Major changes to the not-for-profit financial statement presentation were recently finalized with the issuance of FASB's Accounting Standards Update No. 2016-14.
Join Michelle Spriggs and Mike Burns, Managing Directors in the Not-For-Profit & Education Practice at CBIZ MHM, as they discuss best practices around implementing the new standard at not-for-profit and higher education organizations.
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Webinar Slides: Implementing the New Not-For-Profit Financial Statement Presentation
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CBIZ & MHM
Executive Education Series™
Implementing the New Not-For-Profit
Financial Statement Presentation
Michelle Spriggs
Mike Burns
November 16 & 28, 2017
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About Us
• Together, CBIZ & MHM are a Top Ten accounting provider
• Offices in most major markets
• Tax, audit and attest and advisory services
• Over 2,900 professionals nationwide
A member of Kreston International
A global network of independent
accounting firms
MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting,
tax and financial services provider. CBIZ and MHM are members of Kreston International Limited, a global network of independent accounting firms.
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Before We Get Started…
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Disclaimer
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 service provider to further
discuss the impact on your business.
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Presenters
Michelle is a member of the Accounting and Auditing Group and of the Not-For-Profit &
Education Practice. She is also the not-for-profit subject matter expert in our National
Professional Standards Group. Michelle has more than 25 years of audit experience and
specializes in serving associations and foundations, educational institutions, social
services organizations, and cultural organizations.
774.206.8336 • Mspriggs@cbiz.com
Michelle Spriggs, CPA, MBA
Managing Director
Mike is s member of the Accounting and Auditing Group and is the Managing Director
in Charge of the Firm’s National Not-For-Profit & Education Practice. Mike provides
services directly to a wide variety of educational, cultural and social service
organizations. Mike has more than 30 years of audit experience and exclusively serves
not-for-profit organizations
617.761.0584 • Mburns@cbiz.com
Michael Burns, CPA
Managing Director
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Agenda
• Identify the key changes resulting from the new standard
• Provide examples of reporting these changes
• Implication of Changes: Discern how financial presentation, systems,
policies and procedures may change on account of the new standard
• Implementation Considerations and Pilot Lessons Learned:
Understand methods and best practices for implementing the
changes efficiently and effectively
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Who’s on the Webinar?
• NFP Finance or Executive Staff
• NFP Board or Committee Member
• NFP Auditor or Advisor
• Other
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How Familiar are You with This New Standard?
• This is the first I’ve heard of it
• I have some familiarity with it
• I’ve read all 270+ pages
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Effective Date of ASU No. 2016-14
Effective Date
Early
Adoption
Transition
Fiscal years beginning after 12/15/17
Calendar year end 2018
Fiscal year end 2019
Permitted, but must apply the regular transition
provisions
For year of adoption: apply all provisions
For comparative years: apply all provisions, except
can choose not to present:
Analysis of expenses by function (unless already
required – VHW)
Liquidity disclosures
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Key Objectives of ASU No. 2016-14
Update, not
overhaul of
current model
Better enable
NFPs to “tell
their financial
story”
Improve
information on
financial
performance,
cash flows and
liquidity
Improve net
asset
classification
scheme
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Major Changes
Net asset classes from
3 to 2
Reporting of investment
return
Expenses reported by
nature and function
Cash flow statement
options
New liquidity and
availability disclosures
Additional disclosures for
underwater endowments
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Net Asset Classes
With Donor Restrictions
Nature and Amount of Donor Restrictions
Amount, purpose, and
type of board
designations
Current
GAAP
Without Donor
Restrictions
Temp. RestrictedUnrestricted Perm. Restricted
Revised
GAAP
+
______________________________________________________________________________________________________________
Disclosures
Underwater Endowments – reflected in net assets with donor restrictions rather
than net assets without donor restrictions.
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Implication of Changes
Statement of Financial Position (recommend
detail in footnotes)
Statement of Activities
Footnotes:
Accounting Policies/Basis of Presentation
(Pilot Entity Note 1)
Accounting Policies/Revenue Recognition
(Pilot Entity Note 1)
Endowments (Pilot Entity Note 5)
Net Assets (Pilot Entity Note 6)
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Balance Sheet Example
Without donor restrictions*
Undesignated 3,057,607$ 1,370,401$
Designated by the Board for operating reserve 300,000 250,000
Designated by the Board for endowment 15,511,186 14,912,222
Invested in property and equipment, net of related debt 21,150,885 20,193,878
40,019,678 36,726,501
With donor restrictions
Perpetual in nature 22,864,750 22,450,146
Purpose restrictions 14,228,316 10,351,233
Time-restricted for future periods 1,391,825 1,279,636
Underwater endowments - (42,677)
38,484,891 34,038,338
Total net assets 78,504,569 70,764,839
Total liabilities and net assets 93,314,447$ 86,137,541$
Net Assets (alternative presentation is within the footnotes)
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Implementation Considerations
• Determine if changes needed to adjust general ledger,
spreadsheets, or other tracking systems and financial
statement generation to accommodate new terminology and
presentation
• Determine the appropriate level of disaggregation of net assets
to present in:
• net assets without donor restrictions
• net assets with donor restrictions satisfied:
• over time
• by expenditure for restricted purpose
• net assets with donor restrictions in perpetuity
• Decide degree of disaggregation to present on face of SOFP vs.
in the footnotes
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Pilot Lessons Learned
• Easiest of the changes – decreases some complexity in preparing the
financial statements
• A lot of disclosures use unrestricted, temporarily restricted and
permanently restricted terminology – do a search and replace
• Most of the current information was carried over with a few tweaks
• Allowed a fresh look at level of disaggregation needed
• Report writer changes needed
• Chart of accounts and spreadsheets – minor changes to group
temporarily and permanently restricted net assets into with donor
restrictions
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Implication of Changes – Board Designated Net Assets
Footnotes:
Accounting Policies/Basis of Presentation (Pilot Entity
Note 1)
Liquidity and Availability (Pilot Entity Note 2)
Endowments (Pilot Entity Note 5)
Net Assets (Pilot Entity Note 6)
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Implementation Considerations – Board Designated Net Assets
• Determine if disclosure of Board Designated Net Assets is prudent
based on internal practices, not required
• Determine if further delineation of Board Designated Net Assets is
needed based on self imposed limits by management with Board
authority (i.e. operating reserves, capital funds, quasi-endowments,
contingency funds, future programs, etc.)
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Pilot Lessons Learned – Board Designated Net Assets
• No changes to existing footnote disclosures
• Consideration for proper disclosure in liquidity note
• Reaffirming with Board the manner of designations
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Underwater Endowments
Will no longer be charged to unrestricted as under prior rules; will be reflected
as part of “With Donor Restrictions” detail
Revised Net Asset Classification
In addition to aggregate amounts by which funds are underwater (as currently
required) there will be additional disclosures of the Board policy concerning
appropriation from such funds as well as of the aggregate original corpus of
such funds
Enhanced Disclosures
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Implication of Changes
Defined in Master Glossary:
• Donor restricted endowment funds for which the fair value of the fund at the reporting
date is less than either the original gift amount or the amount required to be
maintained by the donor or by law.
Statement of Financial Position
Separate disclosure in “with donor restrictions” class of net assets (or in
footnotes)
Footnotes
Accounting policies/new accounting pronouncement (Pilot Entity Note 1)
Endowments (Pilot Entity Note 5)
Additional disclosure of original gift and fair value amounts as well as deficiency
amount – all on the aggregate
Policy on spending on underwater funds
Net Assets (Pilot Entity Note 6) – with donor restrictions column
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Implementation Considerations/Pilot Lessons Learned
Ensure current mechanism for tracking underwater endowments has
information by fund on fair value and original gift amount as well as any
donor stipulations for amounts above original gift value
Augment report writer commands to include the underwater amount in net
assets with donor restrictions versus in unrestricted net assets as in past
Reaffirm policy on spending from underwater endowments
Pilot lessons learned – not many changes except regrouping with net assets
with donor restrictions as the existing tracking mechanism had all elements
required for aggregate disclosure
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Implication of Changes
• Report expenses, either on the face of financial statements or in the
footnotes, by:
• Function (program, management, fundraising) (as currently required)
• Natural classification (salaries, fringe, occupancy, etc.) (akin to tax return
approach)
• Separate statement or in the footnotes
• Supplementary information doesn’t meet the requirement
• Will require further disclosure about methods used to allocate costs among
program and support functions
Incorporates more guidance on allocating costs from management and
general
Direct conduct or direct supervision will now be the standard to allow for
allocation
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Implementation Considerations
• Determine best format/location for presentation (separate
statement, footnotes, within statement of activities)
• Confer with finance team and auditors on appropriate level of
natural classifications to use
• Revisit current allocation methods to ensure meeting guidance of
allocation for direct conduct or supervision – update policies as
necessary
• Ensure financial system has functional allocations accurately
captured, make changes as necessary for ease of financial statement
preparation
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Pilot Lessons Learned
• Started with 990 presentation as systems already set up for that
• Adjusted for any differences in how expenses reported in 990 versus
financial statement
• Considering reducing number of line items to 10-12
• Considering whether to report in separate schedule (as noted in
pilot) or in footnote
• Reviewed allocation methods noting existing allocation method
consistent with new definition
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Liquidity and Availability of Resources
• Will now require disclosures relative to liquidity and availability of
resources as follows:
• Qualitative information on how an NFP manages its liquid available resources
and its liquidity risk (in the footnotes)
• Quantitative information that communicates the availability of an NFP’s
financial assets at the balance sheet dates to meet cash needs for general
expenditures within one year (on the face and/or in the footnotes)
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Implication of Changes
Availability of financial assets may be affected by:
Their nature
External limits imposed by donors, laws and contracts with
others
Internal limits imposed by governing board decisions
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Footnotes Example
While not specifically required at this level, we do suggest that the
investment footnote contain further information on redemption time frames
associated with investments.
• Daily
• Monthly
• Quarterly
• Annually
• Greater than annually
• Illiquid
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Implementation Considerations
• Consider the message you wish to convey
• What are the resources available over the next 12 months?
• Are there significant restrictions or internal designations limited the use of
resources?
• What additional sources of liquidity are available?
• Identify the best way to present your message – text only or tables and text
• Determine that Board designations are properly documented
• Consider whether new policies will be required
• Net asset designation policy
• Operating reserve policy
• Determine if existing policies need updating or formalizing
• Determine if system or process changes are needed to easily capture
information for disclosure
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Pilot Lessons Learned
• The most difficult of the changes to implement – a lot to think about
• Readers of the financial statements (regulators, bankers, donors, etc.)
• Faculty and staff (unions if applicable)
• Message we want to convey
• Consistency with other communications (bankers, rating agencies, Board, etc.)
• This change gets the most attention by management and governance
• Involvement by the CFO and Moody’s liaison (AVP for Finance)
• Once management and auditors have settled on disclosure get buy-in from
Audit Committee
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Reporting of Investment Return
Net presentation of investment expenses against investment return on
the face of the statement of activities will be required (most had already
netted these costs against interest and dividends)
Netting includes external and direct internal expenses
Changes in Presentation
Disclosure of investment expenses no longer required
No longer require disclosure of investment return by interest, dividends,
realized gains (losses), and unrealized gains (losses)
Changes in Disclosures
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Implication of Changes
• More comparable measurement of investment returns across NFP
organizations
• More comparable measurements of investments that embedded
management fees within investment return
Net investments return (loss) is reported in the statements of activities
and consists of interest and dividend income, realized and unrealized
capital gains and losses, less external and direct internal investment
expenses.
Policy Footnote Disclosure
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Implementation Considerations
• Identify the costs, if any, that are being netted today
• Evaluate which costs are appropriate to net under new guidance
• External expenses – paid to third parties to generate investment returns
• Direct internal expenses – direct conduct or supervision of strategic and tactical
activities to generate investment returns
• Salaries and related costs for those responsible for the development and execution of
investment strategy
• Costs associated with supervising, selecting and monitoring external investment
management firms
• Consider how to communicate any material changes to net investment
return
• Decide if reports outside the financial statements should be changed for
consistency
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Pilot Lessons Learned
• No change to chart of accounts or how items were accounted for
• Small tweaks to reporting and then corresponding changes to
existing financial statements
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Implication of Changes
Choice of Direct Method or
Indirect Method
Eliminates requirement
to present indirect
reconciliation if Direct
Method used
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Implementation Considerations/Pilot Lessons Learned
• Determine which presentation is best for your organization – pros and cons
• If contemplating a change, consider:
• Recasting your most recent statement in new format and discuss with Audit
Committee the differences from existing presentation
• Determining if any financial system or process changes will be necessary to
support the new form
• Pilot lessons learned – no change deemed necessary
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Pilot Lessons Learned
No Resources
Net asset classes from
3 to 2
Reporting of
investment return
Expenses reported by
nature and function
Cash flow statement
options
New liquidity and
availability disclosures
Additional disclosures
for underwater
endowments
Minimal Resources
Some Resources The Most Attention
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Top 5 Take Aways
1. Identify areas that will be affected and rank changes by degree of
difficulty anticipated for your organization
2. Determine what changes to systems, spreadsheets, chart of accounts,
financial statements, etc. will be necessary and start formulating a plan
for implementation – starting with most difficult
3. Consider cost and time implications of personnel internal and external to
the organization
4. Discuss the implementation plan within the organization, with
governance and with auditors
5. Update and approve policies for any changes made
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If You Enjoyed This Webinar…
Upcoming Courses:
• 12/4 & 12/14: Critical Disclosures – New Revenue Recognition Requirements
• 12/6 & 12/13: Opportunities to Offset Payroll Tax Liabilities with Research and
Experimentation Credit
• 12/7: Individual Year-End Tax Planning Tips for 2017 and Beyond
• 12/21 & 12/28: Fourth Quarter Accounting and Financial Reporting Issues Update
Recent Publications:
• Diversifying Your Organization Starts with Your Board
• Data Analytics Drive Compliance Efforts in the 2018 Work Plan for Not-for-Profits
• Tap Into Relief Efforts Without Drilling Too Deep: Tips for Fundraising After a
Natural Disaster
• Frequently Asked Questions about Not-for-Profit Audits
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