Accounting & Auditing Update for Nonprofit · PDF filePage 3 Learning Objectives • Learn...

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Accounting & Auditing Update for

Nonprofit Organizations

October 17, 2016

CP of NYS Annual Conference Jeremy Meisel & Matthew Becker

Senior Managers, BDO USA, LLP

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Presenters

Jeremy Meisel, CPA

Senior Manager

Greater New York Nonprofit Industry Group

Email: [email protected]

Phone: (212) 885-8016

Matthew Becker, CPA

Senior Manager

Greater New York Nonprofit Industry Group

Email: [email protected]

Phone: (212) 885-7403

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Learning Objectives

• Learn about new Accounting Standards Updates applicable to non-profit

organizations

• Discuss the requirements on the new financial reporting framework for

nonprofit organizations

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Agenda

Financial Statements of NFP Entities

• Net Assets

• Underwater Endowment

• Expiration of Restriction Related to Long-lived Assets

• Expense Reporting

• Investment Income and Expense Reporting

• Liquidity Disclosure

• Cash Flow Statement

• Operating Measure

• Transition

• Effective Date

Recently Issued Standards (ASUs)

• Revenue Recognition (Topic 606)

• Leases (Topic 842)

• Financial Instruments: Recognition and Measurement (Topic 825-10)
















Financial Statements of Not-for-Profit

Entities

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ACCOUNTING STANDARDS UPDATE (“ASU”) 2016-14—NOT-FOR-PROFIT ENTITIES

(TOPIC 958): PRESENTATION OF FINANCIAL STATEMENTS OF NOT-FOR-PROFIT ENTITIES

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• Update, not overhaul, the current model

• Improve net asset classification scheme

• Improve information in financial statements and

notes about:

• Financial performance

• Cash flows

• Liquidity

• Better enable NFPs to “tell their financial story”

NFP Financial Statements Project—Key Objectives (recommended by FASB’s NFP Advisory Committee (NAC))

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Nonprofit Financial Reporting Project - Poll

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Phase 2: need to decide

whether to wait to

deliberate at same time as

the Financial Performance

Reporting project for

business entities

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Unrestricted Temp.

Restricted Perm.

Restricted

Phase 1

Net Assets

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Without Donor Restrictions

With Donor Restrictions

Amount, purpose, and type of board

designations *

Nature and amount of donor restrictions

Current

GAAP

Proposed

GAAP

Disclosures

+

* New disclosure requirement

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• Entities will no longer distinguish between temporary and

permanent restrictions on the face of the statements.

• In addition, the net asset classification of underwater

amounts of donor-restricted endowment funds will be

classified as part of net assets with donor

restrictions. Additional disclosures related to these

underwater endowment funds are required.

• The new standard retains the current requirements to

provide information about the nature and amounts of

different types of donor-imposed restrictions and the need

to highlight how these restrictions affect the use of the

resources and their impact on liquidity.

Net Assets

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“Underwater” Endowments

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

Revised net asset classification

• In addition to aggregate amounts by which funds are underwater (current GAAP), also disclose aggregate of original gift amounts (or level required by donor or law) for such funds, fair value, and any governing board policy or decision to reduce or not spend from such funds.

Enhanced disclosures

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Gifts of cash restricted for acquisition or construction of

PP&E

• NFPs would be required to use the placed-in-service

approach (no more implied time restrictions)

Expiration of Capital Restrictions

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• Report expenses, either on the face of financial

statements or in the notes, by:

• Function *

• Natural classification

• Analysis (disaggregate function by nature)

* currently required in GAAP

• NFPs required to provide disclosures about methods used

to allocate costs among program and support functions

Expense Reporting

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Reporting of Investment Returns

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•Net presentation of investment expenses against

investment return on the face of the statement of

activities

•Netting limited to external and direct internal

expenses

•Disclosure of investment expenses no longer

required, No longer require disclosure of investment

income components

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NFPs required to provide:

• Qualitative information on how an NFP manages

its liquid available resources and its liquidity risk

(in the notes)

• Quantitative information that communicates the

availability of an NFP’s current financial assets at

the balance sheet date to meet cash needs for

general expenditures (on the face and/or in the

notes)

Liquidity and Availability

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• Allow free choice between the Direct Method

and the Indirect Method

• Indirect reconciliation no longer required for

Direct Method

Cash Flow Statement

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• For those NFPs that utilize an operating measure and show

governing board designations, appropriations, and

similar actions (internal transfers) in the measure

• These NFPs must report these types of internal transfers

appropriately disaggregated and described by type

(either on the face of the financial statements or in the

notes)

Operating Measure: Improved Disclosures

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Effective Date: For fiscal years beginning after 12/15/2017 (e.g., FY

2018-19 for Higher Eds)

• Interim financials the following year

Early Adoption: Permitted, but must apply the regular transition

provisions.

Transition:

• For year of adoption: apply all provisions.

• For comparative years presented: apply all provisions, except can

choose not to present:

- Analysis of expenses by nature and function, and/or

- Disclosures around liquidity and availability of resources

Effective Date, Early Adoption, and Transition

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Choose to early adopt in FY 2015-16

• Apply all provisions to FY 2015-16

• If choose to present comparative financials for FY 2014-

15, apply all provisions to FY 2014-15, except can

choose not to present:

(1) Analysis of expenses by nature and function, and/or

(2) Disclosures around liquidity and availability of resources

Example of Early Adoption

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NFPs are already permitted to incorporate many of the

changes in the ASU

The only changes that cannot be done without formally

adopting the ASU are:

(1) Presenting one class of restricted net assets (consolidating

temporarily and permanently restricted)

(2) Underwater endowment accounting

(3) Eliminated disclosures of investment return components and

netted expenses

(4) Eliminated requirement to provide indirect reconciliation if

using direct method for operating cash flows

Important Notes

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End of Comment Period on Exposure

Draft

August 2015

October 28, 2015

Board Meeting Decision to split

project into Phase 1 and Phase 2

Board Meetings Redeliberations on topics in Phase 1

December 2015 –

March 2016

Summer 2016

Goal to

Issue ASU on Phase 1

Project Timeline: Next Steps

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Begin redeliberations

on Phase 2

2nd half of

2016??

FY 2018-19

Effective date of ASU on Phase 1 (Fiscal years

beginning after 12/15/2017)

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Recently Issued Standards (ASUs)

• Revenue Recognition (Topic 606)

• Leases (Topic 842)

• Financial Instruments: Recognition and Measurement (Subtopic 825-10)

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Revenue Recognition (Topic 606)

Objective: To develop a single, principle-based revenue

standard for US GAAP and IFRS

The revenue standard aims to improve accounting for contracts with customers by:

• Providing a robust framework for addressing revenue issues as they arise

• Increasing comparability across industries and capital markets

• Requiring better disclosure

Substantially converged with IFRS on major provisions

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Scope

All contracts with customers, except

• Lease contracts

• Insurance contracts

• Financial instruments

• Guarantees

• Non-monetary exchanges in the same line of business to facilitate sales

to customers

Contracts not with customers are excluded:

• Contributions

• Collaborative arrangements

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Final U.S. GAAP Model – Recognition

Core Principle:

Steps to apply the core principle:

1. Identify

the

contract(s)

with the

customer

2. Identify

the

performance

obligations

3. Determine

the transaction

price

5. Recognize

revenue when

(or as) a

performance

obligation is

satisfied

4. Allocate

the

transaction

price

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

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• Qualitative and quantitative* disaggregation of

revenue into categories that depict how revenue and

cash flows are affected by economic factors

Remaining performance

obligations

Interim requirements

Information about

contract balances

• Quantitative disclosures *

• Opening and closing balances *

• Amount of revenue recognized from contract liabilities *

• Explanation of significant changes in contract balances *

• Transaction price allocated to remaining

performance obligations *

• Quantitative or qualitative explanation of when

amounts will be recognized as revenue *

Disaggregation of

revenue

Final U.S. GAAP Model – Disclosure

* for public entities only

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Transition, Effective Date and Early Application

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Effective dates:

- Public entities: annual reporting periods after 12/15/2017 (including interim period)

- Nonpublic entities: one year later (annual reporting periods after 12/15/2018)—annual period in first year, interim

periods thereafter

- Early application option—no earlier than original public company effective date (annual reporting periods after

12/15/2016)

PY2

(2016)

PY1

(2017)

CY

(2018)

CY Footnotes

Retrospective

(with optional practical

expedients)

Cum

ula

tive

catc

h-u

p

Rev rec under new standard

Cumulative effect at date

of application

Rev rec under legacy

standard

Cum

ula

tive

catc

h-u

p

Existing* and

new contracts

under new

standard

Existing and new

contracts disclosed

under legacy standard

for CY (2018)

*contracts for which all (or substantially all) of the revenue has

not been recognized under legacy revenue guidance

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Grants and Contracts

Unique NFP guidance on contributions, but long-standing diversity in practice in

classifying grants and contracts, particularly from governmental entities

U.S. GAAP focuses on:

• Issue 1: Exchange vs. Non-exchange (contribution)

• Issue 2: Conditions vs. Restrictions

ASU 2014-09, Topic 606 (Revenue from Contracts with Customers)

• Heightened this issue; raised question as to whether grants and contracts are in

scope of that guidance

• Removed limited exchange guidance and focuses on whether or not the

transaction is reciprocal

Terminology and Transition

• “Contributions” encompasses both grants and donations

• A change in classification in connection with enhanced/clarified guidance

would not be the correction of an accounting error

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Example 1

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Example 2

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Leases (Topic 842)

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

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Lessee Model

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Current U.S.

GAAP (IFRS) IASB FASB

Capital (Finance)

Leases Type A Type A

Operating Leases Type A Type B

All leases are

accounted for the

same.

Classification is based

on existing U.S.

GAAP/IFRS

All leases (more than 12 months) are recognized on the lessee’s

balance sheet

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Lessee Accounting Overview

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Financing

Operating

Right-of-use asset

Lease liability

Amortization expense

Interest expense

Cash paid for principal and

interest payments

Right-of-use asset

Lease liability

Single lease expense on a straight-line basis

Cash paid for lease payments

Income Statement Cash Flow Statement Balance Sheet

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Lessor Accounting Overview

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Net investment in

the lease

Interest income and any profit on the lease

Cash received for lease payments

Continue to recognize

underlying asset

Lease income, typically on a straight-line basis

Cash received for lease payments

Sales-

Type /

Direct

Financing

Operating

Income Statement Cash Flow Statement Balance Sheet

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Leases – Effective Date

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• Fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (CY 2019; FY 2019-20)

Public Companies*

• Fiscal years beginning after December 15, 2019 and interim periods beginning after December 15, 2020 (CY 2020; FY 2020-21)

All Other Organizations

• Permitted for all organizations

Early Application

* “Public Companies” refers to the following: (1) public business entities, (2) a not-for-profit

entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or

quoted on an exchange or an-over-the-counter market, and (3) an employee benefit plan that

files or furnishes statements with or to the SEC (Same Here as Revenue Recognition Standard)

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Accounting for Financial Instruments – Recognition and Measurement

ASU 2016-01; Topic 825) Disclosures: FV of Financial Instruments not recognized at FV in Balance Sheet

ASU 2016-01 extends to all entities other than Public Business Entities the exemption from having to disclose this information

Thus, no NFPs or private companies would have to provide these disclosures

• Currently, NFPs with more than $100 million in assets or with any derivatives

(e.g., interest rate swaps) provide these disclosures

ASU is effective for NFPs and private companies for CY 2019 (FY 2019-20). This

provision may be early adopted for all financial statements not yet issued.

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Questions?

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