Not For Profit Entities:
2019 Audit and Accounting
Issues
Visit the NFP webcast archive to watch the
corresponding presentation.
Today’s presenters and moderator
2
Jennifer Hoffman, CPA
• Partner, Not-for-Profit and Higher Education Practices
• Grant Thornton LLP
Sibi Thomas, CPA, CFE, CGMA
• Partner, Nonprofit, Government and Healthcare
• Marks Paneth LLP
Andrea Wright, CPA, MBA
• Partner, Not-for-Profit Practice
• Johnson Lambert, LLP
Learning Objectives
• Identify industry, regulatory, and economic developments affecting
not-for-profit organizations.
• Determine the audit issues impacting this year's engagements.
• Identify the latest not-for-profit accounting concerns and
developments.
• Identify the significant issues on the horizon impacting not-for-profit
organizations.
3
Current Economy
• Important considerations affecting the NFP industry
– Interest rates
– Availability of credit
– Consumer confidence
– Overall economic expansion or contraction
– Inflation
– Real estate values
– Labor market conditions
5
Key Economic Indicators
• GDP - Increased at an annual rate of 3.4% in the 3rd Q 2018
• Annual average unemployment rate
– 3rd Q 2018 – 3.7%
– 2017 – 4.1% -- 2018 – 3.9%
– Unemployment rate of 3.9% = 6.3 million people
– 3rd Q lowest rate since 1969
• Federal minimum wage unchanged at $7.25 since 2009
• 21 States and Washington, D.C. increased minimum wage last year
• Federal funds rate raised 4 times in 2018 at level of 2.25% – 2.5% in December
• Inflation remains near 2% objective over medium term
• Tax reform lowered taxes for individuals and corporations
• Contraction in exports for first time in 2 years amid escalating trade disputes
6
State of NFPs
• NFPs continue to play a large role in the world economy
• Currently more than 1.5 million NFPs registered with the IRS
• Contributions to NFPs in 2017 exceeded $400 billion – 5.2% increase over 2016
• Giving to all but 1 of 9 sectors of recipient organizations (Giving USA)
• Individuals represent 70% of total giving
• Contributions to Donor Advised Funds grew to $29.23 billion in 2017 – 16.5% increase
over 2016
7
Job Market and Talent Pool Concerns
Persistence of low unemployment rates affecting staffing for key
finance functions.
Risks to NFP include:
• Lack of capacity to maintain basic financial systems
• Inadequate staff competency for the complexity of the organization
• Frequent turnover affecting organization-wide morale
• Vulnerability to poor segregation of duties and internal controls due
to under staffing
Possible strategies to mitigate:
• Increase investment in staff salaries and professional development
• Seek outsourced accounting resources to fill gaps
• Involve nonfinance staff in less technical processes for coverage
8
Election-Year Reporting Carries over to 2019
NFPs will be reporting on election related activities throughout 2019.
Proper disclosure is key to ensuring transparency and maintaining
exempt status:
• Distinguish between political campaign activities (not allowed for
EO) and legislative activities, lobbying, voter registration, and voter
engagement, all of which are permissible (with some limitations)
• Understand extent of engagement as defined for 501(c)(3) and
501(c)(4)
• Expenditure Test or Substantial Part Test and decision to take
501(h) election
9
Software as a Service (SaaS)
The cloud has become ubiquitous in business computing. What should
organizations consider before migrating to the cloud:
• Conduct service provider due diligence assessing performance,
services, incident and disaster response, customer support
• Ask industry regulators for guidance on cloud storage of personally
identifiable information
- E.g. HIPAA and FERPA regulations
• Obtain SOC 1 reports for annual review
10
Cybersecurity
• Cybersecurity adversaries (“Bad Actors”) are after data – NFPs
obtain and retain valuable data on donors, customers, and clients
• Most reported breaches are due to hacking, email phishing, or
malware – especially ransomware
• Dark web – anyone can access the dark web and buy sensitive
information
• Where do most successful hacking attempts originate? E-Mail
11
Cybersecurity (Continued)
• What can NFP’s do?
– Bad actors are a daily threat
– Be leery of emails
– Verify the sender
– Be very careful opening emails on a smart phone
– Have a password strategy
– Develop a culture of security
– Have a plan for employees to notify designated
personnel and react quickly when an attack is
discovered
– Take personal security seriously
12
Cybersecurity Resources
• Cybersecurity is an urgent matter as digital threats
continue to rise
• Visit the Cybersecurity Resource Center at
www.aicpa.org/cybersecurity to access
cybersecurity news and information
13
State of Higher Education
• Moody’s has indicated a second consecutive
negative outlook for higher ed in 2019 and 2020
• Public universities expected to have lowest median
net revenue growth in 10 years at 1.5%. Private at
2.8%
• Decline in net tuition revenue impacted by
increase in tuition discounts
– Average 2017-2018 institutional discount rate
expected to rise to 44.8% (NACUBO)
• HEPI Data reports 2.8% inflation for FY18 –
decline from 3.3% rate in FY17
14
State of Higher Education (continued)
• Investment returns favorably affect endowment
distributions (2018 NACUBO-TIAA Study)
– Average IRR 8.2% for 2018 v. 12.2% net
investment gain realized in 2017
– S&P 500 1-year total return 11% for May 31
FYE and 12% for June 30 FYE
• Changes in ASU No. 2014-09 Revenue from
Contracts with Customers affects revenue streams
• Updates to lease accounting standards:
– Adoption of ASU No. 2016-02 by Private
Institutions
– Application of GASB Statement No. 87 by Public
institutions effective 2020-2021
15
State of Higher Education (continued)
• Perks Loan Program expired September 30, 2017
with no new loans issued
– USDE provided wind-down guidance allowing
disbursement to enrolled borrowers through
June 30, 2018
– USDE will begin collection after issuance of
2019-2020 Fiscal Operations Report
– Application to participate for 2019-20 (FISAP)
due October 1, 2018
16
Operation Varsity Blues
• Many higher education institutions have been
faced with inquiries about risk management,
governance and compliance
• Alleged widespread corruption in admissions
process provides wake-up call to entire higher
education community
• Audit committees and senior management will
likely place greater focus and emphasis on
process, controls and compliance to respond to
increased attention
• Auditors may be asked to perform additional
procedures and provide input/perspective
17
IRS Issue Snapshots
• In 2018, IRS Tax Exempt & Government Entities
(TEGE) division issued 9 Issue Snapshots
including:
– “Exempt Organization Gaming and UBTI”
(4/5/18)
– “Understanding how Income Affects Qualification
for Exemption as a IRC Section 501(c)(2)
Corporation” (6/2/18)
19
2017 Tax Cuts and Jobs Act (TCJA) Impacts
• UBTI “Siloing” – Section 13702 of TCJA established IRC
§512(a)(6) provides for UBTI to be separately computed for each
activity
• Notice 2018-67 Interim Guidance:
– Guidance for “making good-faith identification of separate trades
or businesses, and related concepts”
– Proposes use of NAICS 6-digit codes
– Provides safe-harbor thresholds for aggregating income and debt-
finance income from partnerships
– Information on how to calculate NOL within IRC §512(a)(6)
– Addition to UBI under IRC §512(a)(7) not separate
20
2017 TCJA Impacts (continued)
• The “Parking Tax” – “disallowed fringes” under IRC §512(a)(7)
– Notice 2018-99 interim guidance states:
“taxpayer that owns or leases all or a portion of one or more
parking facilities must identify the number of spots…exclusively
reserved for employees”
– Four-step safe-harbor calculation model
– Changes to parking arrangements made by March 31, 2019
can be retroactively applied back to January 1, 2018
– Certain states (for example NY) have issued regulations to
eliminate impact for state purposes
– Notice 2018-100 – This relief is very limited and available to
certain EO’s that meet certain criteria
21
2017 TCJA Impacts (continued)
• Excise Tax on Excess Compensation
– 21% tax on wages and compensation exceeding $1 million of
covered employee – defined as current or former employee:
– 1 of 5 highest compensated employees during taxable year
– Covered employee of organization or predecessor for any
preceding taxable year after 12/31/16
– Q&A guidance for IRC §4960 in Notice 2019-9
22
2017 TCJA Impacts (continued)
• Changes to Form 990-T
– 2018 Form 990-T received the most significant changes in 67
years including:
– Part III, Total UBTI (page 2)
– Line 33, Total of UBTI computed from all unrelated trades or
businesses
– Line 34, Amounts paid for disallowed fringes
– Line 35, Deduction for NOL arising in tax years starting January
1, 2018
– Overall “flat” 21% tax rate on UBTI
– Form 990-T Schedule M
23
Form 990 Versus GAAP Accounting
• Differences generally accounted for on Form 990 Part XI or
Schedule D Part XI and Xii
• ASU No. 2016-14 changes net assets accounting from three net
asset classifications to two
– Former Classification: Unrestricted Net Assets, Temporarily
Restricted Net Assets, and Permanently Restricted Net Assets
• IRS communicated updates to Form 990 to accommodate changes
will take a few years
– Form 990 Part X, Lines 27-29 will continue to list former net asset
titles
– Organizations should consider Schedule O disclosure
24
Sales Tax after Wayfair Decision
• The Supreme Court overturned decades old Quill decision in South
Dakota v. Wayfair
– Physical presence test no longer required for sales tax nexus
– Numerous states have new rules established or coming online in
2019 based on South Dakota nexus thresholds:
– Gross revenue from sales of taxable goods and services
delivered into state exceeding $100,000
– Sold taxable goods and services for delivery into the state in
200 or more separate transactions
• Future implications of volume-of-sales approach could extend to
other types of taxes
25
Changes to the Auditor’s Report
• January 2019 ASB issued SAS Auditor Reporting and Amendments
– Addressing Disclosures in the Audit of Financial Statements
– Aimed at enhancing the relevance and usefulness of the auditor’s
report based on U.S. versus international reporting models
– Public comments called for:
– Greater transparency than “pass/fail” nature of audit opinion
– More information on areas with high risk of material
misstatement, and involving significant judgement and events
– Expansion on description of auditor and management
responsibilities with respect to financial statements
27
Changes to the Auditor’s Report (continued)
• Summary of standards key changes:
– Forming an Opinion and Reporting on Financial Statements (AU-C
Section 700)
– Communicating Key Audit Matters in the Independent Auditor’s
Report (New AU-C Section 701)
– Modifications to the Opinion in the Independent Auditor’s Report
(AU-C Section 705)
– Emphasis of Matter Paragraphs and Other Matter Paragraphs in
the Independent Auditor’s Report (AU-C Section 706)
– The Auditor’s Consideration of an Entity’s Ability to Continue as a
Going Concern (AU-C Section 570)
28
Changes to the Auditor’s Report (continued)
• Summary of standards key changes (continued):
– The Auditor’s Communication with Those Charged with
Governance (AU-C Section 260)
– Terms of Engagement (AU-C Section 210)
• The SAS and related amendments are effective for audits of financial
statements for periods ending on or after December 31, 2020.
– Early implementation is not permitted
29
Data Analytics in Audits
• Rapidly growing capacity for technology to “discover and analyze patterns, identify
anomalies, and extract other useful information in the data underlying an audit” (AICPA
Guide to Audit Data Analytics)
• ADAs can be applied through methods such as ratio analysis, statistical analysis,
journal entry analysis, three-way matching procedures, control testing, etc.
• ADA’s can be applied for risk assessment, test of controls, substantive procedures, etc.
30
Data Analytics in Audits (continued)
• Increased use of ADA can:
– Increase audit quality
– More effective/efficient audits
– Increased coverage
• Data Visualization
– Refers to the use of various graphics – charts, scatter diagrams,
trend lines, etc.
• Data Confidentiality & Security
– Critical when applying ADA
31
Auditing Cryptocurrency Donations
• Currently more than 1,000 types of cryptocurrency
exist; Bitcoin is the most popular
• NFPs that decide to accept cryptocurrency should
consider:
– Risks of accepting or transacting cryptocurrency
– Updates to gift acceptance and investment
policies
– Training opportunities for management and staff
– Internal controls to monitor and process
cryptocurrency
• NFP should review upcoming accounting policies
and valuation techniques to properly classify
cryptocurrencies in financial statements
32
Auditing Cryptocurrency Donations
(continued)
• NFP’s need to consider how the asset should be
reflected in the statement of financial position
• Representatives of the Assurance Services
Executive Committee, Financial Reporting
Executive Committee (FinREC), and the ASB
comprise a Digital Assets Working Group that is
currently developing guidance for the accounting
for and auditing of cryptocurrencies and other
digital assets. More information on this project will
be provided as it becomes available.
33
Auditing Alternative Investments
• The use and variety of alternative types of
investments in NFP portfolios has grown over past
decade
• Increasing number of entities following IFRS
• NFP should have thorough understanding of
valuation method and basis of accounting used by
the investment vehicle
• NFPs and auditors should understand any
differences from U.S. GAAP in valuation
34
Fraud Trends at NFPs
• Association of Certified Fraud Examiners (ACFE) reported in its 2018 Global Report
that NFPs suffered a median loss of $75,000 – Down from $100,000 in 2016
– Limited financial resources at NFPs often exacerbates the impact of fraud
• Most fraud schemes identified at religious, charitable or social service organizations:
– Billing schemes where employees submit fictitious or inflated invoices
– Corruption schemes including bribery and undisclosed conflicts of interest
– Expense reimbursement schemes involving claims for fake or inflated expenses
– Payroll schemes including claims for hours not worked or nonexistent employees
– Theft of cash on hand
– Check and payment tampering schemes
35
Fraud Trends at NFPs
• Financial Statement fraud accounted for 10% of fraud cases
• ACFE’s 2018 most common internal control weaknesses in fraud cases:
– Lack of internal controls
– Lack of management review
– Override of internal controls
– Poor tone at the top
– Lack of competent personnel in oversight roles
• Organizations should be on the lookout for common “behavioral red flags”, the most
common of which continues to be living beyond one’s means and financial difficulties
36
New Yellow Book Independence Rules
• Revision of Government Auditing Standards released July 2018
– For example, auditors conclude that preparing financial statements in their entirety
from a client-provided trial balance creates significant threats to independence
• Services revised standards identify as a threat to independence:
– Preparing line items or sections of the financial statements based on the trial balance
– Recording transactions for which management has approved classification
– Posting coded transactions to an audited entity’s general ledger
• Proposed safeguards to eliminate or reduce threats to independence:
– Exclude individuals who performed non-audit service from engagement team
– Engage another audit organization to review non-audit services performed
37
ASU 2016-14 - Presentation of
Financial Statements for Not-for-Profit
Entities
• Required changes to address the following:
– Complexities about the use of 3 classes of net
assets
– Deficiencies in the transparency and utility in
assessing liquidity especially as it pertains to
misunderstandings and confusion about the term
unrestricted net assets and the impact of limits
imposed by governing boards, grantors, laws,
etc.
– Inconsistencies in the type of information
provided about expenses (function vs. nature)
– Impediment of preparing the indirect method
reconciliation if an NFP chooses to use the direct
method of presenting operating cash flows
39
Changes to Restrictions on Net Assets
• Moving from 3 to 2 net asset classes
– net asset with donor restrictions
– net assets without donor restrictions
• Information about the nature and amounts of different types of
donor-imposed restrictions should be on the face of the statement
of financial position (SFP) or in the notes to the financial statements
• Information about the amounts & purposes of board designations of
net assets without donor restrictions should be provided in notes or
on face of FS
40
Changes to the Statement of Activities
• Statement of activities
– Present change in each of the two classes of net assets
– Aggregate items of revenue, expenses, gains, and losses into
reasonably homogenous groups
– Investment expenses netted against investment return (reported
in net asset category where net investment return is reported)
– No longer required to disclose netted investment expenses
– All NFPs required to report expenses by nature & function in one
location (on face of the statement of activities (SOA), separate
statement or in notes)
41
Changes to Disclosures
• Disclosures
– Amounts & purposes of governing board designations,
appropriations and similar actions that result in self-imposed limits
on the use of resources without donor-imposed restrictions
– Composition of net assets with donor restrictions & how the
restrictions affect the use of resources
– Qualitative information that communicates how an NFP manages
its liquid resources available to meet cash needs for general
expenditures within one year of the date of the SFP
– Quantitative information, either on the face of the SFP, or in the
notes, and additional qualitative information in the notes as
necessary, that communicates the availability of an NFP's financial
assets at the date of the SFP to meet cash needs for general
expenditures within one year.
42
Changes to Disclosures (continued)
• Disclosures (Continued)
– Availability of a financial asset may be affected by (1) it's nature, (2) external limits
imposed by donors, grantors, laws, and contracts with others, and (3) internal
limits imposed by governing board decisions.
– Method(s) used to allocate costs among program & support functions
– Underwater endowment funds, which include required disclosures of:
– NFP's policy and any actions taken during the period concerning appropriation
from underwater endowment funds
– The aggregate FV of such funds
– The aggregate of the original gift amounts
– The aggregate amount by which funds are underwater (deficiencies)
43
Changes to Accounting for Long-lived
Assets
• ASU No. 2016-14 eliminates first accounting
option: Release from restriction all alt once when
property/equipment in service
− Requires “placed-in-service” approach for long-
lived assets absent donor stipulations specifying
how long assets must be used
• NFPs previously using “implied time restriction”
need to change
44
Changes to Expenses
• ASU No. 2016-14 requiring more information on
nature and type of expenses incurred
− Provide an analysis of expenses by function and
nature in financial statements or notes
− Disaggregate functional expense by natural
expense classification
− Present in one location
− Include all expenses of the organization
− Disclose method used to allocate costs
45
Other Changes
• Investment Return and Related Expenses
– Report investment expenses net of the related
investment return for all external expenses
– No longer required to disclose components of
investment return
• Statement of Cash Flows
– Continue to present on the face of the statement
of cash flows (SCF) the net amount for operating
cash flows using EITHER the direct or indirect
method
– No longer required to provide the presentation or
disclosure of the indirect method (reconciliation)
if using the direct method
46
Implementation Considerations
• Implementation considerations for ASU No. 2016-14
– Preparer and auditor collaboration – This should commence as
early as possible. Detailed discussions regarding requirements,
applicability, and how best to comply, present, and communicate
required information in the financials statements
– Use of examples – Reference to existing samples to establish
baseline that can be refined
– Engage those charged with governance – Discuss with board
committees responsible for financial reporting oversight. Some
best practices include drafting disclosure in advance and
presenting to committee for approval.
47
Other Considerations
• Key considerations for certain requirements
– ASU No. 2016-14 requires the classification of underwater endowments within net
assets with donor restrictions
– This is a change in NFP accounting
– NFP should disclose nature of any reclassifications or restatements and their
effects for the period the amendments are first applied
• Comparative financial statements
– FASB ASC 958-10-65-1: An NFP has the option to omit the following for periods
presented before period of adoption
– Analysis of expenses by both functional and natural classification.
– NFPs previously required do not have this option but may present comparative
period information
– Disclosures about liquidity and availability of resources
48
ASU 2018-08 - Clarification of the Accounting for Grants and
Similar Contracts
• Applies to all entities including NFPs and business entities that receive or make
contributions (revenue and expense recognition)
– Exception – ASU does not apply to business entity for transfer of assets from
governmental entity to business entity
• Although guidance applies to the recipient and resource provider, FASB does not intend
for both parties to track each other’s accounting to achieve the same reporting result
• Effective dates for recipients of contributions:
– All non-public entities – Effective for annual periods beginning after December 15,
2018 and interim periods beginning after December 15, 2019
• Effective dates for resource providers of contributions:
– All non-public entities – Effective for annual periods beginning after December 15,
2019, and interim periods beginning after December 15, 2020
• Early adoption permitted
49
Issue 1: Differentiating Reciprocal from Nonreciprocal
Transactions
• Reciprocal (exchange) transactions follow guidance in FASB ASC 606 – Resources
provided are used by the NFP to provide direct commensurate value back to the
resource provider
• Non-reciprocal (contribution) transactions follow guidance in FASB ASC 958-605 –
Resources provided are used by the NFP to benefit a party other than the resource
provider, such as the general public
• In some instances, the resource provider may not receive direct commensurate
value; however the resources may benefit a specific third party. NFP must determine
if the resources provided represent a payment from a third party payer (the resource
provider) on behalf of an existing exchange between.
50
Issue 2: Differentiating Conditional Contributions From
Unconditional Contributions
• Key change in donor-imposed condition definition is concept that a condition includes
both (a) a barrier that must be overcome and (b) a right of return or right of release if
barrier is not overcome
– Contribution agreement must be sufficiently clear in concluding when the recipient
is entitled to the transfer of assets
• Indicators to help NFPs determine if an agreement contains a barrier:
– Measurable performance-related barriers or other measurable barriers
– Limited discretion by the recipient on the conduct of an activity
– Stipulations that are related to the purpose of the agreement
• Probability of overcoming the barrier or probability that the contributor would exercise a
right of return or release If the barrier is not overcome is NOT a factor
51
Accounting for Grants and Similar Contracts
• Simultaneous Release Option - NFP may elect a policy to report
donor-restricted contributions whose restrictions are met in the
same reporting period as revenue recognized within net assets
without donor restrictions
– ASU allows election of policy for donor restricted contributions
initially conditional without also electing policy for other donor
restricted contributions
• No change in existing disclosure requirements for contribution
transactions
– NFPs may need to add required disclosures for conditional
contributions previously accounted for as exchange transactions
52
Accounting for Grants and Similar Contracts
(continued)
• Transition under Modified Prospective Approach
– ASU requirements applied on go-forward basis in year of
adoption. No restatement of prior amounts recognized
• Transition under Retrospective Application Approach
– ASU requirements fully applied to all agreements for all periods
presented
• Include note disclosure in year of adoption to describe ASU
implementation
53
Revenue from Contracts with Customers
• ASU 2015-14 – Extended Effective Date
– Extended effective date for all entities by one year
– Most NFP’s will apply new standards for annual reporting periods
beginning after December 15, 2018, and interim periods within
annual periods beginning after December 15, 2019
– NFP’s with conduit debt will apply new standards for annual
reporting periods beginning after December 15, 2017
54
Revenue from Contracts with
Customers (continued)
• New revenue recognition model replaces virtually
all existing revenue guidance
• Impacts public, private and NFP entities
– Contributions are excluded from standard
because donor not considered customer as
defined in the ASU
– Certain transactions will require bifurcation
between exchange transaction and contribution
(i.e. membership dues or special events)
– Accounting for private and government grants –
addressed in the ASU 2018-08
– Evaluation of student-institution agreements
• New qualitative and quantitative disclosure
requirements
55
Revenue from Contracts with
Customers - Disclosures
• Detailed qualitative and quantitative disclosures
are required about
– the entity’s contracts with its customers
– significant judgments made in applying the
revenue recognition guidance to those contracts,
and
– information about any assets recognized for
contract costs
56
Revenue from Contracts with Customers
• Comprehensive framework for determining how much revenue to
recognize and when it should be recognized.
• 5 step approach to revenue recognition:
57
Revenue from Contracts with
Customers – Effective Dates and
Transition
• First option allows retrospective application of new
revenue recognition guidance to each prior
reporting period presented
• Second option allows retrospective adoption with
the cumulative effect recognized in opening
balance of net assets at the date of initial
application.
− Comparative periods do not have to be restated
• Third option to present single-year financial
statements rather than comparative
58
Revenue from Contracts with Customers –
Developing an Implementation Plan
• Read the standard and all relevant commentary from audit firms,
attend related CPE, and read the TRG materials
• Assign individual staff to become subject matter experts; include
relevant staff outside of accounting: internal audit, legal
• Compile a list of all organizational revenue streams
• Develop and document a position paper on each revenue stream
• Consider discussing issues with similar organizations within your
industry
59
Revenue from Contracts with Customers –
Developing an Implementation Plan (continued)
• If a change is required, is it material?
• If a change in recognition is required, consider the impact on the
following:
– Any needed verbiage changes for new related contracts
– Recognition processes within the accounting system
– Technical changes within the accounting or supporting systems
– Monthly and annual financial close process
– Internal financial reporting
– Audited financial statements
– Forecast and budget processes
– Dashboard goals
60
Revenue from Contracts with
Customers – Developing an
Implementation Plan (continued)
• Communicate changes to CFO, board, audit and
finance committee, senior staff, key programmatic
stakeholders, auditors, internal auditors, contract
signers, banks, bondholders
• Determine requirements to retrospectively adopt
the new standard
• Develop a plan for staff training
61
ASU 2016-02 – Leases
• Key requirements
– Contract conveys right to control use of identified asset for period
of time in exchange for consideration
– Judgment to determine whether customer has right to direct the
use of identified asset
– Lessee may recognize (short-term) lease payments on straight
line basis
– Recognize right-of-use asset and related liability on the SFP
– Do NOT include market value of donated use of facilities as there
is no consideration exchanged
62
Leases
• Key requirements (continued)
– At commencement, the value of the right-of-use (ROU) asset
should consist of initial measurement, lease payments made less
lease incentives, and indirect costs incurred
– Initial direct costs has narrowed to include incremental costs
incurred due to execution of lease. Origination costs historically
capitalized under existing guidance, including costs to negotiate
and arrange a lease will now be expensed when incurred
– Lessee must amortize ROU asset over the life of the lease and
recognize interest expense
– Term of lease will continue to include noncancelable lease term
plus renewal periods
– No remaining ROU asset or liability upon termination. Remaining
amounts recognized as gain or loss on SOA
63
Leases (continued)
• Key requirements (continued)
– Lessor accounting under ASC 842 remains
mostly unchanged
– NFPs benefit from an enhanced level of
transparency under new guidance; no longer
need to analyze footnotes to understand cash
flow implications of operating leases
64
Leases (continued)
• Implementation considerations
– Summarized as moving operating lease
obligations from the footnotes to the SFP
– Bringing operating leases onto the entity’s
statement of financial position could make a
significant difference in the numbers an
organization is reporting
– Although initial implementation will require some
level of effort, the ongoing costs of providing the
information are expected to be consistent with
the costs of complying with existing GAAP,
according to FASB.
65
Restricted Cash
• ASU No. 2016-18 issued in response to discovery of diversity in
practice due to lack of guidance
• Statement of Cash Flows must explain change during period in
total cash, cash equivalents, and restricted cash and cash
equivalents
• No definition of term “restricted cash”
• Required disclosure on nature of restrictions on cash and cash
equivalents
• Effective for financial statements issued for fiscal years beginning
after December 15, 2018
66
Credit Losses
• ASU No. 2016-13 applies to entities holding financial assets and net
investments in leases not accounted for at fair value through net
income, affecting:
− Loans, including programmatic
− Debt securities
− Trade receivables, student loans receivable, leases receivable,
and other receivable from earned revenues
− Net investments in leases
− Off-balance-sheet credit exposures such as loan commitments
− Any other financial assets not excluded from the scope that have
the contractual right to receive cash
• ASU replaced incurred loss methodology with one that reflects
expected credit losses
67
Credit Losses (continued)
• FASB issues narrow-scope improvements to credit
losses in ASU No. 2018-19, Codification
Improvements to Topic 326, Financial Instruments
– Credit Losses
− Mitigates transition complexity by requiring
nonpublic business entities to implement for
fiscal years beginning after December 15, 2021
− Clarifies that receivables arising from operating
leases are NOT within scope of credit losses
68
FASB versus GASB for NFPs
• To determine whether an NFP qualifies as a nongovernmental entity
that should follow FASB, it is necessary to understand who is
required to follow GASB
• Any organization with one or more of the following characteristics is
subject to GASB accounting and reporting rules:
− Popular election of officers or appointment (or approval) of
controlling majority of the members of the governing body by
officials of one or more state or local governments
− The potential for unilateral dissolution by a government with the
net assets reverting to a government
− The power to enact or enforce a tax levy
• The health care industry has seen an increase in governmental
bodies transferring health care system operations to a newly
established NFP
69
Recent Pronouncements
• Recent Accounting Standards Updates:
– ASU No.2018-09 – Codification Improvements to Topic 326, Financial Instruments – Credit Losses
– ASU No.2018-15 – Intangibles – Goodwill and Other – Internal-Use Software: Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract
– ASU No.2018-14 – Compensation – Retirement Benefits – Defined Benefit Plans – General: Disclosure
Framework – Changes to the Disclosure Requirements for DBPs
– ASU No.2018-07 – Compensation – Stock Compensation: Improvements to Nonemployee Shared-Based
Payment Accounting
– ASU No.2019-01 – Leases (Topic 842): Codification Improvements
– ASU No.2018-20 – Leases (Topic 842): Narrow-Scope Improvements for Lessors
– ASU No.2018-18 – Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and
Topic 606
– ASU No. 2018-17 – Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable
Interest Entities
71
Recent Pronouncements (continued)
• Recent Accounting Standards Updates:
– ASU No.2018-16 – Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate
(SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes
– ASU No.2018-13 – Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement
– ASU No. 2018-11 – Leases (Topic 842): Targeted Improvements
– ASU No. 2018-10 – Codification Improvements to Topic 842, Leases
– ASU No. 2019-02 – Entertainment – Films – Other Assets – Film Costs and Entertainment – Broadcasters –
Intangibles – Goodwill and Other
– ASU No. 2018-08 – Not-for-Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for
Contributions Received and Contributions Made Plans
– ASU No. 2018-06 – Codification Improvements to Topic 942, Financial Services – Depository and Lending
72
Auditing Pipeline
• Proposed changes to the Auditor’s Report
– Clarification of documents within scope
– Requirement to determine through management
which documents make up the annual report
– Reading and reporting “other information”
– Consider material inconsistencies
– Respond appropriately
– Effective for periods ending on or after December
15, 2020. No early implementation
74
Auditing Pipeline (continued)
• Proposal to Revise SSAE No. 18
– No longer require practitioner to request written
assertion from responsible party when reporting
directly on subject matter or performing AUP
– Harmonize AT-C § 210 within limited assurance
provisions of ISAE 3000
– Engaging parties acknowledge appropriateness
of procedures of AUP
75
Auditing Pipeline (continued)
• Proposal to address Staff Augmentation under
“Independence Rule”
– Staff augmentation may create self-review or
management participation threats to
independence
– Suggested safeguards:
– Engagement lasts for short period of time
– Competent supervision of staff
– Staff do not perform management
responsibilities
– Appearance of firm’s independence is a primary
consideration
76
Auditing Pipeline (continued)
• Proposal to address Staff Augmentation under
“Independence Rule” (continued)
– Situations that impair independence
– Staff listed in employee directory or other client
publications
– Staff referred to by title, or otherwise, as being
“in charge”
– Staff identified as “employee” in email or other
internal communications
– Staff participates in client’s employee benefit
plans
77
Accounting Pipeline
• FASB proposes alternative to accounting for
Goodwill and Certain identifiable Intangible Assets
for NFPs
− Reduce cost and complexity of accounting
− Extend private company alternatives
78
About the AICPA’s NFP Section
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• Find us at: www.aicpa.org/nfp
• Questions? Email us at [email protected].
Not-for-Profit Section80
NFP Section Benefits
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Not-for-Profit Section81
AICPA Governmental Audit Quality Center (www.aicpa.org/GAQC)
• Firm-based membership center supporting the performance of quality “governmental
audits”
o Approximately 2,075 CPA firm members and 33 state audit organizations
• “Governmental audits” includes audits performed under Government Auditing
Standards such as single audits of NPOs
• Provide resources (e.g., alerts, web events, audit tools, etc.)
• Main areas of current emphasis/efforts
o OMB 2019 Compliance Supplement
o New Yellow Book, implementation
o New 2019 Data Collection Form83
AICPA Governmental Audit Quality
Center (www.aicpa.org/GAQC)
Access more information about
membership requirements or to join
Even if not a member, GAQC Web site
provides useful information for both
auditors and auditees
• For example, GAQC Auditee Resource
Center
84
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