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© Elliott Davis, LLC © Elliott Davis, PLLC

FASB/GASB Update

Russ Madray Scholar-in-Residence

October 26, 2018


This material was used by Elliott Davis during an oral presentation; it is not a complete record of

the discussion. This presentation is for informational purposes and does not contain or convey

specific advice. It should not be used or relied upon in regard to any particular situation or

circumstances without first consulting the appropriate advisor. No part of the presentation may be

circulated, quoted, or reproduced for distribution without prior written approval from Elliott Davis.

Disclaimer


FASB Update • NFP financial statements

• Revenue recognition

• Leases

GASB Update • Leases

• Majority equity interests

Agenda


FASB Update


NFP Financial Statements


ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities

First change in more than 20 years

Will affect all NFPs

Major changes:

The FASB’s New Standard on Not-for-Profit Financial Statements

Net asset classification

Info about liquidity

Expense presentation

Statement of cash flows


Net Asset Classification

Current requirement – 3 classes

• Unrestricted

• Temporarily restricted

• Permanently restricted

New requirement – 2 classes

• Without donor restrictions

• With donor restrictions

Retains current requirements for information about nature and amounts of different types of donor-imposed restrictions

Also requires similar information about governing board designations


Now classified in net assets with donor restrictions, instead of current classification in unrestricted net assets

Also requires disclosure of • Aggregate amount by which funds are underwater

• Original gift amount

• Any governing board policy or decisions to spend, or not spend, from such funds

Underwater Endowments

Underwater = current fair value less than original gift amount (or amount required to be retained by donor or by law)


Reporting expirations of restrictions on gifts of cash or other assets to be used to acquire or construct a long-lived asset • Now required to use the placed-in-service approach (without specific

donor restrictions stating otherwise)

• Option to imply a time restriction and release the restriction over an asset’s useful life (the “over-time” approach) will no longer be permitted

Expiration of Restrictions


Quantitative information either on the face of the statement of financial position or in the notes, and additional qualitative information in the notes as necessary, that communicates the availability of an NFP’s financial assets at the date of the statement of financial position to meet cash needs for general expenditures within one year of the date of the statement of financial position.

Information About Liquidity


Liquidity Disclosure Example

Financial assets available within one year of the balance sheet date for general expenditure are as follows.

Cash and cash equivalents $ 4,575,000

Accounts and interest receivable 2,130,000

Contributions receivable 1,825,000

Short-term investments 1,400,000

Other investments appropriated for current use 10,804,000

$ 20,734,000

The System has certain board-designated and donor-restricted assets limited to use which are available for general expenditure within one year in the normal course of operations. Accordingly, these assets have been included in the information above. The System has other assets limited to use for donor-restricted purposes, debt service and for the professional and general liability captive insurance program. Additionally, certain other board-designated assets are designated for future capital expenditures and an operating reserve. These assets limited to use, which are more fully described in Notes ___ and ___ are not available for general expenditure within the next year and are not reflected in the amounts above. However, the board-designated amounts could be made available, if necessary.

As part of the System’s liquidity management plan, cash in excess of daily requirements is invested in short-term investments and money market funds. Occasionally, the board designates a portion of any operating surplus to an operating reserve, which was $1,200,000 as of December 31, 2018. This fund established by the board of directors may be drawn upon, if necessary, to meet unexpected liquidity needs.

Additionally, the System maintains a $5 million line of credit, as discussed in more detail in Note ___. As of December 31, 2018, $5 million remained available on the System’s line of credit.


Expense Presentation

All NFPs (not just voluntary health and welfare organizations) will provide information about their operating expenses by both nature and function

Enhanced disclosures about the methods used to allocate costs among functions

On face of the statement of activities

As a separate statement

In the notes to the financial statements


Statement of Cash Flows

FASB’s original exposure draft would have required the direct method

New guidance allows NFPs to present either the direct or indirect method

Presentation or disclosure of the indirect method reconciliation is no longer required if the NFP uses the direct method


Effective Date

Annual financial statements issued for fiscal years beginning after December 15, 2017

Interim periods within fiscal years beginning after December 15, 2018

Early application is permitted

Transition • For comparative years presented, apply all provisions, but can choose

to not present

• Analysis of expenses by nature and function

• Disclosures about liquidity and availability of resources


Steps to Take Now

Familiarize yourself with all requirements in ASU 2016-14

Communicate with board about required changes

Revisit policies, procedures, and controls that may need to change to comply with ASU

Communicate with other stakeholders

Review disclosure requirements

Evaluate transition methods and options


Revenue Recognition


Background

ASU 2014-09, Revenue from Contracts with Customers

Issued in 2014

Replaces virtually all existing US GAAP guidance on revenue recognition

Virtually every industry is affected

Requires companies to make more estimates and use more judgment than under current guidance


In scope • Contracts with customers

• Sale of some nonfinancial assets that are not an output of the company’s ordinary activities (e.g., property, plant and equipment, intangibles)

Not in scope • Leasing contracts

• Insurance contracts

• Financial instruments contracts

• Certain nonmonetary exchanges

• Certain put options on sale and repurchase agreements

• Guarantees within the scope of ASC 460

Note—contributions are not considered to be “contracts with custmers”

Scope


Overview

Core principle • Recognize revenue to depict the transfer of promised goods or

services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services

Identify the contract with a customer

Identify the performance obligations

in the contract

Determine the

transaction price

Allocate the transaction price to the

performance obligations

in the contract

Recognize revenue

when (or as) a

performance obligation is

satisfied


Disclosure Requirements

Many of these requirements are optional for non-public companies.


Final (included in Revenue Recognition Guide): • Self-pay patient balances

• Applying a portfolio approach

• Presentation and disclosure

• Third-party settlements

• Risk-sharing arrangements

• Performance obligations

Being finalized: • Various issues related to CCRCs

• Accounting for contract costs

AICPA Healthcare Revenue Recognition Task Force


Effective Date

Public entities • Annual reporting periods beginning after December 15, 2017,

including interim periods within that reporting period

Nonpublic entities • Annual reporting periods beginning after December 15, 2018, and

interim periods within annual periods beginning after December 15, 2019

Transition • Full retrospective

• Modified retrospective


Steps to Take Now

Identify areas requiring estimates and judgments

Assess information systems

Evaluate contracts

Consider the impact on other areas

Communicate with stakeholders


Evaluate transition methods


Leases


As of the lease commencement date, lessee recognizes: • Liability for its lease obligation (initially measured at present value of

future lease payments)

• Asset for its right to use the underlying asset (ROU asset)

• Equal to the lease liability

• Adjusted for lease payments made at or before lease commencement, lease incentives, and any initial direct costs

Lessee Accounting

Lease Liability

Initial Direct Costs

Prepaid Lease

Payments

Lease Incentives

ROU Asset


Lease would be classified as a finance lease if any of the following criteria are met: • Lease transfers ownership to lessee by end of lease term

• Bargain purchase option (lessee reasonably certain to exercise)

• Lease term is for major part of remaining economic life of underlying asset

• Present value of sum of lease payments and any guaranteed residual value equals or exceeds substantially all of fair value of underlying asset

• Underlying asset is of such a specialized nature it is expected to have no alternative use to the lessor at the end of the lease term

Classification – Lessee


Interest expense calculated on lease liability

Amortization expense related to ROU asset

Reported as separate items on the income statement

Results in front-loading the expenses

Finance lease


Allocate total lease payments, including initial direct costs, evenly over the lease term to calculate periodic straight-line expense

Interest expense calculated same as finance lease

Amortization expense is plug figure (difference between straight-line and interest)

Reported as a single item on the income statement—lease expense

Operating lease


Lessee would recognize lease payments as expense over the lease term on a straight-line basis

Lessee would also be required to disclose certain information about the short-term lease

If lease term increases to more than 12 months, or if it is reasonably certain that the lessee will exercise an option to purchase the underlying asset, lessee would no longer apply the short-term lease exception

Short-Term Leases


Effective Date

• Public business entities

• Effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years

• All other entities

• Effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020

• Transition • Apply ASU as of beginning of earliest period presented

• Optional—apply ASU at date of adoption


Steps to Take Now

Inventory all existing lease contracts

Evaluate other contracts that be or may contain a lease

Assess information systems

Consider the impact on other areas

Communicate with stakeholders


Evaluate policy and transition alternatives

Consider alternatives for future lease negotiations


GASB Update


Leases


Provides guidance for lease contracts for nonfinancial assets • Vehicles

• Heavy equipment

• Buildings

Excludes nonexchange transactions, including donated assets, and leases of intangible assets

Also addresses accounting for • Lease terminations and modifications

• Sale-leaseback transactions

• Nonlease components embedded in lease contracts

• Leases with related parties

GASB 87, Leases


Major changes: • Leases will be classified as “short-term,” “contracts that transfer

ownership,” and “all other”

• Leases greater than 12 months will have balance sheet impact on both lessee and lessor

• For all leases other than short-term, the lessee will recognize the intangible use asset, and the lessor will continue to depreciate and account for the lease asset

• Financial statement disclosures and schedules required for contracts that transfer ownership and non-short-term leases

• No disclosure requirement for short-term lease outflows

GASB 87, Leases


A contract that conveys control of the right to use another entity’s nonfinancial asset (the underlying asset) as specified in the contract for a period of time in an exchange or exchange-like transaction.

Definition of a “Lease”

Need to assess whether entity has both the ability and rights to use the asset


Leases are currently classified as either “operating” or “capital,” based on a four-factor test

GASB 87 will sort lease agreements into three categories:

The four-factor test will be eliminated, as will the terminology of operating and capital leases

3 Categories of Leases

Short-term leases

Contracts that transfer ownership

All other leases


A lease that has a maximum possible term of 12 months or less, including any options to extend, regardless of its probability of being exercised

Lessee should recognize short-term lease payments as outflows of resources (expenses) based on the payment provisions of the contract

For a lease that is cancelable by either the lessee or the lessor, maximum possible term is the noncancelable period, including any notice periods

Short-term Lease


Ownership of the underlying asset transfers to the lessee by the end of the contract

Transaction should be reported as a financed purchase of the underlying asset by the lessee, or sale of the asset by the lessor

Contracts that Transfer Ownership


Lessee government required to recognize lease liability and intangible asset representing lessee’s right to use leased asset

Lability is present value of payments covered by contract

Value reduced as payments are made over lease’s term

Asset equals initial measurement of liability

Lessee Accounting


Lease liabilities considered long-term debt

Lease payments are capital financing outflows in the cash flow statement

Lessees will no longer report rent expense for today’s operating-type leases

Instead report interest expense on liability and amortization expense related to asset

Lessee Accounting


Lessee also will report the following: • Amortization expense over shorter of term of lease or useful life of

underlying asset

• Interest expense on lease liability

• Note disclosures about lease

• General description of leasing arrangement

• Amount of lease assets recognized

• Schedule of future lease payments to be made

Lessee Accounting


Lessor government required to recognize lease receivable and a deferred inflow of resources

Lessor will continue to report leased asset in its financial statements

Lease revenue will arise from amortizing deferred inflow of resources in a systematic and rational manner over lease term

Lessor also will report the following in its financial statements: • Interest revenue on receivable

• Note disclosures about the lease • General description of leasing arrangement

• Total amount of inflows of resources recognized from leases

Lessor Accounting


New rules exclude leases associated with investment assets carried at fair value (e.g., investment rental property)

Will continue to be accounted for as they are today

Lessor Accounting


Noncancelable portion of lease plus those periods lessee and lessor are reasonably certain will remain in lease, which includes: • Periods lessee or lessor is able to extend to lease and is reasonably

certain to do

• Periods when lessee or lessor is able to but is reasonably certain not to terminate lease

Fiscal funding/cancellation clauses should not be taken into consideration unless clause is reasonably certain of being exercised

Lease Term


Right-of-use assets may amortize more quickly than the liabilities, negatively impacting net position

Lessees will report lease liabilities as long-term debt, heightening concerns about compliance with restrictive debt covenants

Lessees will report interest expense on the liability and amortization expense related to the asset, thus front-loading the expense recognition

In cash flow statements, lease payments will be classified as capital financing outflows by lessees

Key Impacts of the New Lease Model


Effective for reporting periods beginning after December 15, 2019

Earlier application is encouraged

Transition • Leases should be recognized and measured using facts and

circumstances that exist at beginning of period of implementation

• Lessors should not restate assets underlying their existing sales-type or direct financing leases

• Any residual assets for those leases become carrying values of underlying assets

Effective Date


Asset Retirement Obligations


GASB defines an ARO as “a legally enforceable liability associated with the retirement of a tangible capital asset”

The capital asset must be permanently removed from service through its sale, abandonment, recycling or disposal and not just idled temporarily

GASB 83, Certain Asset Retirement Obligations


AROs result from normal operations of a tangible capital asset, and include legally enforceable liabilities associated with the following: • Retirement of tangible capital assets

• Disposal of a replaced part that is a component of a tangible capital asset

• Environmental remediation associated with retirement of tangible capital assets that results from normal operations of those capital assets

• Obligations of a lessor in connection with a leased property that meets the criteria of an ARO



Scope Exclusions: • Obligations arising solely from a plan to sell or otherwise dispose of a

tangible capital asset

• Activities necessary to prepare a tangible capital asset for an alternative use

• Obligations for asbestos removal that result from the other-than-normal operation of a tangible capital asset (i.e., contamination obligations covered under GASB 49)

• Obligations associated with maintenance, rather than retirement, of a tangible capital asset

• Cost of a replacement part that is a component of a tangible capital asset



A government should recognize a liability for an ARO when the liability is incurred and reasonably estimable

Incurrence of a liability is manifested by the occurrence of both an external obligating event and an internal obligating event resulting from normal operations

Obligating event—its occurrence determines the timing for recognition of an ARO

Recognition of a Liability


Approval of federal, state, or local laws or regulations

Creation of a legally binding contract

Issuance of a court judgment that imposes a legally enforceable liability on a government to retire a tangible capital asset

External Obligating Events


For contamination-related AROs—the occurrence of contamination

For AROs not related to contamination: • Operation of the capital asset, if the liability is determined on asset

usage

• Putting the asset into operation, if the liability isn’t determined on asset usage

• Permanent abandonment (before operations commence)

• For acquired AROs, the acquisition itself

Internal Obligating Events


Reporting periods beginning after June 15, 2018

Earlier application is encouraged

Effective Date


Majority Equity Interests


Old guidance based on whether intent of ownership was an investment or to provide service

New guidance states that a majority equity interest in a legally separate organization should be reported as an investment if the equity interest meets the definition of an investment

Defines a majority equity interest • A financial interest in a legally separate organization evidenced by the

ownership of shares of the organization’s stock or by otherwise having and explicit, measureable right to the net resources of the organization that is usually based on an investment of financial or capital resources by a government

GASB Statement 90, Majority Equity Interests


Majority equity interest that meets definition of an investment should be measured using the equity method, unless it is held by • Special-purpose government engaged only in fiduciary activities

• Fiduciary funds

• Endowment or permanent fund

Those governments and funds should measure the majority equity interest at fair value

Majority Equity Interest


Also requires that a component unit in which a government has a 100% equity interest account for its assets, deferred outflows of resources, liabilities, and deferred inflows of resources at acquisition value at the date the government acquired a 100% equity interest in the component unit

Transactions presented in flows statements of the component unit in that circumstance should include only transactions that occurred subsequent to the acquisition

Effective for reporting periods beginning after December 15, 2018

Earlier application encouraged

GASB Statement 90, Majority Equity Interests


Russ Madray

Scholar-in-Residence

Email: [email protected]

Phone: 864.370.5640

Elliott Davis provides comprehensive assurance, tax and consulting solutions to diverse businesses, organizations and individuals. With a network of forward-thinking professionals in major U.S. markets and alliance resources across the globe, the firm ranks among the top 40 and fastest-growing accounting firms in the U.S. Visit elliottdavis.com for more information.


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