New Accounting Standards Affecting Foundations Rene S. Graves, - - PDF document

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New Accounting Standards Affecting Foundations

Renée S. Graves, CPA, CGFM Community College Internal Auditors Spring Conference May 4, 2017

• Introduction
• Who is affected
• How NFP accounting is improved
• Overview of changes
• Net Asset Classes
• Underwater Endowments
• Investment Return
• Expense Reporting
• Liquidity and availability of resources
• Cash flow

AGENDA

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• Update to the current model – not an overhaul
• Improve understanding of net asset classes
• Improve information in financial statements and

notes:

• Financial performance
• Cash flows
• Liquidity
• Better enable NFPs to “tell their financial story”

INTRODUCTION

Not-for-profit organizations that will be affected include:

• Charities
• Foundations
• Colleges
• Universities
• Health care providers
• Religious organizations
• Trade association
• Cultural institutions

WHO IS AFFECTED BY THE NEW GUIDANCE

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• Improves communication of financial performance

and condition to stakeholders

• Reduces cost and complexities in preparing

financial statements.

• Simplifies the face of the financial statements
• Enhances footnote disclosures
• Provides more relevant information about

resources and the changes in those resources

HOW THE NEW GUIDANCE IMPROVES NFP ACCOUNTING

Helpful to users, such as donors, grantors, creditors, and others in assessing a not-for-profits:

• Availability of resources to meet cash needs for

general expenditures

• Liquidity and financial flexibility
• Financial performance
• Service efforts and ability to continue providing

services

• Execution of stewardship responsibility and other

aspects of its management's performance

HOW THE NEW GUIDANCE IMPROVES NFP ACCOUNTING

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• On August 18th, 2016 the FASB issued a standard

to improve:

• How not-for-profit organizations classify net

assets

• How financial statements are presented
• How liquidity, financial performance & cash

flows are disclosed “The new FASB Standards represent the most significant changes to NFP reporting rules since 1993”

CHANGES TO NOT-FOR PROFIT FINANCIAL REPORTING

• After 20 years, stakeholders have voiced

concerns:

• Complexities in the use of the required three

classes of net assets

• Deficiencies in information needed to assess

liquidity

• Inconsistencies in information provided about

expenses

• Limited usefulness of the statement of cash

flows

CHANGES TO NOT-FOR PROFIT FINANCIAL REPORTING

5 Net Asset Classes

• Revised net asset classes into two classes
• net assets with donor restrictions
• net assets without donor restrictions
• Improved disclosures for internal limits on the use
• f resources without donor restrictions
• Improved disclosures of net assets with donor

restrictions

• Updated accounting and disclosure requirements

for underwater endowment funds

KEY PROVISIONS OF THE NEW STANDARD

Investment Return

• Net presentation of investment expenses against

investment return on the statement of activities

• No longer required to disclose investment

expenses that have been netted Expenses

• Required to present expenses by nature as well as

function

• Analysis showing the relationship between

functional and natural classification for all expenses

KEY PROVISIONS OF THE NEW STANDARD

6 Liquidity and Availability of Resources

• Qualitative disclosure - how a not-for-profit

manages its available liquid resources

• Quantitative disclosure - the availability of financial

assets to meet cash needs for general expenditures within one year Statement of Cash Flow

• Free choice between direct and indirect methods
• Presentation of the indirect reconciliation no longer

required if using the direct method

KEY PROVISIONS OF THE NEW STANDARD

• “Unrestricted” net assets was misunderstood
• Can have internal limitations on use
• Uniform Prudent Management of Institutional

Funds Act (UPMIFA) blurred lines between temporarily restricted and permanently restricted

• Underwater endowment information can help

assess liquidity and availability of resources

• Especially in depressed markets

NET ASSET CLASSES

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NET ASSETS CLASSES

Disclosure

• Amount, Purpose, and type of board designations**
• Nature and amount of donors restrictions

Revised

• Without Donors Restrictions* ● With Donors

Restrictions Current GAAP

• Unrestricted ● Temp. Restricted ● Perm. Restricted

* Can disaggregate further ** New disclosure requirement

• Can disaggregate net assets classes on balance sheet
• Streamlines the Statement of Activities
• Allows for comparative reporting

NET ASSET CLASSES

With donors restrictions Perpetual in nature $XXX Purpose restricted XXX Time restricted only for periods after 20X1 XXX XXX Without donors restrictions: Designated by the Board [for purpose] $XXX Undesignated XXX XX Net assets $XXX

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• The amount and purpose of board-designated net

assets are disclosed either

• on the face of the financial statements
• in the footnotes
• Requires an assessment of the financial

implications before creating board designated funds.

• Ensures the Board of Directors understands the

financial reporting requirements

NET ASSET CLASSES

BOARD-DESIGNATED

NET ASSET CLASSES

“UNDERWATER” ENDOWMENTS

Revised net asset classification

• To be reflected in net assets with donors restrictions

rather than in net assets without donor restrictions

Enhanced disclosures

• Aggregate amounts by which funds are under water

(current GAAP)

• Aggregate amount of original gift amount (or level require

by donor or law)

• Fair value
• Governing board policies, or actions taken, concerning

appropriation from such funds

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Presentation

• 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
• From different portfolios
• In different net assets classes
• In operating versus non-operating

Disclosure

• 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

INVESTMENT RETURN

• Analysis by both nature and function provides

information about

• Stewardship of resources
• Fixed and variable costs
• Report expenses on the face of the financial

statements or in the footnotes by:

• Function
• Natural Classification
• Analysis (disaggregate function by nature)
• Requires disclosure of all expenses in one location

(except netted investment costs)

EXPENSE REPORTING

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• Requires qualitative disclosures about methods

used to allocate costs among program and support functions

• Provides enhanced guidance on allocations from

Management & General expenses:

• Direct Conduct of programs or other

supporting activities requires allocation from M&G

• Direct Supervision of programs or other

supporting activities requires allocation from M&G

EXPENSE REPORTING

• Required to provide enhanced disclosures about

the method(s) used to allocate costs among program and support functions

• Improved definition of management and general

activities

• Provides guidance on the types of costs that can

be allocated among program and/or support functions and those that should not be allocated

EXPENSE REPORTING

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EXPENSE REPORTING

A B C Program Subtotal Mgmt and General Fund Raising Supporting Subtotal Total Expense Salaries and benefits $7,400 $3,900 $1,725 $13,025 $1,130 $960 $2,090 $15,115 Grants to other

• rganizations

2,075 750 1,925 4,750 4,750 Supplies and Travel 890 1,013 499 2,402 213 540 753 3,155 Services and professional fees 160 1,490 600 2,250 200 390 590 2,840 Office and occupancy 1,160 600 450 2,210 218 100 318 2,528 Depreciation 1,440 800 570 2,810 250 140 390 3,200 Interest 171 96 68 335 27 20 47 382 Total expense $13,296 $8,649 $5,837 $27,782 $2,038 $2,150 $4,188 $31,970

Program Activities Supporting Activities

• Current disclosures provide limited information
• Feedback received on Exposure Draft was mixed:
• Support for qualitative disclosures
• Concern about implementation and audit costs
• Separated liquidity and availability into two

separate objectives:

• Liquidity – qualitative disclosure of liquidity risk

and management

• Availability – quantitative disclosure using

information on the balance sheet

LIQUIDITY AND AVAILABILITY OF RESOURCES

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• The FASB approved the following two objectives:
• Qualitative information - how an NFP

manages its liquid available resources and its liquidity risk (in the notes)

• Quantitative information - communicates the

availability of 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)

LIQUIDITY AND AVAILABILITY OF RESOURCES

Requires enhanced disclosures to improve the usefulness of information to assess:

• Limits on the use of resources (liquidity, financial flexibility

and allocation of resources) imposed by:

• The governing board
• Donors
• Methods to manage liquidity to meet near-term demands for

cash

• Types of resources used to carry out operating activities
• Accounting policies and methods to allocate costs between

program and supporting activities

• The effects of underwater endowment funds on spending

policies and financial flexibility

LIQUIDITY AND AVAILABILITY OF RESOURCES

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• Classified balance sheet provides quantitative

disclosures on availability:

• Label current and non-current assets and liabilities
• Segregation of assets whose use is limited
• However, the balance sheet may contain non-

financial assets

• Availability is affected by:
• The nature of the item
• External limits imposed by donors, grantors, law

and contracts

• Internal limits imposed by Board decisions

LIQUIDITY AND AVAILABILITY OF RESOURCES

• Quantitative disclosures could be provided in chart form:

LIQUIDITY AND AVAILABILITY OF RESOURCES

Financial assets, at year-end $234,410 Less: Contractual or donor-imposed restrictions making financial assets unavailable for general expenditure within one year: Restricted by donor with time or purpose restrictions (11,940) Subject to appropriation and satisfaction of donor restrictions (174,700) Investments held in annuity trust (4,500) Board Designations: Quasi-endowment fund, primarily for long-term investing (36,600) Less amount set aside for liquidity reserve: (1,300) Financial assets available within one year to meet cash needs for general expenditures with one year $5,370

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• Free choice between Direct and Indirect method

as a good first step

• Hope it will incentivize more NFPs to choose the

direct method for operating cash flows

• More useful
• Easier to understand
• Public universities and a fairly small number of

NFPs that use the direct method, found it useful and not too costly

CASH FLOW STATEMENT

• FASB contemplated requiring all NFP’s to use the

direct method

• Allows either the Direct Method or the Indirect

Method in presenting operating cash flows

• Indirect reconciliation no longer required for

Direct Method

CASH FLOW STATEMENT

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Phase I Effective for Fiscal Year 2018-19

Net Asset Classes:

• Classification scheme
• Disclosure of board designated net assets
• Underwater endowments
• Expirations of capital restrictions

Investment Return/Expenses:

• Expense by nature; analysis of expenses by function

and nature

• Netting of investment expenses against investment

return

• Disclosure of netted investment expenses
• Enhanced disclosures about
• cost allocations

Operating measures:

• Modest improvements to disclosures about availability

Liquidity/Availability:

• Quantitative disclosures about availability
• Qualitative disclosures about liquidity
• Consideration of alternatives suggested by

stakeholders (e.g., classified balance sheet) Statement of cash flow:

• Methods of presenting operating cash flows

(direct/indirect)

Phase II

Operating Measures—all other elements of proposal, including:

• Whether to require intermediate measure (s)
• Whether and how to define such measure(s),

and what items should or should not be included in the measure(s)

• Alternative disaggregation approaches

suggested by stakeholders Statement of Cash Flows:

• Realignment of certain items
• Effective Date: Calendar Year 2018, Fiscal Year

2018-19

• Early Adoption: Permitted
• Transition:
• For year of adoption: apply all provisions.
• For comparative years presented: apply all

provisions; can choose not to present:

• 1. Analysis of expenses by nature and

function and/or

• 2. Disclosure about liquidity and availability of

resources

EFFECTIVE DATE, EARLY ADOPTION, AND TRANSITION

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Q&A

Renée S. Graves, CPA, CGFM Partner Vicenti, Lloyd & Stutzman 2210 E. Route 66, Glendora, CA 91740 (626) 857-7300 x260 rgraves@vicenticpas.com