overhaul of the aicpa audit and accounting guide not-for...

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S U S A N C . S T E W A R T , C P A , C I A

DIRECTOR, NATIONAL PROFESSIONAL STANDARDS GROUP

MCGLA DREY LLP

Overhaul of the AICPA Audit and Accounting Guide Not-for-Profit

Entities

Expected Issuance of Guide

The AICPA is expected to issue a comprehensive revision of the Audit and Accounting Guide Not-for-Profit Entities in the spring of 2013 Financial Reporting Executive Committee (FinREC)

Not-for-Profit Entities Expert Panel

Not-for-Profit Guide Task Force

Final approval for issuance was given 11/26/12

First revision, other than annual conforming changes, since the Guide was released in 1996

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Presenter:

Susan C. Stewart, CPA, CIA

• Director, National Professional Standards Group

• Member of AICPA NFP Expert Panel and Audit Guide Task Force

• University of Michigan graduate

• University of Minnesota CFO program

• College Football Fan!!!

Source of New Guide Content

Considered over 100 questions that had been asked by members who called the AICPA Help Line

Authoritative guidance from FASB Codification Non-authoritative guidance from FinREC

conclusions Incorporated relevant nonauthoritative AICPA

literature NFP-related Technical Questions and Answers (TIS) section

6140 AICPA White Paper on Fair Value Measurement Alternative investments TIS section 2220.18–.27

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Chapter 1, Introduction

Health care entity definition conformed with AICPA Audit and Accounting Guide Health Care Entities

Scope issues Does not include health care entities

GAAP financial statements Accrual basis, not special-purpose frameworks

Audits, not reviews or compilations

Chapter 2, General Auditing Guidance

Conformed to the Clarity project Similar content to prior Guide

Audit planning

Risk assessment and design of testing

Evaluation of misstatements

Audit communications

Going concern

Group audits

Other guide chapters have NFP-specific suggested audit procedures relating to the chapter’s topic

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Chapter 3, Financial Statements and General Financial Reporting Matters

Statement of financial position Liquidity and the effect of restrictions on liquidity

Statement of activities Prior-period errors

Changes in accounting principles

Reporting items that would be included in other comprehensive income of a business entity


Statement of cash flows Chart of common cash flows and their classification

ASU 2012-05 for financial assets sold immediately

Statement of functional expenses FinREC encouraging presentation by all NFPs that are

supported by the general public

Expanded identification of related parties and transactions with related parties

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Expanded coverage of interests in related entities If the objective of the relationship is to accomplish the

purpose or mission for which the NFP exists or to serve the NFP’s administrative purposes

LLPs, LLCs, partnerships, equity-method investees

Consolidations Classification of net assets

Subsidiaries that use industry-specific guidance

Chapter 4, Cash, Cash Equivalents, and Investments

Combination of chapters 4 and 8 of former Guide

Restrictions, designations, and similar limitations may prevent items from being cash equivalents

Classification in statement of financial position Centralized cash management arrangements

Certificates of deposit

Investment expenses

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Expanded coverage--Interests in related entities (aka alternative investments) if the objective is to invest in the entity for investment return

Disclose declines in fair value after fiscal year-end

Investment pools, including those managed by others Disclosures

Suggested audit procedures


Endowments Classification of net assets under UPMIFA

Effect of governing body appropriations on release of restrictions

Calculation and classifications should be done on a fund-by-fund basis, not on a portfolio basis

Suggested audit procedures for endowments

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Chapter 5, Contributions Received and Agency Transactions

Increased focus on core recognition principles Difficulty in measuring contribution is not justification for

not recognizing the gift

Clarification of explicit and implicit restrictions

Resources must be capable of providing economic benefit permanently for there to be a permanent restriction

FinREC guidance for meaning of remote condition

Additional guidance on fair value measurement


Is the transfer a contribution or an exchange? Flowchart

When elements of both are present, divide the transaction in two, measuring exchange first

Examples Bargain purchase

Membership dues

Naming opportunities

Donor status

Special events

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New sections on reporting and valuing noncash gifts Gifts in kind

FinREC guidance for determining whether the NFP is acting as an agent or is the recipient of a gift

Fundraising and informational materials, advertising, media time or media space

Use of property and equipment Guarantees of indebtedness Loans with below- market interest rates Contributed services


Promises to give FinREC conclusion on when to imply time restrictions that

expire when payments are due

Recognition of conditional promises to give when information about conditions being met comes to light after the fiscal year’s end

Measurement Net realizable value for promises due in less than one year

AICPA White Paper for promises dues in one year or more

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Bequests Classification of contribution revenue

Promises to give payable upon the donor’s death

Fundraising activities Internal fee charged against restricted gifts

Fees netted by fundraiser before remitting gifts

Agency Nondiscretionary assistance programs

Clarification about financially interrelated entity

Chapter 6, Split Interest Agreements and Beneficial Interests in Trust

New coverage of life interests in real estate

Implementation guidance Distinguishing revocable rights from irrevocable rights

Determining whether NFP is the trustee

Purchase of annuity contract to make payments to the beneficiary

FinREC recommendation to use fair value for assets and liabilities if NFP is trustee of a split-interest agreement

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Chapter 6, Split Interest Agreements and Beneficial Interests in Trust

Beneficial interest in a trust held by another entity What if NFP is unable to obtain information to measure the

beneficial interest FinREC recommendation for disclosures

Measurement of split-interest liabilities Software that determines tax deductibility may not be

appropriate for determining fair value AICPA White Paper conclusions

Insurance annuity contracts for certain gift annuities Present value techniques for all other agreements

Chapter 7, Other Assets

Expanded discussion of prepaid and deferred costs

Inventory Inventory valuation

Gross or net presentation of sales of inventory

Acting as an agent in sales of commodities for monetization

Goodwill and intangible assets Impairment ASU 2012-02 and ASU 2011-08

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Chapter 7, Other Assets

Collections Accounting for items not added to a collection

Effect of restrictions on valuation of collection items

Depreciation and impairment of capitalized collections

Separate reporting in statement of activities for transactions involving collection items that were not capitalized

Chapter 8, Programmatic Investments NEW

Programmatic investments are any investment by an NFP that meets the following two criteria: Its primary purpose is to further the tax exempt objectives of

the NFP.

The production of income or the appreciation of the asset is not a significant purpose (that is, an investor seeking a market return would not enter into the investment).

Similar to program-related investment, IRS Sec. 4944(c).

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Core Considerations Determine when the initial transaction occurs whether the

investment is programmatic

If there is a contribution element, report it as contribution expense

Use GAAP for similar financial instruments, except for the contribution element, if any

Significance of the investments and the quantitative and qualitative risks determine the type of financial statement presentation and the extent of disclosures


For programmatic loans, look to one of two areas of GAAP FASB ASC 310 and 835-30

Interest rate incorporates risk that some payments may not be collected

Impute interest income, then recognize impairment expense for uncollectible portion

Inherent contribution Entirely a loan, entirely a contribution, or part loan and part

contribution Determine if contribution portion is conditional or unconditional Measure loan at present value of most likely cash flows

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Programmatic equity interests By definition, they are interests in entities that provide goods

or services that accomplish the purpose or mission for which the NFP exists or that serve the NFP’s administrative purposes.

Follow the guidance in chapter 3, using Exhibit 3-2

Test to identify impairment

Chapter 8, Programmatic Investments NEW Programmatic guarantees of other’s indebtedness Initially recognize liability at fair value unless contingent

liability is greater

Reduce liability as risk is reduced

Disclosures Loans—See FASB ASC 310-10-50

Equity—See FASB 323-10-50 or 958-325-50

Guarantees—See FASB ASC 460-10-50

FinREC recommends additional disclosures

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Chapter 9, Property and Equipment

Use of PP&E owned by others Right to use property without making lease payments or

making payments that are significantly below market rates Inherent contribution unless the agreement includes other rights

or privileges of a commensurate value

If used in exchange transaction in which the resource provider retains legal title during the term of the arrangement, report a contribution if it is probable that the NFP will be permitted to keep the assets when the arrangement terminates

Capitalized interest of tax-exempt debt

Chapter 10, Debt and Other Liabilities

New section on tax-exempt (municipal bond) debt based on the AICPA Audit and Accounting Guide Health Care Entities

Expanded discussion of credit enhancements, debt extinguishments, debt modifications, and classification

Fair value measurement of liabilities

Multiemployer pension or postretirement benefits plans

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Chapter 11, Net Assets and Reclassifications of Net Assets

NFP’s fiduciary responsibility to meet donor restrictions

Expiration of restrictions Using restricted contributions first Restrictions on long-lived assets

If NFP has policy of implying time restrictions on gifts of long-lived assets, those implied time restrictions expire over the useful lives of the acquired assets

In the absence of donor stipulations specifying how long donated assets must be used or an NFP's policy of implying time restrictions, restrictions expire when the assets are placed in service


Expiration of restrictions on promises to give

By specifying future payment dates donors indicate that their gift is to support activities in each period in which a payment is scheduled

Time restrictions lapse when the receivable is due; gift becomes available for the donor-specified purpose

If gift is for the construction or purchase of a specific long-lived asset, the donor supports activities of the period in which that asset is constructed or placed in service, even though the payment dates extend beyond that period

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NFPs are encouraged to disclose detailed information about the restrictions that have been met

Failure to meet a donor’s restriction may require accrual of a liability or a contingency disclosure

Changing classification of net assets reported in a prior year is a correction of an error

Example net asset classification for reporting the noncontrolling interest in a for-profit subsidiary

Chapter 12, Revenues and Receivables from Exchange Transactions

Broad guidance on concepts of revenue recognition Revenues from exchange transactions are reported

as increases in unrestricted net assets even if there are legal limitations on the uses of the revenue arising from contracts or other agreements

Membership dues recognized over the period of membership Special rules for nonrefundable initiation and life

membership fees

Disclosures about financing transactions such as loans receivable and employee receivables

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Chapter 13, Expenses, Gains and Losses

Functional classification of expenses Determining major programs

Most meaningful when major programs correlate with descriptions of the mission and programs used in the NFP’s fund-raising materials, programmatic promotional materials, and other public information

Classification of costs of sales

Classification of costs of special events

Allocation of overhead is an interprogram transaction that should be reported as a reduction of expense of the program providing the services


Fundraising costs Unusual for an NFP to have contributions but have minimal or

no fundraising expense Examples provided

Fundraising brochures and promotional items are expensed when used, not when purchased

Fees charged by professional fundraisers, federated fundraisers and similar are reported as expenses even if netted by fundraiser before remitting gifts

Costs of soliciting contributed services

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Contributions made FinREC recommends that contributions to other NFPs be

separately reported

Distributions to financially interrelated NFPs are functionally classified to the extent possible. The portion that cannot be allocated to functions is treated as a separate supporting service.

An NFP that contributes use of facilities to another recognizes a payable and an expense

Chapter 14, Reports of Independent Auditors

Updated for the Clarity Project

Example Auditors’ Reports Comparative statements or Comparative information

Unqualified opinion

Supplementary information

Special-purpose frameworks

Compliance audits

Prescribed forms

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Chapter 15, Tax and Regulatory Considerations

Greatly expanded discussion about legal and regulatory environment

Maintaining the NFP’s tax-exempt status

Intermediate sanctions

Automatic excess benefit transactions

Lobbying

Political campaign activities

Prohibited tax shelter transactions


Internal Revenue Service Filing requirements

Unrelated business income

Alternative investments

Employment taxes

Private foundation excise tax

FASB ASC 740 Income tax positions

Deferred tax assets and liabilities

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State laws and regulations Charitable solicitation laws

State gaming regulations

UPMIFA

Securities regulation, including annuity contracts

Sarbanes-Oxley and governance

Anti-Terrorist financing guidelines

Chapter 16, Fund Accounting

Few changes

Clarification for converting fund balances to net asset classes Current funds

Plant funds

Loan funds

Endowment funds

Annuity funds

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Questions?

Now is the time!

[email protected]

Thank you!

overhaul of the aicpa audit and accounting guide not-for...

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