Updates on Nonprofit Financial Statements and Net Assets
Stacy Smith, a CPA Shareholder at Mize Houser & Company, discusses key changes in nonprofit financial statements brought about by ASU 2016-14. The update includes improvements in presenting operating cash flows, net asset classes, liquidity information, expense reporting, and investment return. The restructuring of net assets and new disclosure requirements for nonprofits are also highlighted in the update.
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Accounting Update September 14, 2016
Stacy Smith is a Shareholder in Mize Houser & Company s audit department. She has been with the firm since 2001 and became Shareholder in 2014. Stacy focuses on providing audit and related services to financial institutions, not-for- profits, construction companies and employee benefit plans. Stacy is a member of the American Institute of Certified Public Accountants and the Kansas Society of Certified Public Accountants. She also serves on the Board of Brewster Foundation and the Finance Committee of Cair Paravel Latin School. Stacy Smith, CPA Shareholder, Mize Houser & Company P.A.
ASU 2016-14: NFP Financial Statements: Key Phase I Changes Allowing free choice between direct method and indirect method in presenting operating cash flows Improving presentation and disclosures for net asset classes Enhancing information about the liquidity and availability of financial resources Providing better information about expenses and expense allocation Improving reporting of investment return 3
Net Assets The three existing classes of net assets will become two Net assets with donor restrictions Net assets without donor restrictions 4
Net Assets Temp. Restricted Perm. Restricted Current GAAP Unrestricted Revised GAAP + Without Donor Restrictions* With Donor Restrictions* Amount, purpose, and type of board designations ** Nature and amount of donor restrictions Disclosures * NFPs may choose to disaggregate further ** New disclosure requirement 11 5
Net Assets Footnote disclosures will be required to include: Timing and nature of restrictions Composition of net assets with donor restrictions at the end of the period Analysis by time, purpose, and perpetual restrictions 6
Board Designated Net Assets Board-imposed limits on the use of resources without donor restrictions Enhanced disclosures required on the amounts and purposes of designations 7
Underwater Endowments Endowment funds that have a current fair value that is less than the original gift amount (or amount required to be retained by donor or by law) 8
Underwater Endowments Revised net asset classification To be reflected in net assets with donor restrictions rather than in net assets without donor restrictions Enhanced disclosures In addition to aggregate amounts by which funds are underwater (current GAAP), also disclose aggregate of original gift amounts (or level required by donor or law) for such funds, fair value, and any governing board policy, or actions taken, concerning appropriation from such funds. 9
Liquidity and Availability of Resources NFPs required to provide: Qualitative information on how an NFP manages its liquid available resources and its liquidity risk (in the notes) Quantitative information that communicates the availability of an NFP s financial assets at the balance sheet date to meet cash needs for general expenditures within one year (on the face and/or in the notes) Must take into account funds that are not available because of internal or external restrictions 10
Liquidity and Availability of Resources Classified balance sheet could be a good starting point for quantitative disclosures on availability Quantitative disclosures could be provided in chart form Financial assets at year end Less: Contractual or donor-imposed restrictions making financial assets unavailable within one year: Restricted by donor Investments held in trust Board designated for liquidity reserve Financial assets available within one year for general expenditures 350 (12) (80) (100) 158 11
Expense Reporting Report expenses, either on the face of financial statements or in the notes, by: Function* Natural classification Analysis (disaggregate function by nature)** * currently required in GAAP ** choice of location; can be a statement, a supplemental schedule, or a footnote 12
Expense Reporting NFPs required to provide qualitative disclosures about methods used to allocate costs among program and support functions ASU also provides enhanced guidance on allocations from M&G expenses Key concept: direct conduct or direct supervision 13
Reporting of Investment Return Net presentation of investment expenses against investment return on the face of the statement of activities Netting limited to external and direct internal expenses May report net return in multiple, appropriately labeled lines (e.g., from different portfolios, in different net asset classes, or in operating versus non-operating) Footnote disclosure of investment expenses no longer required If reported, carefully label and don t include in expense analysis No longer require disclosure of investment return components 14
Cash Flow Statement Allow free choice between the Direct Method and the Indirect Method in presenting operating cash flows Indirect reconciliation no longer required for Direct Method 15
Expiration of Capital Restrictions Gifts of cash restricted for acquisition or construction of PP&E In absence of explicit donor restrictions, NFPs would be required to use the placed-in-service approach (no more implied time restrictions) 16
Effective Date Effective Date: For fiscal years beginning after 12/15/2017 (e.g., CY 2018, FY 2018-19) Early Adoption: Permitted, but must apply the regular transition provisions. Transition: For year of adoption: apply all provisions. For comparative years presented: apply all provisions, except can choose not to present: Analysis of expenses by nature and function*, and/or Disclosures around liquidity and availability of resources * Unless already required to do so under current GAAP 17
Important Notes NFPs are already permitted to incorporate many of the changes in the ASU The only changes that cannot be done without formally adopting the ASU are: 1. Presenting one class of restricted net assets (consolidating temporarily and permanently restricted) 2. Underwater endowment accounting 3. Eliminated disclosures of investment return components and netted expenses 4. Eliminated requirement to provide indirect reconciliation if using direct method for operating cash flows 18
ASU 2015-14: Revenue Recognition Deferred effective dates CY 2018 (FY 2018-19) for public entities* (including interim) CY 2019 (FY 2019-20) for nonpublic entities (no interim, just annual period; interims in subsequent years) Early adoption permitted, but not before original effective date *Public entities include NFPs with publicly-traded conduit (or direct) debt 19
Revenue Recognition Some Areas of Focus for NFPs Being Discussed by AICPA Task Forces Government (and other) grants and contracts FASB staff has been doing pre-agenda research, working with AICPA NFP Rev Rec Task Force; project just added to FASB s technical agenda Tuition and Fees Membership Dues Licenses and Royalties Health Care: various issues, including: Self-pay patients Medicare/Medicaid payments (and subsequent audits) Continuing Care Retirement Communities: entrance and other fees 20
ASU 2016-02: Leases A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration Right-of-use asset Lessor Lessee Lease payments 21
Leases Components of a lease: Identified, specific asset Supplier cannot easily substitute the asset Lessee has decision-making authority over use of asset ( how and why ) Lessee receives substantially all economic benefit from use of asset 22
Leases Operating lease term greater than one year Financial lease currently capital lease Renewal options included in initial lease term only if lessee is reasonably certain to exercise the option based on relevant economic factors 23
Leases Balance Sheet Income Statement Cash Flow Statement Single lease expense on a straight-line basis Operating: Cash paid for lease payments Right-of-use (ROU) asset Lease Liability Operating Financing: Cash paid for principal Operating: Cash paid for interest payments Authorization expense Interest expense Right-of-use (ROU) asset Lease Liability Finance 24
Leases Effective Date Public Companies* Fiscal years beginning after December 15, 2018, including interim periods within those fiscal years (CY 2019; FY 2019-20) All Other Organizations Fiscal years beginning after December 15, 2019 and interim periods beginning after December 15, 2020 (CY 2020; FY 2020-21) Early Application Permitted for all organizations * Public Companies refers to the following: (1) public business entities, (2) a not-for-profit entity that has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an-over-the-counter market, and (3) an employee benefit plan that files or furnishes statements with or to the SEC (Same Here as Revenue Recognition Standard) 25
Other Recent Accounting Standard Updates 26
ASU 2016-13: Accounting for Financial Instruments Credit Losses Current Expected Credit Loss (CECL) Model Focuses on what a reporting entity expects to collect, rather than on whether the loan/ other asset has gone bad (incurred loss model) Considers past history, current conditions, reasonable expectations about foreseeable future CECL Model not expected to result in significant impact on most entities other than financial institutions. For NFPs, would apply to trade receivables (such as patient receivables), loans receivable, and lease receivables, but not to pledges receivable Likely already taking CECL considerations into account for such assets 27
ASU 2015-03: Debt Issuance Costs To be reported as direct reduction of debt liability for issued debt (like debt discounts), rather than as separate asset Effective for CY 2016 (FY 2016-17); can early adopt 28
ASU 2015-07: Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) No longer require investments for which FV is measured at NAV (or its equivalent) using practical expedient to be categorized in FV hierarchy Clarifies that certain disclosures (e.g., redemption restrictions) only required when practical expedient is actually used Effective for CY 2017 (FY 2017-18); can early adopt 29
ASU 2014-08: Discontinued Operations Defines a discontinued operation as a change that represents a strategic shift that has major effects on an entity s operations and financial results Effective for 12/30/2015 year end 30
ASU 2015-15: Going Concern Substantial doubt defined as existing when relevant conditions and events considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date the financial statements are issued 31
Going Concern Changes look forward period to one year after financial statements issued (instead of one year after balance sheet date) Consideration excludes management s plans that have not been fully implemented Effective for 12/31/16 year end 32
