative information about all of the following: Its contracts with customers The significant judgments, and changes in the

judgments, made in applying the guidance to those contracts

Any assets recognized from the costs to obtain or fulfill a contract with a customer

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• Opening and closing balances• Amount of revenue recognized from contract liabilities• Explanation of significant changes in contract balances

Information about contract balances

• When the entity typically satisfies PO• Significant payment terms• Retroactive settlements with 3rd party payors

Performance obligations

• Qualitative and quantitative* disaggregation of revenue into categories that depict how revenue and cash flows are affected by economic factors

• Explain the relationship with segment disclosures

Disaggregation of revenue

* Disclosure requirements in red are not required for nonpublic entities

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• Method used to recognize performance obligation over time• Judgments to determine the point in time that revenue is

recognized• Methods and inputs to determine the transaction price

Significant judgments

• Quantitative disclosuresCosts to obtain or fulfill a contract

• Transaction price allocated to remaining performance obligations

• Quantitative or qualitative explanation of when amounts will be recognized as revenue

Remaining performance obligations

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Health Care Revenue Recognition ImplementationIssue 8‐10: Performance ObligationsPerformance obligations are identified if each promise to the customer is either a good or service (or a bundle of goods or services) that is

distinct or a series of distinct goods or services that are substantially

the same and have the same pattern of transfer to the customer.

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Example 1—Performance Obligations –Inpatient Health Care Services Goods and services provided during an inpatient

stay should be accounted for as a single performance obligation

The inpatient procedure should be accounted for over time (versus point in time) because the patient simultaneously received and consumed the benefits provided by the hospital

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Example 2A—Performance Obligations – Outpatient Health Care Services – Discrete Physician Visit Goods and services provided during this exam represent

a single performance obligation, even though the underlying tasks performed in each patient’s annual physical exam will vary by patient.

Because the patient simultaneously received and consumed the benefits of the services provided in the physical exam, the revenue should be recognized over time; however, in this case, because all of the goods and services were provided the same day the exam was performed (including the lab services), the revenue recognition would be the same point in time

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Example 2B – Performance Obligations – Outpatient Health Care Services – Physical Therapy In this case, each visit would be a separate performance obligation

based on the fact that the patient has the unilateral right to terminate the contract after each visit with no penalty or compensation due

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Example 3—Performance Obligations –Skilled Nursing Facility Services Each day that Resident A receives services

represents a separate contract and performance obligation, based on the fact that Resident A has the unilateral right to terminate the contract after each day with no penalty or compensation due

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Financial Statement Impact Decrease in patient service revenue Decrease in bad debts Increased disclosures in financial statements

Preparing for the ASU Review contracts and allowance models Determine potential groups for contracts Update budgets and forecasts when appropriate

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ASU 2016-02: Leases

Effective for public business entities and certain not‐for‐profit entities* beginning after December 15, 2018. Calendar Year End – December 31, 2019 Fiscal Year End – June 30, 2020

* Certain not‐for‐profit entities are those that have issued or are a conduit bond obligor for securities that are traded, listed, or quoted on an exchange or an over‐the‐counter market.

For all other entities it is effective for annual periods beginning after December 15, 2019. Calendar Year End – December 31, 2020 Fiscal Year End – June 30, 2021

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ASU 2016-02: Leases

Main provisions of the ASU FASB concluded that the economics of leases can vary for a lessee

and that such economics should be reflected in the financial statements

Recognition of lease assets and liabilities for leases classified as operating leases

A lessee should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease

Retains the differentiation between finance leases and operating leases that impacts the balance sheet, income statement, and cash flows

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A lease contract conveys the right to use an asset (the underlying asset) for a period of time in

exchange for consideration

ASU 2016-02: Leases

Lessor LesseeRight‐of‐use asset

Lease payments

Right‐of‐Use Model

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ASU 2016-02: Leases

Lease contracts in the scope of Topic

842 involve

An identified asset

That is explicitly or implicitly specified

Supplier has no practical ability to substitute and would not economically benefit from substituting

the asset

Decision‐making authority over the use of the asset

The ability to obtain substantially all

benefits from the use of the asset

The right to control the use during the

lease term

Definition of a Lease

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For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities, but rather recognize expense ratably over 12 month period of time

Scope Relief ‐ Short‐Term LeaseExemption for Lessees

ASU 2016-02: Leases

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ASU 2016-02: Leases

All leases are recognized on the Lessee’s balance sheetNeed to evaluate at the inception of the contract

Current U.S. GAAP Topic 842

Capital (Finance) Leases Finance Leases

Operating LeasesOperating Leases

Lessee Model

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ASU 2016-02: Leases

Identifying a Lease ‐ ASU decision tree as to whether or not a contract is or contains a lease: Is there an identified asset

No – Not a leaseYes – Go to next step

Does the customer have the right to obtain substantially all of the economic benefits from the use of the asset throughout the term

No – Not a leaseYes – Go to next step

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ASU 2016-02: Leases

Identifying a Lease ‐ ASU decision tree as to whether or not a contract is or contains a lease: Does the customer or the supplier have the right to direct how and for what

purpose the identified asset is used throughout the termSupplier – Not a leaseCustomer – LeaseIf neither (i.e. how and for what purpose the asset is predetermined) – Go to next step

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ASU 2016-02: Leases

Identifying a Lease ‐ ASU decision tree as to whether or not a contract is or contains a lease: Does the customer have the right to operate the asset throughout the

period of use without the supplier having the right to change the operating instructions

Yes – LeaseNo – Go to next step

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ASU 2016-02: Leases

Identifying a Lease ‐ ASU decision tree as to whether or not a contract is or contains a lease: Did the customer design the asset (or specific aspects of the asset) in a way

that determined how and for what purpose the asset will be used throughout the term

Yes – LeaseNo – Not a lease

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Lessee AccounTing Overview

Balance Sheet

Right‐of‐use assetLease liability

Finance Leases

Amortization expenseInterest expense

Cash paid for principal and interest payments

Right‐of‐use assetLease liability

Operating Leases

Single lease expense on a straight‐line basis

Cash paid for lease payments

Income Statement Cash Flow Statement

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Lessor AccounTing Overview

Balance Sheet

Net investment in the lease

Direct Financing & Sales‐Type 1

Interest income and any selling profit on the lease1

Cash received for lease payments

Continue to recognize underlying asset

Lease income, typically on a straight‐line basis Cash received for

lease payments

Income Statement Cash Flow Statement

Operating

1 Selling profit recognized at lease commencement for sales‐type leases, over the lease term for direct financing leases (note: selling profit is rare for direct financing leases)

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Lease ClassificaTion CriTeria

Would account for as a financing lease when the lease...

Transfers ownership by end of lease termIncludes a purchase option that the lessee is reasonably certain to exerciseTerm is for the major part of the remaining economic life of the underlying assetPresent value of lease payments and the present value of any residual value guarantees amounts to substantially all of the fair value of the underlying asset; orThe asset is of such specialized nature that it would have no alternative use to the lessor at the end of the lease term

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Lease ClassificaTion CriTeria

The required bright‐line rules in current U.S. GAAP will be eliminated, but"When determining lease classification, one reasonable approach to assessing the criteria [...] would be to conclude both of the following:

75 % or more of the remaining economic life of the underlying asset is a major part of the remaining economic life of the underlying asset

90 % or more of the fair value of the underlying asset amounts to substantially all the fair value of the underlying asset"

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ASU 2016-02: Leases

Lessee Accounting Recognition Finance Leases

Lessee effectively obtains control of underlying assetAsset/Liability measured at present value of the lease paymentsRecognize interest on the lease liability separately from the amortization of the leased assetClassify repayments of principal portion of the lease liability within financing activities on SOCFs and payments of interest on the lease liability and variable lease payments within operating section of SCOFs

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ASU 2016-02: Leases

Lessee Accounting Recognition Operating Leases

Lessee does not effectively obtain control of assetAsset/Liability measured at present value of the lease paymentsRecognize a single lease cost, calculated so that the cost of the lease is allocated over the term of the lease on a straight line basisClassify all cash payments within operating activities section of the SOCFs

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ASU 2016-02: Leases

Initial Measurement Present value of lease payments + Initial direct costs

Use discount rate implicit in lease – if unavailable, use incremental borrowing rateInitial direct costs Commissions and/or payments made to an existing tenant to terminate

lease Does not include costs that would have been incurred regardless of

obtaining lease or not

Lease incentives are a reduction of asset

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ASU 2016-02: Leases

Financial Statement Impact Increase in assets and liabilities

Note: ASU states that finance and operating leases cannot be in same line item on balance sheet.

Increased disclosure in financial statements

Practical Expedients for Implementation An entity need not reassess whether any expired or existing contracts are

leases or contain leases. An entity need not reassess the lease classification for any expired or

existing leases. Operating leases are operating leases. Capital leases are financing leases.

An entity need not reassess initial direct costs for any existing leases. May also elect, which must be applied consistently by an entity to all of its

leases, to use hindsight in determining the lease term and assessing impairment of the entity’s right‐of‐use assets.

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ASU 2016-02: Leases

Assets Before After

Current assetsCash and equivalents 1,260 1,260 Accounts Receivable, net 4,590 4,590 Inventory 5,830 5,830 Other current assets 680 680

Total current assets 12,360 12,360 Noncurrent assetsProperty and equipment 17,820 17,820 Accumulated depreciation (6,780) (6,780)

Property and equipment, net 11,040 11,040 Right‐of‐use assets ‐ 12,540 Intangible assets 1,960 1,960 Goodwill 1,370 1,370 Total Assets 26,730 39,270

Current ratio 2.35 2.02Percentage change ‐14%

Liabilities and equity Before After

Current liabilitiesAccounts payable and other 5,250 5,250 Lease liabilities ‐ 870

Total current liabilities 5,250 6,120 Noncurrent liabilities Long‐term debt 7,560 7,560 Lease liabilities ‐ 11,670 Deferred taxes 1,190 1,190 Shareholders' equityCommon stock 100 100 Additional paid‐in capital 6,210 6,210 Retained earnings 6,420 6,420

Total shareholders' equity 12,730 12,730 Total liabilities and equity 26,730 39,270

Debt‐to‐equity ratio 1.10 2.08 Percentage change 90%

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ASU 2016-02: Leases

Preparing for the ASU Compile listing, including terms and periods, of current operating

leases Compile listing, including terms and periods, of contracts that could

contain leases Consider leasing terms of any new leases now Consider any impact on debt covenants

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ASU 2016-01: Financial InsTrumenTs

Effective dates for public business entities: Years beginning after December 15, 2017 Calendar YE – December 31, 2018 Fiscal YE – June 30, 2019

For all other entities including not‐for‐profit entities and employee benefit plans: Years beginning after December 15, 2018 Calendar YE – December 31, 2019 Fiscal YE – June 30, 2020

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All equity investments will be measured at FV through excess of revenue over expensesEquity investments that are accounted for under the equity method or result in consolidation of an investee are not includedNo longer classify equity investments as trading or other than tradingNo longer recognize unrealized gains and losses in other changes in net assetsNo longer use the cost method of accounting for equity securities that do not have readily determinable FV’s Measure at cost, less impairment, plus or minus changes resulting

from observable price changes in similar investments of the same issuer

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Cost method investments (including other ownership interests such as partnerships, unincorporated joint ventures, and LLCs) to be measured at fair value with the changes in the fair value being recognized through net income

Change in fair value measured through earnings If fair value is not readily determinable, entities will need to search for

observable price changes Entities will need to perform a qualitative assessment for each reporting

period to identify impairment Enhanced disclosures about those investments are required The amendments improve financial reporting by providing relevant

information about an entity’s equity investments and reducing the number of items that are recognized in other changes in net assets

Does not impact investments valued at net asset value (NAV)

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Identifying Observable Price ChangesTo identify observable price changes, an entity should consider relevant transactions that occurred on or before the balance sheet date that are known or can reasonably be known. To identify price changes that can reasonably be known, the entity should make a reasonable effort (that is, without expending undue cost and effort) to identify any observable transactions that it may not be readily aware of. The entity need not conduct an exhaustive search for all observable price changes.

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Relevant DefinitionsEquity Security ‐ Any security representing an ownership interest in an entity (for example, common, preferred, or other capital stock) or the right to acquire (for example, warrants, rights, forward purchase contracts, and call options) or dispose of (for example, put options and forward sale contracts) an ownership interest in an entity at fixed or determinable prices. Fair Value ‐ The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.Orderly Transaction ‐ A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (for example, a forced liquidation or distress sale).

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ASU 2016-13: CrediT Losses (Topic 326)

Effective dates for public business entities: Years beginning after December 15, 2019 Calendar YE – December 31, 2020 Fiscal YE – June 30, 2021

For all other entities including not‐for‐profit entities and employee benefit plans: Years beginning after December 15, 2020 Calendar YE – December 31, 2021 Fiscal YE – June 30, 2022

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Current Expected Credit Loss (CECL) ModelMove from “incurred loss” to “expected loss” methodology, which: reflects expected credit losses requires consideration of a broader range of

reasonable and supportable information to inform credit loss estimates.

Considers past history, current conditions, and reasonable expectations about foreseeable future

Entities will no longer wait until credit loss is “probable” to record loss

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CECL Model not expected to result insignificant impact on most entities other thanfinancial institutions For NFPs, would apply to trade receivables

(such as patient receivables), loans receivable,and lease receivables, but not to pledgesreceivable

Likely already taking CECL considerations intoaccount for such assets


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Applicability – Entities holding financial assets and net investments in leases that are not accounted for at fair value (i.e., accounted for at amortized cost): Loans Debt securities Trade receivables Net investments in leases Off‐balance‐sheet credit exposures Reinsurance receivables Other financial assets not excluded from the scope that have the contractual

right to receive cash

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Assets measured at amortized costFinancial assets measured at amortized cost are to be presented at the net amount expected to be collectedEntities should use an allowance account to present net carrying value, not write down individual assetStatement of Operations recognizes the following in excess of revenue over expenses: Credit losses for newly recognized financial assets Changes of expected credit losses previously recorded

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ASU 2016-14: PresenTaTion of Financial STaTemenTs of NoT-for-

ProfiT EnTiTiesEffective dates: Years beginning after December 15, 2017 Calendar YE – December 31, 2018 Fiscal YE – June 30, 2019

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ProfiT EnTiTiesHistory of the NFP Financial Statements Project

The FASB originally initiated a project as part of its ongoing review of GAAP standards to ensure they continue to meet the needs of a changing financial reporting environment. For the most part, the current reporting guidance was established in 1993, when the Board issued FASB Statement No. 117, Financial Statements of Not‐for‐Profit Organizations. The FASB’s Not‐for‐Profit Advisory Committee (NAC) and other stakeholders told the Board that while existing standards for financial statements of NFPs are sound, they could be improved to provide better information to donors, creditors, and other users of financial statements.

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ProfiT EnTiTiesHistory of the NFP Financial Statements Project

In April 2015, the FASB issued a proposed ASU intended to improve existing standards for financial statement presentation of NFP organizations.FASB redeliberated the exposure draft into two phases.In August 2016, the FASB issued ASU No. 2016‐14, Presentation of Financial Statements of Not‐For‐Profit Entities.Impacts Not‐for‐Profit Entities (Topic 958) and Health Care Entities (Topic 954).

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ProfiT EnTiTiesImprovements to NFP Financial Reporting

The first of a two‐phase project, the amendments in FASB ASU 2016‐14 are intended to make immediate improvements that address: Complexity in net asset classification Clarity of information regarding liquidity and availability of cash Transparency in reporting of financial performance measures Consistency in reporting expenses by function and nature Utility of the statement of cash flows

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ProfiT EnTiTiesWho Will Be Affected by ASU 2016‐14?

The ASU will affect substantially all NFPs as well as creditors, donors, grantors, and others that use their financial statements. Those NFPs typically include, among others: Nongovernmental health care providers

Continuing Care Retirement CommunitiesNursing Homes Hospitals

Charities Foundations Private colleges and universities Cultural institutions Religious organizations Trade associations

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• Net Asset Classes:• Classification scheme• Disclosure of board designated net assets• Underwater endowments• Expirations of capital restrictions

• Expenses/Investment Return:• Expenses by nature analysis of expenses by function

and nature• Netting investment expenses against

investment return• Enhanced disclosures about cost allocations

• Operating Measures:• Modest improvements to disclosures for those that use an

operatingmeasure, especially about boardappropriations, designations and similar transfers

• Liquidity:• Quantitative disclosures• Qualitative disclosures

• Statement of Cash Flows:• Methods of presenting operation cash flows

(direct/indirect)


ProfiT EnTiTies• Operating Measures – all other elements of the

proposal, including:• Whether to require intermediate

measure(s)• Whether and how to define such measure(s),

and what items should or should not be includedin the measure(s)

• Alternative disaggregation approaches suggested by stakeholders

• Statement of Cash Flows:• Realignment of certain items

• Need to decide whether to wait to deliberate atsame time as the Financial Performance Reportingproject for business entities

Phase II:Phase I:

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ProfiT EnTiTiesNet Asset Classifications

Currently, GAAP requires three classes of net assets Unrestricted Temporarily restricted Permanently restricted

These classifications have resulted in confusion: About whether and how limits imposed by laws, contracts, and governing

boards affect an NFP’s classes of net assets, and How those kinds of limits and donor restrictions affect liquidity, financial

performance, and cash flows.

The term unrestricted net assets also has been misunderstood by some stakeholders.

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Unrestricted Temp.Restricted

Perm.Restricted

ASU 2016-14: PresenTaTion of Financial STaTemenTs of NoT-for-ProfiT EnTiTies

Without DonorRestrictions With Donor Restrictions

Amount, purpose, and type of boarddesignations *

Nature and amount of donor restrictions

Current GAAP

ProposedGAAP

+Disclosures

* New disclosure requirement

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ProfiT EnTiTiesNet Asset Classifications Footnote Disclosures

Net assets with donor restrictions Timing and nature of restrictions Composition at the end of the period Continue to show an analysis by time, purpose, and perpetual restrictions

Board‐designated net assets Enhanced information will be required on the amounts and purposes of

these designations

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ProfiT EnTiTiesNet Asset Classifications of Underwater Donor‐Restricted Endowment Funds

Endowment fund ‐ an established fund of cash, securities, or other assets to provide income for the maintenance of a NFP.Underwater endowment fund ‐ the current FV of the fund is below its original gift amount or other amount that the NFP is required to maintain by the donor or by law.Existing GAAP, rather than reporting the amounts by which an endowment fund has fallen below its original gift within the restricted class of net assets, that amount must be disaggregated from the fund and presented within unrestricted net assets.

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• To be reflected in net assets with donor restrictions rather thanin net assets without donor restrictions

Revised net asset classification

• The following information will be required:• The original amount of the endowment• The NFP’s policy relating to spending from these funds• Whether that policy was followed

Expanded disclosures will be required


ProfiT EnTiTiesNet Asset Classifications Underwater Donor‐Restricted Endowment Funds

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ProfiT EnTiTiesNet Asset Classifications Expirations of Capital Restrictions

Requirement of placed‐in‐service approach and elimination of over‐time approach for expirations of restrictions to acquire or construct long‐lived assets.

In the absence of explicit donor instructions, NFPs would be required to reclassify net asset with donor restrictions that are for the acquisition or construction of long‐lived assets as net assets without donor restrictions when the long‐lived asset is placed‐in‐service, eliminating the alternative of recognizing the expiration of the donor restriction over‐time (as the asset is used/consumed).

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ProfiT EnTiTiesPresentation of Investment Expenses

How to Present?Net presentation of investment expenses against investment return onthe face of the statement of operations

What to Disclose?Disclosure of investment expenses would be permitted but no longerrequired

No longer require disclosure of investment return components in the endowment net asset footnote

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Expenses Classified by Function and Nature

Report expenses by function and natural classification Separate statement Face of statement of operations Footnotes

Enhanced disclosures Provide qualitative disclosures about methods used to allocate costs among

program and support functions Investment expenses that have been netted against investment return are not

permitted to be included in this analysis


ProfiT EnTiTies

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Analysis of operating expenses by nature and function one place in the F/S (statementof operations, separate statement, or schedule in notes), with additional qualitative information about cost allocations)


ProfiT EnTiTies

F U N C T I O N

N

A

T

U

R

E

Functionalization is optional

ProgramActivities SupportingActivities Total Operating Expenses

Non‐Operating

Total Expenses

ProgramA ProgramB M&G Fundraising

Salaries & BenefitsGrants to OthersEquipment Rental & MaintenanceOccupancy CostDepreciationInformation TechnologyProfessional Service FeesSuppliesTravelPrinting & PublicationInterestOther

Total

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Reporting Financial Performance MeasuresReporting the change in total net assets for the period continues to be a requirement

NFPs will also report the amount of change in each of the two classes of net assets on the statement of operations

Presenting an intermediate measure of operations is still allowable Disclosures will be enhanced to provide additional information about the

items included or excluded from the operating measure


ProfiT EnTiTies

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Transparency and Utility of Liquidity Information

Availability of financial assets may be affected by: Its nature External limits imposed by donors, laws, and contracts with others Internal limits imposed by governing board decisions

Quantitative and qualitative information about liquidity will be required for the purpose of providing financial statement users: Understanding of an entity’s exposure to risks, as well as how an entity

manages its liquidity risk Information about the availability of assets to meet cash needs for general

expenditures within one year of the balance sheet date


ProfiT EnTiTies

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Board decided not to require NFP entities to use the direct method of presenting operating cash flows

Continue to use either the direct or indirect method

Indirect reconciliation is no longer required if the direct method is chosen


ProfiT EnTiTiesCash Flows Statement

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STaTemenTs of Financial PosiTion

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STaTemenT of OperaTions

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STaTemenT of OperaTions

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STaTemenT of Cash Flows - DirecT

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STaTemenT of Cash Flows

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FooTnoTe BNeT asseTs wiTh donor resTricTions are

resTricTed for The following purposes or periods.

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FooTnoTe DNeT asseTs were released from donor

resTricTions

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FooTnoTe DD

Not‐for‐Profit Entity A’s governing board has designated, from net assets without donor restrictions of $92,600, net assets for the following purposes as of June 30, 20XX.

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NoTe EInvesTmenTs

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FooTnoTe F

The table below presents expenses by both their nature and their function for fiscal year 20XX.

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FooTnoTe GFinancial AsseTs Less AmounTs NoT Available

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Flows (Topic 230): ResTricTed CashEffective dates: Public business entities

Years beginning after December 15, 2017Calendar YE – December 31, 2018Fiscal YE – June 30, 2019

All other entitiesYears beginning after December 31, 2018Calendar YE – December 31, 2019Fiscal YE – June 30, 2020

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Flows (Topic 230): ResTricTed CashKey provisions:

Provides guidance on the presentation of restricted cash and cash equivalents in both the beginning and ending cash balances, as well as in cash flows from operations, investing, and financing activities in the statement of cash flowsRestricted cash and cash equivalents, as well as changes therein, should be included in the statement of cash flowsThe Update addresses disparity in practiceEntities impacted by the Update: All entities that have restricted cash or cash equivalents, and Are required to prepare a statement of cash flows under

Topic 230

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Michael F. Garczynski, CPA, CGMAArnett Carbis Toothman LLPPartner – Health Care Servicesvoice: 412.635.6780 or 800.452.3003e‐mail: [email protected]

QUESTIONS?

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Jordan P. Pitzer, CPAArnett Carbis Toothman LLPSupervisor – Health Care Servicesvoice: 724.6358.1565 or 800.452.3003e‐mail: [email protected]

Documents

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