welcome 2016 year-end not-for-profit accounting and tax update · 2016 year-end not-for-profit...
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© 2016 KSM Business Services, Inc.
Welcome
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2016 Year-End Not-for-Profit Accounting and Tax Update
© 2016 KSM Business Services, Inc.
The information presented herein is general in nature and should not be
acted upon without the advice of a professional.
2016 Year-End Not-for-Profit Accounting and Tax Update
November 18, 2016
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▪ Welcome ▪ Changing the Face of Not-for-Profit Financial Reporting ▪ Revenue Recognition: New Standard and Not-for-Profit
Implementation Issues ▪ Leases – ASU 2016-02; Topic 842
Today’s Agenda
© 2016 KSM Business Services, Inc.
Changing the Face of Not-for-Profit Financial Reporting
November 18, 2016
Amanda Horvath, CPA, CGMA
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▪ Project Overview
▪ Key Provisions of ASU 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities - Net asset classes - Underwater endowments - Expiration of resources - Statement of cash flows - Liquidity and availability - Investment return of resources - Reporting of expenses
▪ Phase II
Agenda
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▪ November 2011: Two projects added to the FASB agenda ▫ Standards-setting project – NFP Financial Reporting ▫ Research project – Other Financial Communications
▪ Recommendations made by the FASB’s Not-for-Profit Advisory Committee: ▫ Revisit net asset classifications ▫ Improve statements of activities and cash flows ▫ Create framework to provide commentary and analysis ▫ Streamline disclosure requirements
Project Overview
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Project Overview
Nov. 2011: Projects Added
Jan. 2014: Removal of
Other Financial Communications
Project
April 2015: Exposure
Draft Issued
Aug. 2015: End of Public
Comment Period
Oct. 2015: Division of
Redeliberations
Aug. 2016: Phase 1
Completed
2012-Early 2015: The FASB Meetings
Phase 1 Effective Date: Fiscal years beginning after 12/15/2017
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▪ Net asset classes ▪ Underwater endowments ▪ Expiration of resources ▪ Statement of cash flows ▪ Liquidity and availability of resources ▪ Investment return ▪ Reporting of expenses
Key Provisions
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Net Asset Classes
Unrestricted Temporarily Restricted
Permanently Restricted
Without Donor Restrictions With Donor Restrictions
NEW! Amount, Purpose, and Type of Board Designations
Nature and Amount of Donor Restrictions
Current GAAP
New GAAP
Disclosures
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Net Asset Classes
This level of detail is not required on face of statement.
Must present on statement: • Total net assets without
donor restrictions • Total net assets with donor
restrictions
Detail may instead be included in the footnotes.
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Net Asset Classes Example Footnote Details – Net Assets with Donor Restrictions
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Net Asset Classes Example Footnote Details – Net Assets with Donor Restrictions
(Continued)
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Net Asset Classes
Implementation Considerations
Would disaggregation of net asset balances on the statement of financial
position be meaningful to users?
Is the right level of detail provided in the footnotes for
users?
Are policies and procedures related to board-designated
net assets adequate?
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Underwater Endowments
Current GAAP New GAAP
Offset Against Unrestricted Net Assets
Offset Against Net Assets with Donor Restrictions
Enhanced Disclosures
Policy and any actions taken on whether to reduce or not spend from such funds
Original gift or level otherwise required to be maintained Amount of underwater endowments in aggregate
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Implementation Consideration
Underwater Endowments
Does your spending policy adequately address underwater
endowment funds?
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Expiration of Resources
Placed-in-Service Approach
Current GAAP – Two Options
Approach Releasing Restriction over Asset’s Useful Life
Gifts of Cash Restricted for Acquisition or Construction of Property & Equipment
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Approach Releasing Restriction over Asset’s Useful Life
Expiration of Resources
Placed-in-Service Approach
Current GAAP – Two Options
Gifts of Cash Restricted for Acquisition or Construction of Property & Equipment
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▪ May continue to utilize either the direct or indirect method
▪ When using direct method: ▫ Removed requirement to
reconcile change in net assets to net cash flows from operating activities
Statement of Cash Flows
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Implementation Consideration
Statement of Cash Flows
Which would be more meaningful to users – direct or indirect
method?
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▪ New Disclosure Requirements:
▫ Qualitative info on how liquid resources are managed
▫ Quantitative info on availability of financial assets to meet cash needs within one year
Liquidity and Availability of Resources
In Footnotes
On the Face and/or in Footnotes
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Liquidity and Availability of Resources Example Footnote – Liquidity and Availability
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Liquidity and Availability of Resources Example Footnote – Liquidity and Availability
(Continued)
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Implementation Considerations
Liquidity and Availability of Resources
Would a classified statement of financial position be useful?
Do you have adequate policies that address liquidity?
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Investment Return
Net Against Returns Disclose Amount of Expenses
OR
Report Within Expenses
Current GAAP
New GAAP Net Against Returns
(External and Direct Internal) No Requirement to Disclose Amount
Investment Expenses
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▪ ASU defines direct internal investing activities ▪ Permits presentation of investment return on multiple lines ▪ Eliminates requirement to show investment return
components in endowment rollforward
Investment Return
Salaries and related expenses of staff developing and
executing investment strategy
Costs related to: • Investment management • Supervising, selecting and
monitoring of investment firms
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Investment Return
Would a disaggregated investment return be informative to users?
Are there direct internal investment expenses that
should be included in investment return?
Is staff time qualifying as direct internal investment
expense tracked appropriately?
Implementation Considerations
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▪ ASU requires presentation in one location with three options: ▫ Statement of activities ▫ Separate statement of expenses ▫ Footnotes
▪ Requires disaggregation of major program services and supporting activities
▪ Requires description of methods used to allocate costs
Reporting of Expenses
ALL NFPs will be required to present expenses by nature and function
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Reporting of Expenses
The financial statements report certain categories of expenses that are attributable to one or more program or supporting functions of the Organization. Those expenses include depreciation and amortization, the president’s office, communications department, and information technology department. Depreciation is allocated based on square footage, the president’s office is allocated based on estimates of time and effort, certain costs of the communications department are allocated based on estimates of time and effort, and the information technology department is allocated based on estimates of time and costs of specific technology utilized.
The financial statements report certain categories of expenses that are attributable to more than one program or supporting function. Therefore, these expenses require allocation on a reasonable basis that is consistently applied. The expenses that are allocated include depreciation, interest, and office and occupancy, which are allocated on a square-footage basis, as well as salaries and benefits, which are allocated on the basis of estimates of time and effort.
Example Footnotes – Functional Expense Allocation
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▪ ASU updates descriptions of M&G activities: ▫ Payroll, in addition to general recordkeeping
▫ Specifies M&G includes billing and collecting fees and reporting under contracts
▫ Adds human resources
▪ Examples of items that should and should not be allocated added to implementation guidance
Reporting of Expenses
▫ CEO
▫ CFO
▫ Human Resources
▫ Grant Accounting and Reporting
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Implementation Considerations
Reporting of Expenses
Should functional or natural classification of expenses
be presented on statement of activities?
Where should you present expense analysis by function
and nature?
Should any changes be made to expense allocation
approach?
What major functions need
presented?
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▪ Effective for annual F/S issued for fiscal years beginning after Dec. 15, 2017
▪ Early adoption is permitted ▪ Retrospective basis for all years presented ▫ Except the following:
- Analysis of expenses by function and natural classification
- Liquidity and availability of resources disclosure
Effective Date and Transition
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▪ The FASB Website: fasb.org ▫ PDF of ASU ▫ FASB In Focus – executive summary ▫ FASB In Focus – 75-minute archived webcast from
Sept. 13, 2016
▪ AICPA NFP Section webpages
Available Resources
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▪ Focusing On: ▫ Require a measure of operations? ▫ How to define a measure of operations? ▫ Realignment of cash flow items to align with operation
measure? ▫ Segment reporting for NFP health care entities (instead of
analysis of expenses by natural and functional classification)?
▪ Redeliberations have not started
Phase II
© 2016 KSM Business Services, Inc.
Revenue Recognition: New Standard and Not-for-Profit
Implementation Issues November 18, 2016
Andrew Ault, CPA, CFE
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▪ Overview of Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606)
▪ Application considerations related to not-for-profit revenue sources
▪ Examples ▪ Steps for implementation
Agenda
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▪ How did we get here? ▫ Nature of current guidance ▫ Needs of users ▫ Timeline
▪ Objective ▫ Single, principles-based approach
▪ Scope ▫ All entities with contracts with customers ▫ Certain exceptions
Overview of New Standard
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Overview of New Standard
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▪ Identify the contracts with customers ▫ Contract definition and criteria ▫ Generally, apply on a contract-by-contract basis
- Portfolio approach – if no major changes expected - Combination – if negotiated with single objective / obligation
▫ Modifications - Approved by both parties - Separate contract if new goods or services are distinct and
prices reflect standalone price - Otherwise, combine with remaining original performance
obligations
Overview of New Standard – Step 1
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▪ Identify the separate performance obligations ▫ Promise with a customer to transfer a good or service ▫ Good or service must be distinct
- Capable of being distinct - Distinct within the context of the contract
▫ Combine with other goods or services until distinct ▫ Can include unstated, or “implicit” promises
Overview of New Standard – Step 2
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▪ Determine the transaction price ▫ Amount of consideration expected in exchange for goods or
services ▫ Special considerations:
- Variable consideration (discounts, refunds, credits, incentives, penalties, etc.) - Implicit or customary - Estimation methods
» Expected value – weighted average, if many outcomes » Most likely amount – appropriate when only two outcomes
Overview of New Standard – Step 3
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▫ Special considerations, continued: - Constraining estimates of variable consideration
- Include only to extent that it is probably that a significant reversal in the amount of cumulative revenue recognized will not occur when the revenue becomes resolved
- Refund liability should be recorded for monies received (or receivable) for which the entity does not expect to be entitled
Overview of New Standard – Step 3
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▫ Special considerations, continued: - Existence of significant financing component
- Expressed or implied - Revenue would be cash selling price - Practical expedient – one year or less
- Noncash consideration at fair value - Consideration payable to the customer
- Reduction of transaction price, unless for good or service
Overview of New Standard – Step 3
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▪ Allocate the transaction price to the separate performance obligations ▫ Allocate in an amount that depicts the consideration the
entity expects to be entitled for each performance obligation - Determine the stand-alone selling price of the goods or services
underlying each performance obligation - Observable price in similar situation - Contractually stated, or list price - Estimated price
Overview of New Standard – Step 4
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▫ Allocate proportionately with stand-alone selling price - Determine if discounts or variable consideration relate only to
certain performance obligations ▫ Resolution of uncertainty (no the same as a contract
modification) that changes the transaction price get allocated on same basis as at contract inception
Overview of New Standard – Step 4
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▪ Recognize revenue when (or as) the entity satisfies a performance obligation ▫ Satisfied upon transfer of good or service
- Transferred when customer obtains control - Control is the ability to direct the use and obtain the remaining
benefits of the asset (or prevent others from doing so) ▫ Determine if control of good or service is transferred
- Over time - At a point in time
Overview of New Standard – Step 5
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▪ Performance obligation is satisfied over time, if (any): ▫ Customer receives and consumes the benefits as the entity
performs - Routine / recurring service, such as cleaning
▫ Entity’s performance creates or enhances an asset that the customer controls - Tangible or intangible
▫ Entity’s performance creates asset with no alternative use to the entity and entity has enforceable right to payment for services to date
Overview of New Standard – Step 5
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▪ Performance obligation satisfied over time should be measured with a reasonable measure of progress ▫ Output methods ▫ Input methods
▪ Remeasure at the end of each reporting period ▪ Be consistent in methods used under similar
circumstances
Overview of New Standard – Step 5
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▪ If not satisfied over time, then satisfied at a point in time ▫ Indicators of transfer of control will determine the point in
time to recognize revenue - Entity has right to payment - Customer has legal title - Customer has physical possession - Customer has significant risks and rewards of ownership - Customer has accepted the asset
Overview of New Standard – Step 5
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▪ Receivable – unconditional right to consideration ▪ Contract asset / liability – differences between entity
performance and customer payment ▪ Incremental costs of obtaining a contract ▫ Practical expedient – amortized over one year or less
▪ Costs of fulfilling a contract ▫ Other guidance ▫ Directly relate, enhance resources, and are expected to be
recovered ▪ Amortized on systematic basis (estimated customer life)
Overview of New Standard – Statement of Financial Position
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▪ Principal vs. Agent considerations ▫ For each good or service ▫ Previous concepts, such as control, responsibility and risk ▫ Gross vs. Net
▪ Warranties – can be separate performance obligation, as opposed to being accounted under the “liability” guidance ▫ Indicated by option to purchase, or long coverage period
▪ Disclosure – qualitative and quantitative information to enable readers to understand the nature, timing, amount and uncertainty of revenues and cash flows ▫ Reduced for nonpublic entities
Overview of New Standard – Other Considerations
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▪ Transition – chosen adoption method dictates the years that revenue, and the direct effects of change in accounting principle, will need to be restated ▫ Retrospective (full, or with practical expedients) ▫ Cumulative effect
▪ Effective date ▫ Public (and certain NFPs) – calendar 2018
- Includes NFPs 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 others – calendar 2019
Overview of New Standard – Other Considerations
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▪ The FASB created Transition Resource Group in June 2014 to inform them of implementation issues
▪ AICPA created 16 industry task forces to develop a new accounting guide with application examples ▫ Issues are reviewed by the AICPA Revenue Recognition
Working Group and the Financial Reporting Executive Committee, as well as the TRG, when applicable
▫ Accounting Guide expected in early 2017 ▪ Has resulted in new and clarifying ASUs, including the one
year deferral
Overview of New Standard – Transition Efforts
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▪ AICPA NFP Task Force – implementation issues ▫ Contributions ▫ Bifurcation ▫ Subscriptions and membership dues ▫ Tuition and housing ▫ Government grants
NFP Application Considerations
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▪ Contributions ▫ TRG agreed that nonreciprocal contributions are NOT within
the scope of the new standard ▫ There will be no clarifying amendment ▫ This will be clarified in the forthcoming accounting guide
▪ Bifurcation of transactions between contribution/exchange ▫ Accounting guide will clarify that other guidance still applies
in determining fair value of exchange transaction with remainder reported as contributions.
NFP Application Considerations
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▪ Subscriptions and membership dues ▫ May be difficult to determine performance obligations ▫ What about lifetime memberships and subscriptions?
▪ Tuition and housing ▫ Special considerations are needed related to the complexity
of this industry – nonrefundable deposits, withdrawal periods, combination of separate housing contracts, financial aid vs work-study, etc.
NFP Application Considerations
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▪ Grants ▫ Long-standing diversity in practice regarding whether
governmental grants are reciprocal vs. nonreciprocal ▫ Under the new standard, the government may not be
considered a customer when the citizens, or society as a whole, receives the value in return for the grant funds
▫ Grants that previously fit the criteria of an exchange transaction may better align with the definition of conditional contribution than a contract with a customer
▫ The FASB has added to its technical agenda to clarify guidance
NFP Application Considerations
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NFP Application Considerations
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▪ Membership dues with a publication ▫ Annual dues of $180 ▫ Member benefits include:
- Advocacy - Educational opportunities - Industry trend information - Quarterly newsletter (fair value of $60 per year)
Examples
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Examples
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▪ Education and advocacy membership ▫ NFP has annual dues of $200 ▫ Only benefit members receive is a monthly newsletter (fair
value of $50)
Examples
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Examples
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▪ Grant research agreement payment ▫ NFP will receive milestone payment upon completion of
research for U.S. Department of Justice (DOJ) ▫ Once provided, research becomes property of DOJ ▫ NFP has received positive feedback from DOJ based on
interim project reports ▫ Based on experience, NFP concludes there is a 90%
likelihood it will be entitled to the entire milestone payment
Examples
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Examples
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▪ Naming rights ▫ A corporation provides $1 million for the right to name a
sports arena at a local college ▫ The contract provides:
- The number of years the arena will carry the name - The location of the sign in relation to the highway - The right to rename the arena in event of corporate name
change
Examples
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Examples
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▪ Starting point ▫ Assign someone to take the lead (probably you) ▫ Get familiar with the principles-based approach
- Read the standard - Read AICPA / TRG materials
▫ Create list of all types of revenues (dues, sponsorships, grants, investment earnings, contributions, service fees, etc.)
Steps for Implementation
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▪ Midway point ▫ Evaluate and determine changes from current GAAP for
each revenue stream (document conclusions with facts, references to the codification, and options chosen) - Remember to apply the standard consistently to contracts with
similar characteristics and in similar circumstances - Utilize the AICPA accounting guide
▫ Consider materiality of revenue recognition changes
Steps for Implementation
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▪ Last steps ▫ Consider changes needed to:
- Contract language - Close process - Forecasting/budgeting
▫ Communicate results with board, bank and auditors ▫ Determine adoption method ▫ Facilitate training of staff
Steps for Implementation
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▪ The main difference is the principle-based approach itself ▪ Management should be ready now to answer questions
about the standard ▫ Best to be proactive in these discussions
▪ No shortcuts
Conclusion
© 2016 KSM Business Services, Inc.
Leases – ASU 2016-02; Topic 842 November 18, 2016
Adam Cookerly, CPA
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▪ Joint project between the FASB and the IASB. Although, did not fully agree and therefore standards do have differences.
▪ 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 focuses on this concept and has changed lease recording to require capitalization of this right-of-use asset.
Leases
Lessor
Right-of-use asset
Lease payments
Lessee
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▪ A lease within the scope of Topic 842 involves a right to control the use of an identified asset during the term of the lease.
▫ An identified asset should be explicitly or implicitly specified. The supplier
has no practical ability to substitute and would not benefit economically from substituting the asset.
▫ The consumer (lessee) has the decision-making authority over the use of the asset and ability to obtain substantially all economic benefits from the use of the asset.
Identifying a Lease New primary determinant for on/off statement of financial position treatment
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▪ All leases (more than 12 months) are recognized on the lessee’s statement of financial position.
▪ The FASB has decided to maintain two separate classifications based on existing U.S. GAAP. The IASB removed the two classifications, accounting for all leases the same.
Lessee Model
Current New IASB FASB
Finance (capital) leases Finance leases Finance leases Operating leases Finance leases Operating leases
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Lessee Accounting Statement of
Financial Position
Statement of Activities
Statement of Cash Flows
Finance • Right-of-use asset
• Lease liability
• Amortization (depreciation) expense
• Interest expense
• Cash paid for lease (principal and interest) payments
Operating • Right-of-use asset
• Lease liability
• Lease expense on a straight-line basis
• Cash paid for lease payments
Short-term lease
• Nothing recorded
• Lease expense • Cash paid for lease payments
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▪ Short-term leases are terms of 12 months or less ▫ Lease terms should include optional extension periods if the lessee is
reasonably certain of exercising
▪ Criteria for classification of the type of lease is essentially the same as current GAAP except the specific thresholds have been removed ▫ Transfer of ownership at end of lease term ▫ Purchase option reasonably certain of exercising ▫ Lease represents major part of remaining economic life ▫ Present value equals or exceeds substantially all of the fair value of the
asset ▫ Asset is specialized and expected to have no alternative use to the lessor
at the end of the lease
Lessee Accounting – Classification
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▪ Initial entry will record a right-of-use asset and associated lease obligation at the present value of lease payments not yet paid using the discount rate for the lease ▫ Right-of-use asset should also include any lease payments made
at or before the commencement date as well as any initial direct costs incurred.
▪ Discount rate
▫ Implicit rate in lease whenever readily determinable ▫ Organization’s incremental borrowing rate ▫ Non-public organizations are permitted to use a risk-free discount
rate determined using a period comparable with the lease term as an accounting policy for all leases
Lessee Accounting – Initial Measurement
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▪ A lessee enters into a three-year lease and agrees to make the following annual payments at the end of each year: $10,000 in year one, $15,000 in year two, and $20,000 in year three. The initial measurement of the right-of-use asset and liability to make lease payments is $38,000 at a discount rate of eight percent.
▪ The table below highlights the differences in accounting for the lease depending on whether it is classified by the lessee as a finance lease or an operating lease.
Lessee Accounting – Example
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Statement of Financial Position
Statement of Activities
Statement of Cash Flows
Sales-type & Direct financing
Net investment in the lease
Interest income and any sales profit on the lease1
Cash received for lease
Operating Continue to recognize underlying asset
Lease income on a straight-line basis
Cash received for lease
Lessor Accounting
Criteria for classification between sales-type and operating/direct financing is essentially the same as current GAAP
Direct financing leases will be uncommon as the criteria for determination is similar to one of the sales-type determining factors.
1 Sales profit is recognized at lease commencement for a sales-type lease and
over the lease term for a direct financing lease. Sales profit is rare for direct financing leases.
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▪ Public Entities (including not-for-profits with publicly-traded conduit (or direct) debt) ▫ Fiscal years beginning Dec. 15, 2018
▪ All Other Entities ▫ Fiscal years beginning Dec. 15, 2019
▪ Early application ▫ Permitted for all entities
ASU 2016-02 Effective Date
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▪ Substantially all leases will be recorded on the statement of financial position of the lessee
▪ Lessee ▫ Statement of financial position will change ▫ Statements of activities and cash flows will primarily remain
unchanged ▪ Lessor will likely experience little or no change in
accounting ▪ Link to the FASB ASUs issued: ▫ http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=11761
56316498#2016
Conclusion
