2018-nonprofit-symposium-fasb-trifecta

SPONSORS GOLD S I LV E R BRONZE The Perfect Storm THE FASB TRIFECTA Monika Pelz, Partner, Audit Brenda Kahler, Senior Manager, Consulting Matt Gard, Senior Manager, Audit PRESENTER Monika Pelz, CPA Audit Partner, Armanino • 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 PRESENTER Matt Gard, CPA Senior Manger, 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 PRESENTER Brenda Kahler, CPA Senior Manager, Armanino • 15+ years of accounting experience primarily with nonprofits in Big 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 PRESENTATION OVERVIEW • Revenue Recognition • Lease Accounting • Financial Statement of Not-for-Profit Entities o Statement of Cash Flows o Net Asset Classification and Related Disclosures o Information Useful in Assessing Liquidity o Expenses by Function and Nature REVENUE RECOGNITION REV REC FOR NONPROFITS • Revenue from Contracts with Customers, ASC 606 o Effective 1/1/2019 (FY2019-20) • Proposed Changes in Accounting for Contributions APPLICATION OF THE STANDARD Which orgs will likely be impacted? What types of revenue are exempt? • Museums • Contributions • Performing Arts Groups • Many, if not most, government • K-12 Schools and Universities • Trade Associations • Hospitals and Clinics • Other Specialized Nonprofits • Organizations holding fundraising events contracts • Many, if not most, foundation grants • Certain “memberships” that are actually annual giving campaigns 5-STEP PROCESS Identify contracts Identify performance obligations Determine transaction price Allocate transaction price Recognize revenue when or as performance obligations are satisfied LIQUIDITY OBJECTIVE OF PROJECT To improve the quality of information users have to assess liquidity and how nonprofit organizations manage their exposure to liquidity risk including limitations on the use of financial assets… 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 • Accounts and notes receivables due in > NATURE OF FINANCIAL Financial assets that CANNOT year ASSET • Contributions receivable due in > year be converted to cash • Investments not redeemable within year • Endowment assets considered perpetually EXTERNAL LIMITS OF DONORS, LAWS, CONTRACTS Donor restrictions limiting availability Contractual and legal restrictions INTERNAL LIMITS IMPOSED BY GOVERNING BOARD • • • • • restricted Assets from unappropriated endowment earnings, beyond year Restricted for programs in future years, beyond year Trust and life income funds Assets set aside from Debt service or Bond sinking fund agreements State required annuity reserves and assets set aside under self-insurance agreements Financial assets designated • Long-term quasi endowments for long-term investments Designated for future years • Designations for future periods beyond a year WHAT’S LIQUID AND WHAT’S AVAILABLE? QUALITATIVE DISCLOSURE 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? LIQUIDITY 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 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 donorrestricted endowments have been made available for operations as of June 30, 20X1 There are certain limitations on availability of long-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 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 QUANTITATIVE DISCLOSURE Availability (Quantitative) • For quantitative disclosures the statement of financial position is the best starting point • The disclosure is a subset of and would be reconcilable to the total assets on the statement of financial position • Qualitative disclosures should clarify the quantitative information and add context QUANTITATIVE DISCLOSURE ANALYSIS 6/30/2017 Financial assets Cash and cash equivalents $ Contributions receivable 800,000 5,000,000 Investments 25,000,000 Perpetual trusts held by others 400,000 Total financial assets 31,200,000 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 expenditures within one year $ 15,700,000 TRANSITION METHOD & EFFECTIVE DATE TRANSITION METHOD & EFFECTIVE DATE Relevant Components Effective Date & Other Key Facts • Liquidity • Fiscal years beginning after • Functional Expenses • Net Assets • Cash Flow (Direct vs Indirect) • Place in Service Approach for Reporting Expirations of Restrictions on Long-lived assets December 15, 2017 • Retrospective application to earliest period presented • Change in Accounting Principle for prior period restatements due to net asset changes • Liquidity and functional expense presentation only required in year of adoption • Early adoption permitted on a full standard basis IMPLEMENTATION TIPS Determine the impact each change will have on your financial statements Discuss and document your liquidity and reserve policies Evaluate the impact the liquidity footnote will have internally/externally and how to best manage the story being told Determine if changes are needed to your chart of accounts account for presentation changes (e.g., chart of accounts) Consider adequacy of software SYSTEM CONSIDERATIONS SYSTEM CONSIDERATIONS Chart of Accounts • What changes might be needed to your Chart of Accounts in order to be able to present a classified statement of financial position? • Is your Chart of Accounts designed to give you the appropriate groupings of the types of funds you have received and their use? • How are you monitoring assets that are restricted as to use? o i.e., restricted cash or pledged accounts receivable • How you track and release board designated funds? SYSTEM CONSIDERATIONS Other Considerations • On what basis are you forecasting cash flow? How you manage your day-to-day cash needs? • How are you tracking compliance with debt covenants? • How are you tracking known liquidity problems like grant nonrenewal or loss of a major donor? TAKE ACTION Talk to your advisors to: • Understand and implement new FASB reporting requirements • Evaluate and assess your current accounting system and ability to meet new reporting requirements needs • Assist in implementation of a new system, if warranted • Discuss Managed Services options that can offer flexible staffing to supplement your existing team during the transition period, if you currently utilize a system in which they have expertise