2018-nonprofit-symposium-fasb-trifecta

• Revenue Recognitiono Statement of Cash Flows o Net Asset Classification and Related Disclosures o Information Useful in Assessing Liquidity o Expenses by Function and Nature PRESENTATI

The Perfect Storm

G O L D

S I LV E R

B R O N Z E

SPONSORS

THE FASB

TRIFECTA

Monika Pelz, Partner, Audit

Brenda Kahler, Senior Manager, Consulting Matt Gard, Senior Manager, Audit

• 23 years of audit and accounting experience

• Focus on serving nonprofit entities including private

foundations, K-12 independent schools & performing arts

• American Institute of Certified Public Accountants (AICPA)

• California Society of Certified Public Accountants (CalCPA)

• BS, Specific Emphasis – Accounting, Sonoma State

University

Monika Pelz, CPA

Audit Partner, Armanino

• 12 years of audit and accounting experience

• Focus on serving nonprofit entities including museums and performing arts, K-12 independent schools, and private

foundations.

• Member of the American Institute of CPAs and the

California Society of CPAs

• BS in accounting from Saint Mary’s College

Matt Gard, CPA

Senior Manger, Armanino

• 15+ years of accounting experience primarily with nonprofits

in Big 4 public accounting and in-house as a Controller

• Prior to Armanino, she lead an Intacct implementation as an Armanino client for a $50M nonprofit operating in 20+

countries

• Extensive knowledge of nonprofit accounting and compliance requirements including U.S Single Audit requirements

• BS in Accounting, Bryant University

Brenda Kahler, CPA

Senior Manager, Armanino

• Revenue Recognition

o Statement of Cash Flows

o Net Asset Classification and Related Disclosures

o Information Useful in Assessing Liquidity

o Expenses by Function and Nature

PRESENTATION OVERVIEW

REVENUE RECOGNITION

• Revenue from Contracts with Customers, ASC 606

o Effective 1/1/2019 (FY2019-20)

• Proposed Changes in Accounting for Contributions

REV REC FOR NONPROFITS

APPLICATION OF THE STANDARD

Which orgs will likely be

impacted?

• Museums

• Performing Arts Groups

• K-12 Schools and Universities

• Trade Associations

• Hospitals and Clinics

• Other Specialized Nonprofits

1. Identify contracts

2. Identify performance obligations

3. Determine transaction price

4. Allocate transaction price

5. Recognize revenue when or as performance

obligations are satisfied

5-STEP PROCESS

• Symphony Membership Program

• $60 Annual Dues

• Members Receive:

o Monthly newsletter $30 value

o Access to the symphony’s archives $10 value

o One free admission $15 value

o Designated parking $20 value

EXAMPLE

Allocate member dues to each of the 4 elements, and recognize

Allocate member dues to each of the 4 3 elements, and recognize

Sales prices per individual item increased because overall membership

price remained the same, and one element was removed.

If available to everyone, not part of the customer contract

• Identify arrangements that would be considered contracts with customers

• Analyze identified contracts to determine specific deliverables

• Seek legal assistance

• Understand potential IT/system changes

• Prioritize training

• Take action now!

o Effective 1/1/19 for December 30 FYE

o Effective 7/1/19 for June 30 FYE

IMPLEMENTATION TIPS

Accounting for Grants and Contracts

• Intended to address difficulties in determining:

o Whether a grant is a contribution or

exchange transaction

o Whether conditional or unconditional

FASB EXPOSURE DRAFT

Does the resource provider itself (foundation, government agency, etc.) receive commensurate value?

• Value to the general public doesn’t count

Some transactions include BOTH a contribution and

exchange element

CONTRIBUTION VS EXCHANGE

Donor-Imposed Conditions vs Restrictions

• Presence of both a barrier and a right of return/release

Indicators of Conditions:

• Measurable performance-related barrier

• Limited discretion on expenditures

CONDITIONS VS RESTRICTIONS

Likely effective date is fiscal years beginning after 12/15/18 (2019) for

“nonpublic” nonprofit organizations.

LEASE ACCOUNTING

Definition of a Lease

• Contract that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period

of time in exchange for consideration

• Control over the use of the identified asset means that the

customer has both:

1. the right to obtain substantially all of the economic benefits

from the use of the asset and

2. the right to direct the use of the asset

DEFINITION OF A LEASE

CURRENT AND NEW STANDARDS

Current Lease Accounting

• Operating and Capital

Leases

• Operating leases kept off

the balance sheet by the

lessee

New Lease Accounting

• Still requires classification as either Finance or Operating lease

• Key difference is lease assets and liabilities from operating leases should be recognized in balance sheet

• Right of Use Model

• Recognize a right-of-use asset and liability

• Amortization expense

• Interest expense

Principal repayment presented as financing and interest presented

Single lease cost recognized on a straight line basis over the lease term

All cash payments presented as

operating

Short-term leases of 12 months or less

• Permitted to not recognize lease assets and lease liabilities

Optional payments

• Include optional payments in calculations if exercising of options is reasonably certain

SUMMARY

• Expands qualitative and quantitative disclosures

• Intention is to enable financial statement users to assess the amount, timing, and uncertainty of cash flows from leases

• Enhanced disclosures include:

o Nature of leases

o Significant judgments and assumptions

o Maturity tables

Public Companies

• Fiscal years beginning after December 15, 2018

All Other Organizations

• Fiscal years beginning after December 15, 2019

Early application permitted for all organizations

o Modified Retrospective Approach

EFFECTIVE DATES

1. Assess existing leases and their impact on the

business

2. Update lease inventory

3. Evaluate impact to financial statements

4. Assess internal controls and policies over lease

accounting

5. Consider adequacy of software

IMPLEMENTATION TIPS

FINANCIAL STATEMENT REPORTING CHANGES

OVERVIEW OF CHANGES

Changes will affect the following financial statement reporting areas:

Net Asset Classification Reporting of Expenses Cash Flow Statement Liquidity

NET ASSET

CLASSIFICATION & RELATED

DISCLOSURES

NET ASSET CLASSIFICATION DISCLOSURES

Temporarily Restricted Net Assets

Permanently Restricted Net Assets

Net Assets

with Donor

Restrictions

Unrestricted Net Assets

Net Assets

without

Donor Restrictions

STATEMENT OF FINANCIAL POSITION

Current assets

Cash and cash equivalents $ 7,545,000 $ 7,435,000 Tuition and fees receivable, net 100,000 90,000 Contributions receivable, net 2,500,000 2,200,000 Prepaid expenses 135,000 124,000 Long-term investment appropriated for current use 500,000 450,000 Short-term investments 1,500,000 1,200,000 Total current assets 12,280,000 11,499,000

Noncurrent assets

Contributions receivable, net of current portion 2,951,000 Property and equipment, net 47,040,000 48,067,000 Long-term investments 15,000,000 16,000,000 Certificates of deposit restricted for bond reserves 200,000 200,000 Total noncurrent assets 65,191,000 64,267,000

LIABILITIES AND NET ASSETS Current liabilities

Accounts payable $ 535,000 $ 450,000 Accrued payroll, taxes and benefits 1,250,000 1,200,000 Other accrued expenses 500,000 475,000 Deferred tuition and fees 6,165,000 6,100,000 Other current liabilities 55,000 50,000

Total liabilities and net assets $ 77,471,000 $ 75,766,000

Disclosure Requirements for Net Assets WITH Donor

Restrictions:

• Nature and amount of donor restrictions

• Underwater endowments reflected in net assets with restrictions

o The NFP’s policy to either reduce expenditure or not spend from

underwater endowment funds

o The aggregate fair value

o Aggregate original endowment gift amount or level required by

donor stipulations or by law to be maintained

o Aggregate amount of deficiencies

• Governance policy regarding spending

NET ASSET CLASSIFICATION & DISCLOSURES

NET ASSETS W/ DONOR RESTRICTIONS

Subject to expenditure for specified purpose:

Capital purchases or improvements $ 1,500,000

$ 3,000,000

Subject to the passage of time:

Subject to school spending policy and appropriation:

Investment in perpetuity (including amounts above original gift amounts)

which, once appropriated, is expendable to support:

CHANGE IN ENDOWMENT ASSETS

Without Donor Restriction

With Donor Restriction Total

Endowment net assets, beginning of year $ 4,100,000 $ 6,950,000 $ 11,050,000

Disclosure Requirements for Net Assets WITHOUT Donor

Restrictions:

• Amount of board-designated net assets either on the face of or

in the notes to the financial statements

Other Net Asset Considerations:

• Expiration of Capital restrictions

o Gifts of cash restricted for the acquisition or construction of PP&E

• In the absence of explicit donor instructions, NFPs would be required to use

“placed-in-service” approach

NET ASSET CLASSIFICATION & DISCLOSURES

Net assets released from restrictions 1,680,000 (1,680,000) Total revenues, gains, and other support 21,775,000 800,000 22,575,000

-Expenses

Program services 15,300,000 - 15,300,000 General and administrative 4,600,000 - 4,600,000 Fundraising 600,000 - 600,000 Total expenses 20,500,000 - 20,500,000

Change in net assets 1,275,000 800,000 2,075,000

Net assets at beginning of year 38,791,000 11,500,000 50,291,000

Net assets at end of year $ 40,066,000 $ 12,300,000 $ 52,366,000

EXPENSES

• Expenses, including amounts for operating expenses by both their nature and function

o Can be provided on the face of the statement of activities, as a separate statement, or in notes to financial statements

• Nature – Salaries and benefits, occupancy, depreciation, etc.

• Function – Program and Supporting Activities (Fundraising and M&G)

• Required to present investment return net of external and direct internal investment expenses

o Permitted, but no longer required to disclose any investment

expenses that are netted against investment return.

REPORTING OF EXPENSES

Note F

The table below presents expenses by both their nature and their function for fiscal year 20X1.

Program Activities Supporting Activities

Student Programs Management Fund- Supporting Total Instruction Support Services Subtotal and General Raising Subtotal Expenses

Salaries and benefits $ 7,400,000 $ 2,725,000 $ 10,125,000 $ 3,130,000 $ 260,000 $ 3,390,000 $ 13,515,000 Supplies and travel 890,000 499,000 1,389,000 325,000 40,000 365,000 1,754,000 Services and professional fees 560,000 600,000 1,160,000 450,000 90,000 540,000 1,700,000 Office and occupancy 360,000 297,000 657,000 218,000 50,000 268,000 925,000 Depreciation 960,000 670,000 1,630,000 450,000 140,000 590,000 2,220,000 Interest 271,000 68,000 339,000 27,000 20,000 47,000 386,000 Total expenses $ 10,441,000 $ 4,859,000 $ 15,300,000 $ 4,600,000 $ 600,000 $ 5,200,000 $ 20,500,000

The financial statements report certain categories of expenses that are attributable to more than one program or supporting function Therefore, these expenses require allocation on a reasonable basis that is consistently applied The expenses that are allocated include depreciation, interest, and office and occupancy, which are allocated

on a square-footage basis, as well as salaries and benefits, which are allocated on the basis of estimates of time and effort.

STATEMENT

OF CASH FLOWS

• Allowed to use either the direct or indirect method of presenting operating cash flows

• Indirect reconciliation no longer required when choosing to

present direct method presentation

OPERATING CASH FLOWS

LIQUIDITY

Define the time horizon used to manage liquidity ( e.g., 30/60/90 days)

Disclosure requirements

• Total amount of financial assets

• Amounts not available to meet cash needs within the time horizon

• Financial liabilities that are due within the time horizon

• Qualitative information about how you manage liquidity:

o Strategy for addressing entity-wide risks that may affect liquidity (e.g., credit lines)

o Policy for establishing liquidity reserves

o Basis for determining the time horizon used for managing liquidity

LIQUIDITY

• Contributions receivable due in > 1 year

• Investments not redeemable within 1 year

• Trust and life income funds

Contractual and legal restrictions

• Assets set aside from Debt service or Bond sinking fund agreements

• State required annuity reserves and assets set aside under self-insurance agreements

WHAT’S LIQUID AND WHAT’S AVAILABLE?

Liquidity (Qualitative) Best Practices

• How does the nonprofit manage daily cash requirements?

• Are there liquidity reserves already established?

• Are there board-designated funds that could be used if needed?

• Are there lines of credit available?

QUALITATIVE DISCLOSURE

As part of the Organization's liquidity management, it has a policy to structure its financial assets to be available

as its general expenditures, liabilities, and other obligations come due.

As part of this policy, the Organization holds in its short-term investment account a balance of securities equal to at least three months of operating expenses that can be readily liquidated to pay for operating needs.

Long-term investments include endowment funds consisting of donor-restricted endowments and a quasi-endowment Income from donor-restricted endowments is restricted for specific purposes and, therefore, is not available for general expenditure. As described in Note 10, the quasi-endowment has a spending rate of 5 percent

Accordingly, $500,000 of appropriations from the quasi-endowment will be available within the next 12

months The quasi-endowment could be made available in its entirety if needed No appropriations from restricted endowments have been made available for operations as of June 30, 20X1 There are certain limitations

donor-on availability of ldonor-ong-term investment funds totaling approximately $2,500,000 at June 30, 20X1 and 20X0

which are subject to certain lockup restrictions as indicated in Note 8 The Organization would be able to access these funds at the end of any calendar year with a 60 day redemption notice, but would otherwise not be available

to support general expenditures within one-year from the statements of financial position As of June 30, 20X1, the Organization does not intend to redeem such investments As more fully described in Note X, the Organization also

has committed lines of credit in the amount of $500,000, which it could draw upon in the event of an unanticipated liquidity level.

LIQUIDITY DISCLOSURE

QUANTITATIVE DISCLOSURE ANALYSIS

6/30/2017 Financial assets

Cash and cash equivalents $ 800,000 Contributions receivable 5,000,000 Investments 25,000,000 Perpetual trusts held by others 400,000

Less: amounts unavailable for

general expenditure within one year:

Long-term contributions receivable (2,500,000) Investments not redeemable (4,000,000) Board-designated investments (6,000,000) Endowment investments (3,000,000)

Financial assets available to meet cash needs for general