Webinar Slides: What's New in Not-for-Profit Accounting and Auditing Standards?

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EXECUTIVE EDUCATION SERIES: What's New in Not-for-Profit Accounting and Auditing Standards? Presented by: Shareholders Laura Krueger Brock & Patrick Quinn July 18, 2013

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Original Air Date: July 18, 2013 This course will provide an update regarding accounting and auditing standards that most commonly impact not-for-profit and educational organizations. Representatives from Mayer Hoffman McCann's Not-for- Profit practice group will discuss: Accounting and auditing standards Fair value measurements and related disclosures Presentation and disclosure of patient service revenue, provision for bad debts, and the allowance for doubtful accounts for certain health care entities Disclosures about employer's participation in a multiemployer pension plan Classification of the proceeds of donated financial assets in the cash flow Other recent accounting standards updates How the clarity standards will impact not-for-profit and educational organizations Current events and ongoing projects Changes in the new AICPA Not-For-Profit Accounting and Auditing Guide Continued discussion and updated exposure draft related to changes in lease accounting The biggest changes in decades to OMB Circular A-133 and the various cost principals The FASB NFP Financial Reporting Initiative Regulatory developments to be mindful of Join us for this course that will focus on: The potential impact of the accounting and auditing standards on not-for-profit and educational organizations The potential regulatory changes that may impact the way not-forprofits account for and report information Best practices in accounting practices and disclosures

Transcript of Webinar Slides: What's New in Not-for-Profit Accounting and Auditing Standards?

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EXECUTIVE EDUCATION SERIES: What's New in Not-for-Profit Accounting

and Auditing Standards?

Presented by: Shareholders Laura Krueger Brock & Patrick Quinn

July 18, 2013

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To view this webinar in full screen mode, click on view options in the upper right hand corner.

Click the Support tab for technical assistance.

If you have a question during the presentation, please use the Q&A feature at the bottom of your screen.

Before We Get Started…

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This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic polling questions throughout the webinar.

External participants will receive their CPE certificate via email immediately following the webinar.

CPE Credit

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Laura Krueger Brock, CPA, CFE Shareholder 727.572.1400 | [email protected] Laura is a Shareholder in the Not-For-Profit & Education Audit Practice and has over 30 years experience in public accounting primarily with Not-For-Profit and Government clients. She is head of the public sector attest practice in the Tampa Bay office. She is a past conference chair and speaker at the annual Not-For-Profit conference of the Florida Institute of CPAs. Her subjects have included fraud, internal controls and auditing and accounting.

Today’s Presenters

Patrick Quinn, CPA Shareholder 401.626.3211 | [email protected] Patrick is a Shareholder in the Not-For-Profit & Education Audit Practice. He has more than 17 years of accounting and audit experience working with not-for-profit and education organizations. He performs audits and reviews of financial statements, and assists clients with analyzing and interpreting financial results as well as debt offerings and internal control matters. He is a past conference chair and speaker at the annual Not-For-Profit conference of the Rhode Island Society of CPAs.

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The information in this Executive Education Series

course is a brief summary and may not include all the details relevant to your situation.

Please contact your MHM service provider to further

discuss the impact on your financial statements.

Disclaimer

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Today’s Agenda

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Accounting and auditing standards

Current events and ongoing projects

Changes to the AICPA NFP A&A guide

The FASB NFP financial reporting initiative

Regulatory and other developments

OMB Circular A-133 changes

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Fair value measurements

Patient service revenues

Multiemployer pension plans

Donated assets

Other standards updates

Clarity standards

Theft, fraud and internal control

Accounting and Auditing Standards

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The good news is there is not much new regarding fair value this year.

Items of significance: Enhanced Fair Value disclosures Level 2 and 3 financial instruments, not under the NAV

practical expedient, must disclose techniques that were used in valuation This involves not just indicating “Level 3 inputs” but indicating what

specific inputs are used. For instance, some Level 3 inputs are discounted cash flows models or market comparisons

Fair Value Measurements

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Enhanced Fair Value disclosures (continued) The non-NAV items are generally investments such as:

Alternative investments that are not investment companies Alternative investments reported on the tax basis or a non-US

GAAP framework Direct investments in private companies Direct investments in real estate Mortgage portfolios (i.e. organizations that hold employee

mortgages)

Fair Value Measurements

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Enhanced Fair Value disclosures (continued) Requires detailed disclosure of the inputs used to valuation Disclose ranges of assumptions such as discount rates,

earnings multiples, etc. This information is required to be disclosed in tabular format Private equity/venture capital fund financial statements

should have good examples of what is required, should you need to implement something

Discuss these disclosures early on with your auditors, keeping in mind materiality

Fair Value Measurements

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Enhanced Fair Value disclosures (continued) Supplemental fair value

disclosure information for financial instruments not measured and reported at fair value: Must now include information on

how fair value was determined within the hierarchy

Also need to describe the inputs to valuation that are used (see previous slides)

Fair Value Measurements

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Fair Value Measurements

Fair Value Measurement The fair value of the Organization’s bonds payable approximates $98,000,000 and $96,500,000 at June 30, 2013 and 2012, respectively, based upon observable quoted market prices for the same or similar issues utilizing Level 2 inputs. The market prices utilized reflect the rate the Organization would have to pay a creditworthy third party to assume its obligation and do not reflect an additional liability to the Organization. The Organization has concluded that fair value approximates carrying value for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, and deposits given the short-term nature of these instruments. The fair values of such instruments have been derived, in part, by management’s assumptions, under Level 2 fair value methods that include discount rates and other observable inputs. Different assumptions could significantly affect these estimated fair values. Accordingly, the net realizable values could be materially different from the estimates presented on the Statements of Financial Position at June 30, 2013 and 2012. In addition, the estimates are only indicative of the value of individual financial instruments and should not be considered an indication of the fair value of the Organization.

Sample disclosure for reported only items

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ASU 2013-08, Financial Services-Investment Companies Relates to investment companies

Clarifies the definition of an investment company

Could impact NFPs if alternative investments that Organizations invest in are now out of the scope of the Investment Company Guide, thus will no longer qualify for the NAV Practical Expedient

Fair Value Measurements

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ASU 2013-08, Financial Services (Continued)

Good news – the FASB chose

not to change accounting at the real estate entity level, thus these entities use consistent fair value measurements as other investment companies and should still qualify for NAV.

Fair Value Measurements

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ASU 2013-08 (Continued)

Entities with the following characteristics generally qualify as investment companies: More than one investor Investors are not related parties of the investment advisor More than one investment Ownership interests in the fund are either equity or partnership

interests

Fair Value Measurements

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ASU 2013-08 (Continued)

What can you do to assess whether this ASU will impact your organization? Contact your investment funds to assess whether they are still

considered to be “investment companies” Examine the current financials of the investment funds, if

traditional private equity/venture capital funds then this new standard is not likely an issue

If they are closely held funds with few investors, need to consider this new guidance

Fair Value Measurements

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ASU 2011-07, Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and Allowance for Doubtful Accounts for Certain Healthcare Entities

Was issued two years ago, but generally effective for fiscal

2013 for most entities

Key provisions: Patient revenue bad debts must now be presented as a reduction

of Net Patient Service Revenue Bad debts can no longer be presented as an operating expense

Patient Service Revenue

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Key provisions (continued): Bad debt expense from receivables Other Than patient service

revenue can be presented as an operating expense

Requires enhanced disclosures about an entity’s revenue recognition and bad debt policies

Disclose, by major payor source, policy for assessing collectability in determining the timing and amount of net patient service revenue to be recognized

Disclose, by major payor source, net patient service revenue before the provision for bad debts

Provide qualitative and quantitative analysis of the changes in the allowance for doubtful accounts

Patient Service Revenue

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New guidance effective for periods ending after 12/15/12 for nonpublic entities, was effective calendar 2011, fiscal 2012 for public entities

Multiemployer Pension Plans

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Disclose: Plan name (enough info to allow users to access the Form

5500) Funded status Expiration dates of any collective bargaining agreements If employer’s contributions represent more than 5% of total,

disclose this fact Contributions made to each plan Description of any changes impacting comparability among

years

Multiemployer Pension Plans

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Statement of Cash Flows Presentation – ASU 2012-05 Classify donated financial assets as inflows from operating

activities if: Upon receipt, assets were directed for sale without any limitations Assets were converted to cash nearly immediately Donor did not restrict the use of the assets for long-term purposes

If donor restricted for long-term purposes, such as a capital expenditure, then the donation is classified in the financing section

In all other cases (i.e. not converted to cash), classify as investing activities

Donated Financial Assets

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EITF Issue 12-B, Not-for-Profit Entities: Services Received from Personnel of an Affiliate for Which the Affiliate Does Not Charge the Recipient NFP

Other Recent Accounting Standards Updates

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Affiliate Services Questions have arisen about whether a recipient

organization should consider personnel costs incurred on its behalf by an affiliate as contributed services and apply the relevant recognition guidance.

The question was how such contributions should be measured – based on cost or an estimated fair value?

New rules effective on a Prospective basis for fiscal years beginning after June 15, 2014 (fiscal 2015, calendar 2015), can be early adopted.

Other Recent Accounting Standards Updates

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Affiliate Services (Continued) Final ASU

Measure services at the cost recognized by the affiliate providing the services

If recognizing at cost will significantly overstate the value of the services received, then recipient NFP may elect to recognize at either: Cost recognized by affiliate Fair value of the service

If Health Care Entity, report the services as an equity transfer from the affiliate and increase in net assets. All others can elect where to report, but cannot report as contra-expense or contra-asset

Other Recent Accounting Standards Updates

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Clarity Standards

The AICPA’s Auditing Standards Board (ASB) redrafted all but one of the auditing sections in Codification of Statement on Auditing Standards (contained in AICPA Professional Standards)

Resource: AICPA Financial Reporting Center

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Exposure Draft of Proposed Statement on Auditing Standards Using the Work of Internal Auditors Released The ASB has completed the clarity redrafting of its last AU section in AICPA

Professional Standards and has issued proposed Statement on Auditing Standards (SAS) Using the Work of Internal Auditors.

This proposed SAS would supersede AU section 322 and AU-C section 610, The Auditor’s Consideration of the Internal Audit Function in an Audit of Financial Statements, and, among other amendments, would also significantly amend AU-C section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement (AICPA, Professional Standards).

Comments were due July 15, 2013.

Clarity Standards

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Effective for years ended on or after December 15, 2012.

The codification of the clarified standards uses section numbering established by SAS No. 122, Statements on Auditing Standards: Clarification and Recodification and contains “AU-C” section numbers.

“AU-C” is a temporary identifier to avoid confusion with the references to AU section and will remain effective through 2013.

Clarity Standards

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Primary effects: 1. Opinion format 2. Opinion terminology 3. Component materiality and group audits 4. Legal inquiry letters 5. Fraud inquiries 6. Opening balances in initial audit engagements

Clarity Standards

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See the sample Auditor’s Report included as a download on this webinar.

Auditor’s Report

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Fraud risks specific to NFPs

Per Association of Certified Fraud Examiners, a typical organization loses an estimated 5% of its annual revenue to fraud

Damaged reputation can have devastating consequences Donors Grantors Other public sources

Theft, Fraud & Internal Control

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Management should establish fraud risk management program Fraud risk assessment – identify the

fraud schemes that could potentially occur

Consider red flags or warning signals

Theft, Fraud & Internal Control

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Changes to the AICPA Not-for-Profit Accounting and Auditing Guide

Other accounting developments

Changes to OMB Circular A-133

Current Events and Ongoing Projects

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2013 Overhauled Audit and Accounting Guide

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The AICPA has issued 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

First revision (other than annual conforming changes) since the Guide was released in 1996.

Changes in the new AICPA NFP A&A Guide

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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

Background for New Content

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Accounting & Financial Reporting Basis of accounting content is from GAAP, but the Guides

provide additional explanation and practical guidance

Auditing Auditing guidance considered interpretive publication under

AU-C section 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards

“The auditor should consider applicable interpretive publications in planning and performing the audit.”

AU-C 200.27

Authoritative Status of AICPA Guides

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16 Chapters in the Guide

Chapter 2 – General Auditing Considerations Conformed to the Clarity project Includes NFP specific guidance Fraud risks specific to NFPs Other guide chapters have NFP specific suggested

audit procedures relating to the particular chapter’s topic

Chapter Updates

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Chapter 3 – Financial Statements, the Reporting Entity, and General Financial Reporting Matters Significantly expands guidance on interest in related

entities Summary chart of examples: NFP entities For-profit entities Special-purpose leasing entities

Chapter Updates

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Relationship

FASB Accounting Standards Codification

(ASC) Reference

Discussion in This Chapter

The reporting entity controls another NFP through a majority voting interest in its board and has an economic interest in that other entity.

Use the guidance in FASB ASC 958-810-25-3

Paragraphs 3.67-.69

The reporting entity controls an NFP through a form other than majority ownership, sole corporate membership, or majority voting interest in the board of the other entity and has an economic interest in that other entity.

Use the guidance in FASB ASC 958-810-25-4

Paragraph 3.70

The reporting entity has control over another NFP or an economic interest in the other, but not both

Use the guidance in FASB ASC 958-810-25-5

Paragraph 3.71

Excerpt from Exhibit 3-2

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Chapter 3 – Financial Statement/Reporting Entity Statement of functional expenses Required as a basic financial statement for voluntary health

and welfare entities FinREC encourages presentation by all NFPs that are

supported by the general public -NFP with contributions of 20-30% of total revenue presumed to

be supported by general public (excluding gov’t support) -Consider facts & circumstances and use judgment

Chapter 4 – Cash, Cash Equivalents, and Investments Expanded guidance on investments commonly used by

NFPs with summary chart of examples

Chapter Updates

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Chapter 5 – Contributions Received and Agency Transactions Contribution vs. exchange transaction Table 5-1 Membership dues Grants Contribution recognition and measurement Contributed fundraising material, info material or

advertising, including media time or space Examples – public service announcements, radio advertising,

newspaper print space Donated asset vs. donated service FinREC recommend: Recognize a contribution in NFP has active

involvement in determining and managing the message and use of the materials; otherwise not a contribution

Chapter Updates

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Chapter 5 – Contributions Received and Agency Transactions (Continued) Below-market interest rate loans No or low-interest loan of funds is a contribution to the

NFP. Record contribution revenue and interest expense for fair

value of the contribution Fair value typically estimated at the difference between market rate

interest and actual interest Related party status doesn’t impact recording. Recognition of contribution/interest different for long-term

loan vs. due-on-demand loan See attached examples

Chapter Updates

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1/1/2013 NFP receives 0% interest loan of $200,000 payable 12/31/2015 Market interest rate is 6%

1/1/2013 Dr. Cash $200,000 Cr. Loan Payable* (169,775) Cr. Contribution revenue** (30,225) To record receipt of loan * calculated at PV of $200k at 6%

over 2 yrs ** donor restricted, release over term of

loan

12/31/13, 12/31/14 and 12/31/15 Dr. Interest expense $10,075 Cr. Loan payable (10,075) To record annual interest 12/31/15 Dr. Loan payable $200,000 Cr. Cash ($200,000) To record loan repayment

Example #1 – Long-term Loan from a Foundation

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1/1/2013 NFP receives 0% interest loan of $200,000 due on demand, repaid 12/31/2015 Market interest rate is 6%

1/1/2013 Dr. Cash $200,000 Cr. Loan Payable (200,000) To record receipt of loan

12/31/13, 12/31/14 and 12/31/15 Dr. Interest expense $12,000 Cr. Contribution (12,000) To record annual interest 12/31/15 Dr. Loan payable $200,000 Cr. Cash ($200,000) To record loan repayment

Example #2 – Due on Demand Loan from a Foundation

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Chapter 6 – Split Interest Agreements and Beneficial Interests in Trusts Beneficial interest in trust held by another entity NFP later becomes aware of trust where NFP is named

beneficiary or has a beneficial interest NFP needs to make reasonable efforts to obtain a copy of

executed trust document or statement from trustee or other information about the trust

Recognize the beneficial interest in trust and contribution the first year information becomes available

Should not record a prior period adjustment if NFP made reasonable efforts and continues to make efforts to obtain necessary information

Chapter Updates

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Chapter 10 – Debt and Other Liabilities New section on tax-exempt debt based on the AICPA

Audit and Accounting Guide for Health Care Entities Expanded discussion of debt extinguishments, debt

modifications, credit enhancements and other classifications

Chapter 11 – Net Assets and Reclassifications of Net Assets

Provides guidance on expiration of restrictions Use restricted contributions first

Chapter Updates

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Chapter 15 – Tax and Regulatory Considerations Expanded discussion regarding legal and regulatory

environment Discussion regarding maintaining NFPs tax-exempt

status Unrelated business income and income tax positions State and local regulatory issues such as state

charitable solicitation laws, gaming regulations and UPMIFA

Chapter Updates

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Lease accounting continues to be a topic for discussion, with continued exposure drafts and deliberation

2013 Lease accounting exposure draft For most leases other than real estate:

Recognize a right of use asset and a lease liability, initially recognized at the present value of lease payments

Recognize and report the interest expense on the lease liability separately from the amortization of the right of use asset

For most real estate leases: Recognize a right of use asset and a lease liability at the present

value of lease payments\ Recognize a single lease cost — that combines the interest on the

lease liability with the amortization of the right of use asset — on a straight line basis

Other Accounting Developments

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Revenue recognition Seems most NFPs will not be impacted given many

transactions are outside of the scope given they are contributions or collaborative arrangements

Most significant changes are likely to be enhanced disclosures

Definition of a Non-Public Entity Deliberation as to whether a distinction is necessary Some entities are public regardless of how this turns out

given the nature of their conduit debt arrangements

Other Accounting Developments

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Changes to OMB Circular A-133

Why Change? Single Audit guidance has not been significantly amended

since 1996.

OMB seeks to ensure the highest integrity in the financial management and operation of federal programs and to strengthen accountability for federal dollars by improving policies that protect against waste, fraud, and abuse.

Effort to reduce ‘‘red tape’’ that is attached to the financial assistance the federal government provides annually in the form of grants and cooperative agreements.

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OMB Uniform Guidance

www.whitehouse.gov/omb/grants_docs under Proposed Policies

Replaces OMB Circulars: A-21, A-87, A-89, A-102, A-110, A-122, and A-133

Federal Register: Reform of Federal Policies Related to Grants and Cooperative Agreements – provides a summary of changes and rationale for certain changes

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OMB Uniform Guidance

Subchapters: A through D: General and Pre Award Requirements E: Post Federal Award Requirements F: Cost Principles G: Audit Requirements H: Appendices

State/Local- Wide Central Service Cost Allocation Plans

State and Local Indirect Cost Proposals

Data Collection Form

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Subchapters A to D

CFDA (Catalog of Federal Domestic Assistance) will be replaced with

CFFA (Catalog of Federal Financial Assistance)

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Subchapter E: Post Federal Award Requirements

Subrecipient Monitoring – no significant changes Good reminders of NFP responsibilities: Inform the subrecipient of the CFFA title and number Ensure the subrecipient is aware of the federal

requirements Monitor the activities of the subrecipients

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Subchapter E: Post Federal Award Requirements

Procurement Standards Must have written selection procedures for procurement

transactions May be required to submit proposed procurement to the

Federal Awarding Agency except when purchase is considered a small purchase: Small purchase threshold increased to $150,000

(previously $100,000)

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Subchapter F: Cost Principles

Salaries Other Direct Costs Indirect Cost Rate

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Salaries

Salaries of administrative and clerical staff should normally be treated as indirect costs (some exceptions)

Employees charged as indirect costs — no additional documentation is needed outside the normal payroll distribution system reports

Employees who work 100% on a federal grant: Semi-annual certifications that the employee worked solely

on the program for the period covered by the certification Must be signed by the employee or a responsible supervisory

official

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Salaries

Employees who work on multiple programs/activities: Timesheets indicating the number of hours worked on

the grant or Budget estimates as long as they are subsequently

reconciled to actual through an after-the-fact certification The certification should occur no later than every 12 months

OMB is exploring alternatives to

time-and-effort reporting requirements

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Other Direct Costs

Family leave and dependent care Clarification of allowability to the extent they are reasonable and consistent with written

institution-wide policy and practice

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Indirect Cost Rate

Option of extending prior approved Indirect Cost Rate for up to 4 years subject to approval of the indirect cost cognizant agency. Only approved if there have been no major changes in

indirect costs. If granted the entity would not be allowed to request a

rate review until the extension period ends.

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Indirect Cost Rate

No negotiated indirect cost rate? Flat rate of 10% of total direct costs for entities without the

capacity for a full negotiation for no more than four years while they develop the capacity to engage in full negotiations

The catch: Must extend the indirect cost rate to subrecipients, use the 10% flat rate, or negotiate a rate in accordance w/ federal guidelines

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Subtitle G: Audit Requirements

Audit Threshold changed to from $500,000 to $750,000 of federal expenditures

Timing of single audit report submission is unchanged: Within 30 days of report issuance No later than 9 months after fiscal year end (ongoing

discussion to change this to 6 months)

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Audit Report Changes

Report questioned costs over $25,000 (previously $10,000)

Report known or likely fraud affecting the Federal Award

Changes to required components of a finding

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Required Elements of Auditor Findings

1. Federal program, CFFA no., year, grant number 2. Criteria on which the finding is based 3. Condition found including facts supporting the

deficiency 4. Cause explaining how the condition occurred 5. Effect or potential effect or potential impact 6. Identification of questioned costs, if any 7. Information to provide proper perspective 8. Documentation of how the statistical sample was drawn

to support that the sample size utilized was appropriate and proportional to any findings or conclusions

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Required Elements of Auditor Findings (Continued)

9. Identification of whether or not it is a repeat finding 10.The possible asserted effect to permit granting

agency to determine the cause of affect 11.Recommendation to prevent further occurrences 12.Views of responsible officials 13.Reference number

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Major Program Determination Auditors must go through a rigorous process to

determine which federal grants to test.

Changes to OMB Circular A-133

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Type A threshold is $500,000 (previously $300,000)

Type A and Type B programs must be evaluated and categorized as high risk or low risk

Major Program Determination

Changes to OMB Circular A-133

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Program has not been audited as a major program within the last two years

Program had findings reported in the last year (previous look back was two years)

New program to the entity Identified by federal government as having higher risk: ARRA

Complexity of program requirements: Section 8 eligibility requirements

Changes to OMB Circular A-133

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Auditor must test: All High Risk Type A programs

All High Risk Type B programs, but limited to 1/4th the number of low risk Type A programs

Must meet coverage rule: 20% of total for low risk auditee (previously 25%) 40% of total for high risk auditee (previously 50%)

Changes to OMB Circular A-133

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Compliance Requirements to be Audited Previously included 14 different compliance requirements

A. Activities Allowed or Unallowed

B. Allowable Costs/Cost Principles

C. Cash Management

D. Davis Bacon

E. Eligibility

F. Equipment and Real Property

Management

G. Matching, Level of Effort and

Earmarking

H. Period of Availability

I. Procurement, Suspension and

Debarment

J. Program Income

K. Real Property Acquisition and

Relocation Assistance

L. Reporting

M. Subrecipient Monitoring

N. Special Tests and Provision

Changes to OMB Circular A-133

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7 Compliance Requirements

A. Activities Allowed or Unallowed

B. Allowable Costs/Cost Principles

C. Cash Management

D. Davis Bacon

E. Eligibility

F. Equipment and Real Property

Management

G. Matching, Level of Effort and

Earmarking

H. Period of Availability

I. Procurement, Suspension and

Debarment

J. Program Income

K. Real Property Acquisition and

Relocation Assistance

L. Reporting

M. Subrecipient Monitoring

N. Special Tests and Provision

Changes to OMB Circular A-133

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Data Collection Form Changes For 2013 audits: Auditors must report their EIN Audit findings much follow a standard format:

2003-001, 2003-002, etc. Instead of indicating the type of finding for each major

program, each finding will be listed separately Added a question for number of findings PDF submissions of audit reports must be unlocked,

unencrypted, and at least 85% text-searchable (a scan of a paper copy will likely not comply)

Changes to OMB Circular A-133

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Resource group is evaluating NFP financial reporting

Evaluating operating measures – one statement vs. two statement approach

Considering changing net asset classification – more aligned with operations vs. donor restrictions?

Considering changes to the statement of cash flows

The FASB NFP Financial Reporting Initiative

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Required statement of functional expenses?

Considering the addition of an MD&A section to the annual financials

Disclosure framework – perhaps condense the currently overwhelming disclosures?

Many potential changes ahead, nothing is final at this point

The FASB NFP Financial Reporting Initiative

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Regulatory and Other Developments

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IRS Colleges and University Project – final results, generally applicable to all NFP’s as it indicates what the IRS is looking at

IRS 2013 work plan New York Nonprofit Revitalization Act Compensation The Economy Charity Watchdog Agencies Message is there are various regulators looking at the

NFP sector – lots to keep on top of

Regulatory and Other Developments

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400 organizations were sent questionnaires. Process resulted in 34 examinations.

Primary areas of focus: Unrelated business income Executive compensation Employment tax

IRS College and University Project

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Unrelated business income Disallowing expenses for lack of profit motive Disallowing expenses for improper expense allocation

Allocations between exempt and non-exempt activities must be reasonable

Reclassifying activities as unrelated IRS reclassified certain activities as unrelated, resulting in $4

million of additional UBI

IRS College and University Project

How does this relate to Accounting? Uncertain Tax Positions (FIN 48)!!

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Compensation Most examinees attempted to meet the rebuttable

presumption standard Broad existence of compensation policies Procedures designed to avoid conflicts of interest Entities by and large documented the basis for setting

compensation

IRS College and University Project

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Compensation About 20% of examinees failed to meet the rebuttable

presumption standard because of problems with their comparability data Institutions not similarly situated were used – i.e. location,

endowment size, revenues, net assets, # of students Comp studies failed to document the selection criteria for schools

included Comp studies failed to specify whether data included just salary or

salary and other forms of compensation

IRS College and University Project

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Employment tax IRS looked at employment tax returns at 11 organizations

All resulted in adjustments to wages:

Failure to include in income the value of personal use of autos, housing, social club memberships and travel

Misclassification of employees as independent contractors Failure to withhold tax for wages paid to non-resident aliens Failure to include in income the value of certain graduate tuition

waivers and reimbursements

Resulted in wage adjustments of $36 million and payroll taxes and penalties of over $7 million

IRS College and University Project

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Employment taxes Charitable spending – focus on organizations with high

fundraising activity but minimal charitable activity – looking at validity of exempt status

International activities Ensure that assets and income of domestic charities are not

diverted to non-charitable purposes when sent abroad Ensuring compliance with recordkeeping and reporting

when NFPs operate or donate funds overseas FBAR reporting

IRS Exempt Organizations 2013 Work plan

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UBTI IRS plans to examine a sample of organizations which

reported substantial gross UBI for three consecutive tax years, but reported no income or tax due

512(b)(13) study – taxes on certain payments from

controlled organizations to their parents

IRS Exempt Organizations 2013 Work plan

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On June 21, 2013, the New York State Legislature passed the Nonprofit Revitalization Act.

Regulating enhancement of NFP oversight governance.

If signed by the governor, most provisions of the act take effect on July 1, 2014.

New York Nonprofit Revitalization Act

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Key provisions: Conflict of interest policies required for all nonprofits Whistleblower policies required for NFPs with twenty or more

employees and annual revenue of over $1 million Annual audit is required if all of the following

Registered to solicit funds in New York Already required to file independent accountant audit reports with the

Attorney General Annual revenue of over $500,000. If it meets all of these criteria

Does not allow an employee of an NFP to serve as chair of the board or hold a position with similar responsibilities.

Permits the board and committee members to participate in meetings by videoconference and allows meeting notices and notice waivers to be sent electronically, as well as electronic signatures on written consents.

New York Nonprofit Revitalization Act

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Hot topic of late at the federal and state level

New York State Governor executive order to limit executive compensation to $199,000 for organizations that receive funding from the state

Other states have similar bills or proposed bills limiting executive compensation.

Compensation

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Important to understand both the general and specific economic conditions facing the industry

Unemployment rate remains at 8% for 2012 conservatively representing over 12 million people

After a few years of slow growth, the U.S. economy is showing signs of recovery

Household spending increasing

Housing sector showing signs of improvement

Federal spending cuts delayed

The Economy: An Overview

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Multi-dimensional Financial strength

Maintaining and enhancing revenue streams Adapting to changing government funding Controlling costs

Leadership

Day-to-day Resource management Succession planning Volunteers

Mission Clarity

Measurable, positive outcomes

The Economy: Organizational Sustainability

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Charity Watchdog Agencies Currently 16 watchdog agencies monitoring NFPs!

Use of quantitative measures (mainly from 990) Program expense/total expense ratio Fundraising revenue/Fundraising expenses

Try to establish governance standards

Try to establish benchmark for financial health

Charity Navigator requests "restating" for some humanitarian organizations

Updates to GuideStar to provide more information (98%of users access the “free” information)

Charity Watchdog Agencies

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Questions?

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Join us for these future webinars 7/30: What’s New in Not-for-Profit Accounting and Auditing

Standards? (repeat of today’s course) 11/7: New and Emerging Business Risks for Not-for-Profit and

Educational Organizations

Read these related MHM Messengers 23-12: Evolving Business Practices Spur Transition from SAS

70 to SOC Reports 12-12: An Update on Not-for-Profit Financial Reporting 9-12: FASB Emerging Issues Task Force Addresses Key Not-

for-Profit Issues

If You Enjoyed This Webinar…

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Laura Krueger Brock, CPA, CFE Shareholder 727.572.1400 | [email protected] Laura is a Shareholder in the Not-For-Profit & Education Audit Practice and has over 30 years experience in public accounting primarily with Not-For-Profit and Government clients. She is head of the public sector attest practice in the Tampa Bay office. She is a past conference chair and speaker at the annual Not-For-Profit conference of the Florida Institute of CPAs. Her subjects have included fraud, internal controls and auditing and accounting.

Today’s Presenters

Patrick Quinn, CPA Shareholder 401.626.3211 | [email protected] Patrick is a Shareholder in the Not-For-Profit & Education Audit Practice. He has more than 17 years of accounting and audit experience working with not-for-profit and education organizations. He performs audits and reviews of financial statements, and assists clients with analyzing and interpreting financial results as well as debt offerings and internal control matters. He is a past conference chair and speaker at the annual Not-For-Profit conference of the Rhode Island Society of CPAs.