2018 Community Health Center Accounting Standards Update
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In this session, we will discuss several sweeping accounting standards updates that will specifically affect Community Health Centers. Specifically, there are three new upcoming standards updates that will require changes in financial reporting and presentation; recording of leases, revenue recognition from contracts, and changes in financial statement presentation for non-profit organizations.
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2018 Community Health Center Accounting Standards Update
- 1. 2018 Community Health Center Accounting Standards Update presented by Brian Newton, CPA Partner & Shareholder Mathew Hamlin, CPA Senior Manager
- 2. Introduction: About Jones & Roth •Oregon roots dating back to 1946 •Dedicated team with expertise in the FQHC industry •Combine the resources and technical expertise of a large firm with the service and staff continuity of a local firm •Suite of services we can provide to FQHCs beyond annual audit and tax services
- 3. Agenda Accounting Standards Updates ◦Non-profit reporting changes ◦Lease accounting ◦Health care revenue recognition ◦Revenue from contracts with customers ◦Proposed accounting standard update – accounting for contributions
- 5. Non-Profit Reporting Changes ASU No. 2016-14 • Final version of phase 1 was issued in August 2016 as FASB ASU No. 2016-14: Presentation of Financial Statements of Not-for-Profit Entities • ASU No. 2016-14 (phase 1) is effective for annual financial statements issued for fiscal years beginning after December 15, 2017 • Calendar years 2018 • Fiscal years 2018/2019 • Early adoption is permitted
- 6. Non-Profit Reporting Changes ASU No. 2016-14 Key changes in ASU 2016-14 • Net assets • Liquidity and availability disclosures • Expense reporting • Investment return • Statement of cash flows • Implementation considerations
- 7. Non-Profit Reporting Changes ASU No. 2016-14 Key Changes ASU 2016-14 Net assets Liquidity disclosures Expense reporting Investment return Statement of cash flows Implementation Considerations
- 8. Non-Profit Reporting Changes Net Assets Unrestricted Temporarily Restricted Permanently Restricted Net Assets Without Donor Restrictions Net Assets With Donor Restrictions
- 9. Net Assets with Donor Restrictions • The part of net assets of a not-for-profit entity that is subject to donor-imposed restrictions (donors include other types of contributors, including makers of certain grants) • Will include “funds of perpetual duration” which replaces permanently restricted net assets Net Assets without Donor Restrictions • The part of net assets of a not-for-profit entity that is not subject to donor-imposed restrictions Non-Profit Reporting Changes Net Assets
- 10. Non-Profit Reporting Changes Net Assets Net Asset Disclosure Requirements ◦ Composition of net assets with donor/grantor restrictions ◦ Emphasis on how/when resources (net assets) can be used ◦ Specified purpose(s) ◦ Specified time(s) ◦ Perpetual (endowment – “funds of perpetual duration”) ◦ Quantitative and qualitative information about board designations ◦ Board designated net assets should be broken out on face of statement or in footnote disclosure
- 11. Non-Profit Reporting Changes Net Asset Classes Minimum Presentation Requirement: *This presentation would require additional footnote disclosure
- 12. Non-Profit Reporting Changes Net Asset Classes Disaggregated Data Presentation:
- 13. Non-Profit Reporting Changes Net Asset Classes Footnote Disclosure Example – Board Designated Net Assets: Board Designated Net Assets: The Board of Directors has established an operating reserve with the objective of setting aside funds to be drawn on in the event of financial distress or an immediate liquid need of the organization. The operating reserve balance totaled $257,000 at June 30, 2019.
- 14. Non-Profit Reporting Changes ASU No. 2016-14 Key Changes ASU 2016-14 Net asset classes Liquidity disclosures Expense reporting Investment return Statement of cash flows Implementation Considerations
- 15. Non-Profit Reporting Changes Liquidity and Availability The following information is required on the face of the statement of financial position or in the notes: ◦ Relevant information about the nature and amount of limitations on the use of cash and cash equivalents ◦ Contractual limitations on the use of particular assets ◦ Quantitative information, and additional qualitative information as necessary, about the availability of an NFP’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date
- 16. Non-Profit Reporting Changes Liquidity and Availability Additional information about liquidity shall be provided by any of the following: ◦ Sequencing assets according to their nearness of conversion to cash and sequencing of liabilities according to the nearness of their maturity and resulting use of cash ◦ Classifying assets and liabilities as current and non-current ◦ Disclosing in the notes any additional relevant information about liquidity or maturity of assets and liabilities, including restrictions on the use of particular assets ◦ Availability of financial asset may be affected by: ◦ Its nature ◦ External limited imposed by donors, laws and contracts with others ◦ Internal limits imposed by governing board decisions
- 17. Non-Profit Reporting Changes Liquidity and Availability
- 18. Non-Profit Reporting Changes Liquidity and Availability Key components to the required note disclosures for liquidity and availability: • Disclosure of the access to liquid assets • If there any restrictions/limitations on the use of the liquid assets • The organization’s goal for liquidity/ensuring expenditure needs are met Example note disclosures available in your handouts
- 19. Non-Profit Reporting Changes Liquidity and Availability Example 1: Excerpt ABC has a goal to maintain financial assets, which consist of cash and short-term investments, on hand to meet 60 days of normal operating expenses, which are, on average, approximately $275,000…. As more fully described in Note 10, ABC also has committed lines of credit in the amount of $20,000, which it could draw upon in the event of an unanticipated liquidity need.
- 20. Non-Profit Reporting Changes ASU No. 2016-14 Key Changes ASU 2016-14 Net asset classes Liquidity disclosures Expense reporting Investment return Statement of cash flows Implementation Considerations
- 21. Non-Profit Reporting Changes Expense Reporting All not-for-profit entities must present an analysis of expenses by function and nature in one location – i.e. a Statement of Functional Expenses ◦ Includes expenses by nature (payroll, supplies, etc.) and function (program; general and administrative; fundraising) ◦ Used to only be a requirement for voluntary health and welfare organizations Must also include a description of the method(s) used to allocate costs among program and support functions New standard provides additional guidance on management and general expenses
- 22. Non-Profit Reporting Changes Expense Reporting Example footnote disclosure on method used to allocate expenses: Allocation 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.
- 23. Non-Profit Reporting Changes Expense Reporting •Program service expenses are direct and indirect costs related to providing the mission and its programs •Management expenses are related to the overall direction of the organization (administration) •Fundraising expenses constitute an appeal for financial support (membership development)
- 24. Non-Profit Reporting Changes Expense Reporting •Classification of expenses according to the purpose for which they are incurred •Important for the budget and required for financial reporting •Directly identifying a specific expense to a function is the preferred method of charging expense to the various functions •If direct is not practical, allocating shared expenses indirectly is appropriate • Reasonably estimate and apply consistently
- 25. Non-Profit Reporting Changes Expense Reporting Resources for guidance on expense reporting: ◦ AICPA Audit and Accounting Guide for Nonprofits ◦ Standards of Accounting and Financial Reporting for Voluntary Health and Welfare Organization (the “Black Book”) ◦ Uniform Guidance 2 CFR 200 (Federal guidance) ◦ IRS Form 990 Instructions ◦ Jones & Roth
- 26. Non-Profit Reporting Changes ASU No. 2016-14 Key Changes ASU 2016-14 Net asset classes Liquidity disclosures Expense reporting Investment return Statement of cash flows Implementation Considerations
- 27. Non-Profit Reporting Changes Investment return Investment return shall be presented on net basis, with all external and direct internal investment management and custodial expenses netted against the return ◦ Internal expenses include direct conduct or direct supervision of the strategic and tactical activities involved in generating investment return – salaries, etc. for staff responsible for development and execution of investment strategy. Also includes allocable costs supervising, selecting and monitoring external investment management firms. ◦ Excludes costs not associated with generating investment return. No longer required to report investment income components and related expenses separately The new standard does not apply to programmatic investing – activity of making loans or other investments that are directed at carrying out the NFP’s mission
- 28. Non-Profit Reporting Changes ASU No. 2016-14 Key Changes ASU 2016-14 Net asset classes Liquidity disclosures Expense reporting Investment return Statement of cash flows Implementation Considerations
- 29. Non-Profit Reporting Changes Statement of cash flows NFP’s may continue to use either the direct or indirect method of reporting cash flows If direct method is used, no longer required to show the reconciliation of the change in net assets to cash flows from operating ◦ Additional considerations for changes to statement of cash flows are included in Phase 2
- 30. Non-Profit Reporting Changes ASU No. 2016-14 Key Changes ASU 2016-14 Net asset classes Liquidity disclosures Expense reporting Investment return Statement of cash flows Implementation Considerations
- 31. Non-Profit Reporting Changes Implementation Considerations Overall ◦ Read the ASU – available on FASB website: http://www.fasb.org/home ◦ Identify individual(s) in your organization to tackle the information ◦ Ensure proper training is received by personnel ◦ Discuss the impact of the new changes on audit timing and planning with your CPA ◦ Update your financial reporting templates ◦ Consider applying the new standard to your latest financial statements to review affect of new standard ◦ Consider whether any changes in the financial statements will trigger necessary changes to debt covenants or grant agreements
- 32. Non-Profit Reporting Changes Implementation Considerations Net Assets ◦ Determine what changes will need to be made, if any, to method used to track net assets ◦ Assemble information about board designated net assets, if any ◦ For endowments, review new disclosures for underwater endowments, if any Liquidity ◦ Identify all financial assets, and limitations thereto, for expenditure for next 12 months ◦ Consider presentation options ◦ Develop a formal policy for managing the organization’s liquidity needs as this will need to be explained in the footnote disclosures
- 33. Non-Profit Reporting Changes Implementation Considerations Expenses ◦ If not already doing so, determine how/where to present the required expense information – all expenses by nature and function in one place ◦ If not already in place, develop and document allocation methodology to be used to allocate expenses between program services and supporting services Investment reporting ◦ Update general ledger as needed to report investment income net of external and direct internal investment expenses ◦ Establish procedures to accumulate such investment expenses, as necessary Cash Flows ◦ If using direct method, you may eliminate the reconciliation of operating cash flows ◦ If using the indirect method, determine the usefulness of the direct method as this is a consideration for Phase 2
- 34. Non-Profit Reporting Changes Implementation Considerations The amendments in this Update should be applied on a retrospective basis in the year that the Update is first applied. However, if presenting comparative financial statements, an NFP has the option to omit the following information for any periods presented before the period of adoption: 1. Analysis of expenses by both natural classification and functional classification (functional expense statement) 2. Disclosures about liquidity and availability of resources. In the period that the amendments are first applied, an NFP should disclose the nature of any reclassifications or restatements and their effects, if any, on changes in the net asset classes for each period presented.
- 35. Non-Profit Reporting Changes Implementation Considerations Resources: Financial Accounting Standards Board: ◦ http://www.fasb.org/home AICPA Not-for-Profit Section: ◦ http://www.aicpa.org/InterestAreas/NotForProfit/Pages/default.aspx
- 36. • Topics of Phase 2 of NFP Financial Statement Project ◦ Whether to require a measure of operations for all NFPs and defining a measure of operations ◦ Realignment of certain line items on the Statement of Cash Flows ◦ Exploring option of segment reporting No release date yet schedule for proposed Phase 2 of the accounting standard update Non-Profit Reporting Changes Phase 2 Update
- 37. Lease Accounting ASU No. 2016-02 Purpose of the updated accounting standard is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The main difference between previous GAAP and the updated standards is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP.
- 38. December 15, 2018: • A public business entity • 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 • An employee benefit plan that files financial statements with the U.S. SEC December 15, 2019: • All other entities including not-for-profit entities Effective Dates - Fiscal years beginning after Lease Accounting ASU No. 2016-02
- 39. Lessee Accounting: • Should recognize the assets and liabilities that arise from leases ◦ Exception for leases with a term of 12 months or less whereby election is made to recognize lease expense over term of lease ◦ Exception does not apply to cases in which the organization is reasonably certain to exercise option to extend the lease beyond the 12 month term • Lessees will be required to report on their statement of financial position a “right-of-use” asset and a lease liability • Lessees will be required to classify all leases as either finance (capital) or operating leases Lease Accounting ASU No. 2016-02
- 40. If lease meets any of the following then it is considered a Finance Lease for the lessee and a Sales-type lease for the lessor: • Transfer of ownership at end of lease term • Option to purchase that the lessee is reasonably certain to exercise • Lease term is for major part of remaining economic life of asset • Present value of lease payments plus any guaranteed residual value equals or exceeds substantially all the fair value of the asset Lease Accounting ASU No. 2016-02
- 41. FINANCE LEASES • Recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments • Recognize interest on the lease liability separately from amortization of the right-of-use asset • Classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows Lease Accounting ASU No. 2016-02
- 42. OPERATING LEASES • Recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments • Recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis • Classify all cash payments within operating activities in the statement of cash flows Lease Accounting ASU No. 2016-02
- 45. Lessor Accounting • Largely unchanged • Vast majority of operating leases should remain classified as operating leases and lessors continue to recognize income on a generally straight line basis over the term of the lease • Some modifications to align with revenue recognition guidance Lease Accounting ASU No. 2016-02
- 46. Applies to any entity that enters into a contract with customers to transfer goods or services. For NPOs, the standard may affect revenue such as tuition, room and board, fee for service arrangements (patient service revenue), and membership dues. Because the rules only apply to exchange transactions, accounting for contributions will not change. Revenue from Contracts with Customers ASU 2014-09
- 47. Indicator Exchange Transaction Contribution Nonprofit organization's intent in soliciting the asset Nonprofit organization asserts that it is seeking resources in exchange for specified benefits. Nonprofit organization asserts that it is soliciting a contribution. Provider's expressed intent about the purpose of the asset to be provided Provider asserts that it is transferring resources in exchange for specified benefits. Provider asserts that it is making a contribution to support the nonprofit organization's programs. Methods of delivery of the assets to be provided by the nonprofit organization to third party recipients Delivery method is specified by the provider. Time or place of delivery is at the discretion of the nonprofit organization. Method of determining payment amount Provider pays the nonprofit organization an amount equal to the value of the assets provided by the nonprofit organization or the assets' cost plus markup, based on the quantity of assets to be provided. Provider determines the amount of payment. Penalties assessed if the nonprofit organization fails to make timely delivery of assets Nonprofit organization is penalized for nonperformance. Provisions for economic penalties exist beyond the amount of payment. Nonprofit organization is not penalized for nonperformance. Penalties are limited to the delivery of assets already produced and the return of the unspent amount. Delivery of assets to be provided by the nonprofit organization Assets are to be delivered to the provider or to individuals or organizations closely connected to the provider. Assets are to be delivered to individuals or organizations other than the provider. Exchange Transaction vs Contribution
- 48. Exchange Transaction vs Contribution • An unconditional transfer of assets or settlement of liabilities in a voluntary, nonreciprocal transfer Contribution: • A reciprocal transfer resulting from transactions such as program service fees and sales revenue Exchange transaction:
- 49. Exchange Transaction vs Contribution • Recorded at fair value • Recognized as revenue in the period received even if restricted for a future period; none are deferred Contribution: • Recorded when the transfer of the services or goods has been completed • Revenue from exchange transactions should be recorded as deferred revenue to the extent that it has not yet been earned Exchange Transaction:
- 50. Revenue from Contracts with Customers ASU 2014-09 Step 1: Identify if a contract exists A contract is an agreement between two or more parties that creates enforceable rights and obligations. An entity should apply the requirements to each contract that meets the following criteria: ◦ 1. Approval and commitment of the parties ◦ 2. Identification of the rights of the parties ◦ 3. Identification of the payment terms ◦ 4. The contract has commercial substance ◦ 5. It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
- 51. Revenue from Contracts with Customers ASU 2014-09 Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
- 52. Amended Effective Date for non public business entities is for fiscal years beginning after December 15, 2018 (Calendar year ending December 31, 2019, or fiscal years ending in 2020). • Earlier adoption is permitted for any fiscal year beginning after 12/15/16 Organizations that are primarily supported by exchange transactions, such as fee for services arrangements and membership organizations, should currently spend some time testing their existing recognition policies against the five-step recognition process in ASU 2014-09 and determine if there are any revenues for which new information systems need to be designed to implement the standards. Revenue from Contracts with Customers ASU 2014-09
- 53. Healthcare Industry Specific Revenue Considerations • Patient service revenue (fee for service) • Capitation arrangements • State specific programs • CCO/ACO specific programs • “Coverage” arrangements – ex. School Based Health Center • Incentive payments • Risk share / risk withhold agreements
- 54. FASB project with the objective to improve and clarify existing guidance on revenue recognition of grants and contracts by not-for- profit entities There was difficulty and diversity in practice amongst not-for-profits with: ◦ Characterizing grants and similar contracts with governmental agencies and others as reciprocal transactions (exchanges) or nonreciprocal transactions (contributions) ◦ Distinguishing between conditional and unconditional contributions FASB issued proposed Accounting Standards Update, Not-for-Profit Entities: Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made in August 2017 for comments Accounting Guidance for Contributions Proposed ASU
- 55. Main Provisions of the Proposed ASU – Contribution vs. Exchange Provides a more robust framework to determine whether a transaction should be accounted for as a contribution or exchange transaction The proposed ASU clarifies how a NFP organization determines whether a resource provider is participating in an exchange transaction by providing guidance to evaluate what the resource provider is receiving in return for the resources transferred In instances in which the resource provider (or a third party pass through payer, for example Medicare) is not receiving commensurate value for the resources provided, the transaction is accounted for as a contribution, not an exchange transaction Accounting Guidance for Contributions Proposed ASU
- 56. Main Provisions of the Proposed ASU – Unconditional vs. Conditional Requires organizations to determine whether a contribution is conditional on the basis of whether the underlying agreement includes: ◦ A barrier that must be overcome, and ◦ Either a right of return of assets transferred or a right of release of a promisor’s obligation to transfer assets If the agreement includes both, the recipient is not entitled to the transferred assets until it has overcome the barriers in the agreement. The contribution is not recognized as revenue until it is deemed unconditional – the barrier no longer exists. Accounting Guidance for Contributions Proposed ASU
- 59. THANK YOU! Thank you for attending today’s presentation! Eugene (541) 687-2320 Portland (503) 648-0521 Bend (541) 382-3590 bnewton@jrcpa.com mhamlin@jrcpa.com
Editor's Notes
- Accounting standards and reporting updates
- Background: Financial Accounting Standards Board (FASB) added a project to its agenda to improve information presented in the financial statements of Not-for-profits. Goal to make Not-for-profit financial statements more comparable and to provide donors and lenders with information to assess organizational health Issued draft of proposed changes and received pages of comments As a result of the comments, the changes were broken into two phases The first phase is effective for fiscal years beginning after 12/15/17 So if you have 12/31 year end it would be for 12/31/18 year end For 6/30 year end, it would be for your 6/30/19 year end –year beginning 7/1/18 This Update makes several improvements to current reporting requirements that address, among others, the following problems: 1. Complexities about the use of the currently required three classes of net assets that focus on the absence or presence of donor-imposed restrictions and whether those restrictions are temporary or permanent 2. Deficiencies in the transparency and utility of information useful in assessing an entity’s liquidity caused by potential misunderstandings and confusion about the term unrestricted net assets and how restrictions or limits imposed by donors, grantors, laws, contracts, and governing boards affect an entity’s liquidity, classes of net assets, and financial performance 3. Inconsistencies in the type of information provided about expenses of the period—for example, some, but not all, NFPs provide information about expenses by both nature and function 4. Impediment of preparing the indirect method reconciliation if an NFP chooses to use the direct method of presenting operating cash flows.
- The first significant change is to classes of net assets From three types to two types New rules require segregation into two categories: Net assets with donor restrictions Net assets without donor restrictions These classes are to be presented on the face of statement of financial position and the statement of activities This eliminates the distinction between resources with permanent restrictions and temporary restrictions on the face of statements which is aimed to reduce complexity. However, types of restrictions will be required to be disclosed either on the face or in the notes – we will discuss more on that later
- Definitions are not that much different than before. Brings clarity to board restrictions of net assets. The board is not a donor so those are not truly restricted net assets.
- Although the net assets classes have been simplified, there is emphasis on disclosures Within the Net Assets with Donor restrictions, you must disclose the types of restrictions Specified purpose – program, etc. Specified for future time period Funds of Perpetual duration – this takes the place of the old “Permanently restricted” net assets (Endowments) Also, for any board designated net assets – Must be broken out on statements or in the notes and include disclosures on the expected use of the funds
- Questions on Net Asset changes?
- Moving on to the new Liquidity Disclosures
- Required on face of FS or in notes: First two items are not new: Relevant information about the nature and amount of limitations on the use of cash and cash equivalents Contractual limitations on the use of particular assets New requirement: Quantitative information, and additional qualitative information as necessary, about the availability of an NFP’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet date Question is how to do this?
- There are several methods of meeting the requirement to disclose quantitative and qualitative information on the liquidity of the NPOs assets and its ability to meet its expenditure needs Sequencing assets according to their nearness of conversion to cash and sequencing of liabilities according to the nearness of their maturity and resulting use of cash Classifying assets and liabilities as current and non-current Disclosing in the notes any additional relevant information about liquidity or maturity of assets and liabilities, including restrictions on the use of particular assets Availability of financial asset may be affected by: Its nature External limited imposed by donors, laws and contracts with others Internal limits imposed by governing board decisions
- This shows a basic example of sequencing of the assets in order of liquidity There would also be a required note disclosure -
- Example of a note Key components Disclosure of the access to liquid assets If there any restrictions/limitations on the use of the liquid assets The organization’s goal for liquidity / ensuring expenditure needs are met Three different examples provided with your materials QUESTIONS?
- QUESTION: How many of your organizations’ FS already include a statement of Functional Expenses? If you haven’t been doing this in your FS, you may have a start in your Form 990 – required for most NPOs in their 990s Clarification on what is included in Management and General activities: 958-720-45-7 Management and general activities include the following: Oversight Business management General recordkeeping and payroll Budgeting Financing, including unallocated interest costs pursuant to paragraph 958-720-45-24 Soliciting funds other than contributions and membership dues, for example, the costs associated with: Promoting the sale of goods or services to customers, including advertising costs Responding to government, foundation, and other requests for proposals for customer-sponsored contracts for goods and services Producing and disseminating the annual report All other management and administration except for direct conduct of program services, fundraising activities, or membership development activities BEWARE Common errors in statement of functional expenses Not properly allocating management and general expenses Reporting no fundraising expenses when the organization has substantial contribution income Not allocating salary and related costs for Executive Director or other members of management Not allocating insurance, occupancy and depreciation Using a fixed percentage to allocate costs rather than a basis more accurately representing true functions benefited
- Different pools of allocable costs and how such amounts are allocated Methods used for tracking? Easiest method is to track expenses using general ledger accounts Specific department / program codes Designated account numbers Track direct and indirect expenses separately to allow for easier allocation QuickBooks classes QUESTIONS?
- Expenses for NPO can be broadly categorized into three main expense functions. Statement of Functional Expenses is required NPO financial reporting. Program service expenses are direct and indirect costs related to providing programs and social services. Costs of the activities for which the organization exists. Include a call for action from the public. Mgmt and General Related to overall direction of NPO Include expenses for activities of Board, Business mgmt., general bookkeeping, budgeting, Usually include part of the salaries of ED and related staff. Can allocate time if staff spent time elsewhere Fundraising Activities that constitute an appeal for financial support. Examples are costs of personnel, consultants, rent, printing, postage, special events 3) Membership development
- Functional classification is Classification of expenses according to the purpose for which they are incurred. - There will be estimates involved, the calculation must be reasonable, objective, supportable, and applied consistently - There should be written policies in place on how organization allocates and policies should be followed. Update policies when better information becomes available. Example: An individual may perform service benefitting more than one program. Or an executive director may spend part of the time on management or program or fundraising Accounting considerations: FASB requires all nonprofits to provide information about expenses reported by their functional classification May be provided in the statement of activities or in notes to the financials. Preference is reporting functionally in the statement of activities.
- Functional expense allocation should be in writing and approved by the board
- Current GAAP allows for investment expenses to be presented with the investment return, netting down the revenue OR can be presented with expenses. ASU 2016-14 requires all investment returns to be shown NET of external and direct internal investment expenses Direct Internal expenses include direct conduct or supervision of the strategical and tactical activities involved in generating the investment return. If the organization’s investments are managed by a third party, there are probably minimal INTERNAL expenses - all subject to the concept of materiality However if your organization is a foundation for example and does much of its investment management internally then, these expenses could be considerable. New standard also removes the requirement to disclose the separate components of investment return and expenses This does not apply to programmatic investment – such as income from making loans if that is the NPO’s mission
- Little progress made on phase 2 so we are still in waiting mode
- Overall Read the ASU – available on FASB website: http://www.fasb.org/home Identify individual(s) in your organization to tackle the information Ensure proper training is received by personnel (this was a good first step!) Discuss the impact of the new changes on audit timing and planning with your auditors Consider applying the new standard to your latest financial statements to review affect of new standard
- Net Assets Determine what changes will need to be made, if any, to method used to track net assets Assemble information about board designated net assets, if any For endowments, review new disclosures for underwater endowments, if any Liquidity Identify all financial assets, and limitations thereto, for expenditure for next 12 months Consider presentation options Develop a formal policy for managing the organization’s liquidity needs as this will need to be explained in the footnote disclosures What is your board approved liquidity policy – if you don’t have one yet, now is the time to get in writing because we need to disclose in FS notes going forward
- Expenses If not already doing so, determine how/where to present the required expense information – all expenses by nature and function in one place If not already in place, develop and document allocation methodology to be used to allocate expenses between program services and supporting services Investment reporting Update general ledger as needed to report investment income net of external and direct internal investment expenses Establish procedures to accumulate such investment expenses, as necessary Cash Flows If using direct method, you may eliminate the reconciliation of operating cash flows If using the indirect method, determine the usefulness of the direct method as this is a consideration for Phase 2
- The amendments in this Update should be applied on a retrospective basis in the year that the Update is first applied. However, if presenting comparative financial statements, an NFP has the option to omit the following information for any periods presented before the period of adoption: 1. Functional expenses can be single year presentation 2. Liquidity disclosure for PY not required, can be single year presentation
- QUESTIONS?
- On the horizon – we also have Phase 2 of the NFP FS project in the works with focus areas including: Whether to require a measure of operations for all NFPs and how to define a measure of operations Realignment of certain line items on the Statement of Cash Flows Exploring option of segment reporting Next Fritz will discuss Lease Accounting changes
- Purpose of the updated accounting standard is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The main difference between previous GAAP and the updated standards is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. Because applying the new lease standards results in new assets and liabilities in the financial statements, nonprofit organizations with debt will need to assess the effects of those new assets and liabilities on debt covenants. It is necessary to make a rough estimate of the effects of implementation on financial covenants as soon as possible, and then stress test those covenants to see how sensitive they are to changes that might occur, such as a decrease in pledges or the signing of a new lease. It may be necessary talk to lenders about adjusting the covenants for the new standards, and it is best to do that as soon as possible. For most nonprofit organizations, determining the effort necessary to implement the standard requires locating all the leases.
- Conduit Bond Obligor:
- The core principle is that a lessee should recognize the assets and liabilities that arise from leases. All leases create an asset and a liability for the lessee, and, therefore, recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. Distinction between finance and operating leases on stmt of fin. Position Financial Accounting Standards Board (FASB) released final accounting standards update for the accounting for leases The new standard will require all leases – Financing (capital) and operating leases – to be shown on the balance sheet Exception for leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Then recognize lease expense over term of lease. This is more indicative of the nature of the leases – the lessee has a right to use asset and a liability to make payments under the terms of the lease
- All leases – must determine if they are a “finance/sales-type lease” or Operating lease. Similar to former “capital lease” determination process 842-10-25-2 A lessee shall classify a lease as a finance lease and a lessor shall classify a lease as a sales-type lease when the lease meets any of the following criteria at lease commencement: The lease transfers ownership of the underlying asset to the lessee by the end of the lease b. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise. c. The lease term is for the major part of the remaining economic life of the underlying asset. However, if the commencement date falls at or near the end of the economic life of the underlying asset, this criterion shall not be used for purposes of classifying the lease. Guidance suggests using 75% of economic life (just like capital lease determination) d. The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments in accordance with paragraph 842-10-30-5(f) equals or exceeds substantially all of the fair value of the underlying asset. Guidance suggests using 90% or more of FV as the threshold for substantially all of the FV If none of these are met, then it is an operating lease
- Must differentiate between Financing leases and Operating leases because there are some differences in reporting Both – the lessee will recognize a right-of-use asset and lease liability, initially measured at the PV of lease payments Finance lease: Recognize interest on the lease liability separately from amortization of the right-to-use asset in the statement of comprehensive income Payments of principle of lease liability in financing section of CF and of interest in operating section of CF
- Must differentiate between Financing leases and Operating leases because there are some differences in reporting Both – the lessee will recognize a right-of-use asset and lease liability, initially measured at the PV of lease payments Operating lease: Recognize single lease cost, calculated so that the cost of the lease is allocated over the term generally on S/L basis Generally all payments will be in operating section of CF.
- Scenario: The organization has a lease for its administrative building that calls for $18,000 a year. The lease has 15 years remaining. Let’s look at the differences in the balance sheet under the old rules vs. the new rules.
- Scenario: The organization has a lease for its administrative building that calls for $18,000 a year. The lease has 15 years remaining. Let’s look at the differences in the balance sheet under the old rules vs. the new rules.
- Some modifications to align with revenue recognition guidance: for example, specific aspects of the lessor accounting guidance for real estate assets were designed to conform with the revenue recognition guidance specific to sales of real estate, and both the previous leasing and certain revenue recognition guidance in GAAP utilized a risk-and-rewards principle for determining when the sale of an asset occurred retains alignment in key respects between the lessor accounting guidance and the revenue recognition guidance in Topic 606. For example, whether a lease is similar to a sale of the underlying asset depends on whether the lessee, in effect, obtains control of the underlying asset as a result of the lease (consistent with the transfer of control principle for a sale in Topic 606), and a lessor is precluded from recognizing selling profit or sales revenue at lease commencement for a lease that does not transfer control of the underlying asset to the lessee. Questions Next we will discuss revenue from contracts with customers
- Briefly discuss the changes to revenue recognition for contracts with customers These rules only apply to exchange transactions so Does not apply to charitable donations
- Contract means you provide me this value and I’ll provide you this value in return (not a contribution) Contribution means I’m providing you value and expect nothing in return other than the warm and fuzzies (contribution) We care because properly distinguishing between the two means you are properly recognizing revenue which can drastically change your financials depending on the size of the grant or contract Talk about long term donations (pledge) and grants. Even long term grants should be fully recognized as revenue in the year the award is made. Did everyone know that? I get more questions about this from NPOs then any other item. This is gold guys. This chart comes from the NPO accounting professional standards as a template to work from in determining exchange transaction vs. contribution.
- The biggest difference in determining if a transactions is a contribution or exchange transaction is determining if reciprocal Does the contributor get anything in return for their contribution? Grants “Grants” can be either and determining the right classification can have a big impact on recognizing revenues Many grants may be exchange transactions or conditional promises to give rather than contributions as defined in GAAP. However, some grant agreements could be contributions, and accountants give consideration to the factors in the following paragraphs when determining whether a grant is a contribution, a conditional promise to give, or an exchange transaction. An organization determines whether a grant is an unconditional promise to give, a conditional promise to give, or an exchange transaction in accordance with GAAP. That determination will often be difficult and require significant judgment. Each grant is evaluated individually in light of the considerations
- FASB generally require measuring contributions received at the fair value of the assets or services received or promised, or the fair value of the liabilities satisfied. Contributions are recognized as revenues or gains in the period they are received, even if the donor has restricted their use and the restriction will be met in a future reporting period; that is, none are deferred. As a result, contributions are recorded immediately either as an increase in unrestricted net assets, temporarily restricted net assets, or permanently restricted net assets, depending on the nature of the donor restrictions, if any
- Step 1: Does a contract exist? A contract is an agreement between two or more parties that creates enforceable rights and obligations. CONTRIBUTIONS DO NOT fall into this category. An entity should apply the requirements to each contract that meets the following criteria: 1. Approval and commitment of the parties 2. Identification of the rights of the parties 3. Identification of the payment terms 4. The contract has commercial substance 5. It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
- Step 2: Identify the performance obligations in the contract A performance obligation is a promise in a contract with a customer to transfer a good or service to the customer. Must be distinct – identifiable in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract To allocate an appropriate amount of consideration to each performance obligation, an entity must determine the standalone selling price at contract inception of the distinct goods or services underlying each performance obligation Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
- The Financial Accounting Standards Board (FASB) is currently working on another accounting standard update that would specifically apply to not for profit entities. The ASU is called: , Not-for-Profit Entities: Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made There is difficulty and diversity in practice of classifying transactions as contributions or exchange transactions. This determination will be especially important with the application of the new revenue recognition standard. Went out as a draft in August and is now back with the FASB team for revision.
- The main provisions include clarification of Contributions vs. exchange transactions A grant is considered to be an exchange transaction if the grantor receives commensurate value in return for the resources provided. Grantors, such as private foundations or government agencies, are not synonymous with the general public, and neither the indirect benefit received by the public nor the positive sentiment from acting as a donor qualifies as commensurate value to the grantor. If the general public is receiving the primary benefit, then the transaction is deemed a contribution. Still leaves some room for gray, but the final ASU will likely have additional examples.
- The second main provision is clarification between unconditional and conditional contributions. The proposed ASU requires organizations to determine whether a contribution is conditional on the basis of whether an agreement includes: A barrier that must be overcome, and Either a right of return of assets transferred or a right of release of a promisor’s obligation to transfer assets. Indicators would be used to guide the assessment of whether an agreement contains a barrier. The indicators would include: The inclusion of a measurable performance-related barrier or other measurable barrier Whether a stipulation is related to the purpose of the agreement The extent to which a stipulation limits discretion by the recipient The extent to which a stipulation requires an additional action or actions.