READY TO ROLL WITH THE NEW NFP REPORTING STANDARD? July 19, 2017 - - PDF document

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READY TO ROLL WITH THE NEW NFP REPORTING STANDARD?

Dustin Haywood Director dhaywood@bkd.com Kieth McGovern Director kmcgovern@bkd.com July 19, 2017

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Background & overview

• f NFP Accounting

Standards Update Statement of Financial Position Statement of Activities & Expenses Disclosures, i.e., liquidity Next steps, adoption &

• ther implications

AGENDA

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• Refresh & update, not overhaul, financial reporting model
• Simplify & improve net asset classification presentation
• Enhance & adjustment information in statements & notes

about

• Financial performance
• Cash flow
• Liquidity
• Allow NFPs “tell their financial story”

NFP REPORTING CHANGES – OBJECTIVES

• Fiscal year beginning after December 15, 2017
• Early adoption permitted, but not required
• Retrospective application

NFP REPORTING CHANGES – IMPLEMENTATION DATES

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PERCEIVED WEAKNESSES IN NFP REPORTING

Difficulty in assessing an entity’s liquidity No clear

• perating

measure defined Inconsistent reporting of expenses Confusion regarding statement of cash flows Complexity with three net asset classes

Donors, creditors &

• ther users

7 // experience drive

Issued August 18, 2016, ASU No. 2016-14 FASB re-deliberated Comments submitted by August 20, 2015 Exposure draft issued April 22, 2015 FASB NFP Advisory Committee formed in 2010 Current guidance (FAS 117) issued 20 years ago

BACKGROUND

8 // experience drive

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STATEMENT OF FINANCIAL POSITION

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CHANGE IN NET ASSET CLASSIFICATIONS

* NFPs may choose to disaggregate further ** New disclosure requirement Nature & amount of donor restrictions

With Donor Restrictions*

Perm. Restricted Temp. Restricted

Amount, purpose & type of board designations**

Without Donor Restrictions*

Unrestricted

Current GAAP Revised GAAP Disclosures +

• May choose to further disaggregate on SOFP
• Note: New standard requires disclosures about amounts & purposes of

board designations of net assets without donor restriction, either in SOFP

• r footnotes
• Footnote requirements
• NFPs will be required to disclose information about nature & amounts of

different types of restrictions that impact how/when donor-restricted net assets can be used

NET ASSET DISCLOSURES

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SOFP: EXAMPLE

2016

Assets

Cash and cash equivalents 500,000 $ Student accounts receivable, net of allowance 1,500,000 Contributions receivable 1,000,000 Other receivables 500,000 Prepaid expenses and other assets 250,000 Loans receivable, net of allowance 2,500,000 Investments 35,000,000 Assets held in trust 750,000 Property and equipment, net of accumulated depreciation 48,000,000 Total assets 90,000,000 $

Liabilities

Accounts payable 1,000,000 $ Line of credit 15,000,000 Accrued and other liabilities 2,000,000 Deferred revenue 1,500,000 Annuities and trusts payable 500,000 Refundable government loan advances 2,500,000 Long-term debt 27,500,000 Total liabilities 50,000,000

Net Assets

Without donor restrictions Undesignated 10,000,000 Designated by the Board for endowment 5,000,000 15,000,000 With donor restrictions Perpetual in nature 16,000,000 Purpose restriction 6,600,000 Time-restricted for future periods 2,500,000 Underwater endowments (100,000) 25,000,000 Total net assets 40,000,000 Total liabilities and net assets $90,000,000

• Endowment footnote
• “Underwater” endowment funds will now be shown as reduction in

donor-restricted net assets, rather than charged against net assets without restriction (formerly, Unrestricted)

• NFPs must also disclose
• Board’s interpretation of UPMIFA as to its ability to spend from underwater funds
• NFP’s policy, & any actions taken during the period, concerning appropriation of

underwater endowment funds

• Aggregate amounts of following items
• Fair value of underwater endowment funds
• Original endowment gifts
• Amount of funds’ deficiencies

NET ASSET DISCLOSURES

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NET ASSET DISCLOSURES – EXAMPLE

2016 Subject to expenditure for specified purpose: Scholarships 1,000,000 $ Athletics, development and other purposes of the University 3,500,000 4,500,000 Subject to the passage of time: Charitable trust agreements 500,000 Promises to give that are not restricted by donors, but which are unavailable for expenditure until due 2,000,000 2,500,000 Endowments: Subject to appropriation and expenditure when a specified event occurs: Scholarships 1,100,000 Faculty chairs 1,000,000 Underwater endowments (100,000) 2,000,000 Subject to endowment spending policy and appropriation: Scholarships 10,000,000 Faculty chairs 5,500,000 Charitable annuity and trust agreements 250,000 Lectureships 250,000 16,000,000 Total endowments 18,000,000 Total net assets with donor restrictions 25,000,000 $

ENDOWMENT DISCLOSURES – EXAMPLE

2016 Without Donor With Donor Restriction Restriction Total Board-designated endowment funds $ 5,000,000 $ - $ 5,000,000 Donor-restricted endowment funds Original donor-restricted gift amounts required to be maintained in perpetuity by donor

• 16,000,000

16,000,000 Accumulated investment gains

• 2,000,000

2,000,000 Total endowment funds $ 5,000,000 $ 18,000,000 $ 23,000,000 2016 Without Donor With Donor Restriction Restriction Total Endowment net assets, beginning of year $ 5,500,000 $ 19,000,000 $ 24,500,000 Investment return, net 250,000 1,000,000 1,250,000 Contributions

• 500,000

500,000 Appropriation of endowment assets for expenditure (1,000,000) (2,500,000) (3,500,000) Other changes: Transfers to create board-designated endowment funds 250,000

• 250,000

Endowment net assets, end of year $ 5,000,000 $ 18,000,000 $ 23,000,000

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• Assuming adoption as of June 30, 2017
• Restatement amount would be equal to underwater value as of

July 1, 2015

• Any change in underwater value attributed to 2016 activity would

be reflected as a change in 2016 investment return amount

UNDERWATER RECLASSIFICATION – EXAMPLE

Without Donor With Donor Restriction Restriction Total Change in Net Assets $ XXX,XXX $ XXX,XXX $ XXX,XXX Net Assets, Beginning of Year, as Previously Stated XXX,XXX XXX,XXX XXX,XXX Restatement applicable to prior year underwater endowments XXX,XXX (XXX,XXX)

• Net Assets, Beginning of Year, Restated

XXX,XXX XXX,XXX XXX,XXX Net Assets, End of Year $ XXX,XXX $ XXX,XXX $ XXX,XXX 2016

• Example UPMIFA Disclosure
• “From time to time, certain donor-restricted endowment funds may

have fair values less than the amount required to be maintained by donors or by law (underwater endowments). We have interpreted UPMIFA to permit spending from underwater endowments in accordance with prudent measures required under law. At June 30, 2016, funds with original gift values of XXX,XXX, fair values of XXX,XXX, and deficiencies of XXX,XXX were reported in net assets with donor restrictions.”

ENDOWMENT DISCLOSURES

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• 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 “placed-in-service” approach (no more implied time restrictions)

OTHER NET ASSET CONSIDERATIONS

2016

Assets

Cash and cash equivalents 581,676 $ Student accounts receivable, net of allowance of $788,113 and $846,091 for 2016 and 2015 1,309,783 Contributions receivable 174,965 Federal award reimbursements receivable 691,686 Other receivables 902,355 Prepaid expenses and other assets 717,120 Employee loans receivable 269,800 Loans receivable, net of allowance of $114,418 and $112,617 for 2016 and 2015 2,516,282 Investments 47,393,303 Assets held in trust 636,443 Property and equipment, net of accumulated depreciation 40,404,807 Total assets 95,598,220 $

Liabilities

Accounts payable 1,166,220 $ Line of credit 1,780,000 Accrued and other liabilities 1,973,788 Deposits 233,572 Deferred revenue 1,036,459 Annuities and trusts payable 903,971 Refundable government loan advances 2,675,380 Long-term debt 19,494,000 Total liabilities 29,263,390

Net Assets

Unrestricted 25,470,235 Temporarily restricted 8,451,410 Permanently restricted 32,413,185 Total net assets 66,334,830 Total liabilities and net assets 95,598,220 $

SOFP – CURRENT STANDARD

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SOFP – NEW STANDARD TEMPLATE

2016

Assets

Cash and cash equivalents 581,676 $ Student accounts receivable, net of allowance of $788,113 and $846,091 for 2016 and 2015 1,309,783 Contributions receivable 174,965 Federal award reimbursements receivable 691,686 Other receivables 902,355 Prepaid expenses and other assets 717,120 Employee loans receivable 269,800 Loans receivable, net of allowance of $114,418 and $112,617 for 2016 and 2015 2,516,282 Investments 47,393,303 Assets held in trust 636,443 Property and equipment, net of accumulated depreciation 40,404,807 Total assets 95,598,220 $

Liabilities

Accounts payable 1,166,220 $ Line of credit 1,780,000 Accrued and other liabilities 1,973,788 Deposits 233,572 Deferred revenue 1,036,459 Annuities and trusts payable 903,971 Refundable government loan advances 2,675,380 Long-term debt 19,494,000 Total liabilities 29,263,390

Net Assets

Without donor restrictions Undesignated 15,890,212 Designated by the Board for endowment 9,592,091 25,482,303 With donor restrictions Perpetual in nature 32,413,185 Purpose restriction 8,167,229 Time-restricted for future periods 284,181 Underwater endowments (12,068) 40,852,527 Total net assets 66,334,830 Total liabilities and net assets 95,598,220 $

NET ASSET DISCLOSURES – CURRENT STANDARD

Temporarily Restricted Net Assets

2016 Building initiatives

• $

Charitable trust agreements 109,216 Contributions receivable 174,965 Future periods 4,773,507 Accumulated earnings on endowments 3,393,722 8,451,410 $

Permanently Restricted Net Assets

2016 Investment in perpetuity, the income of which is expendable to support Scholarships 15,599,138 $ Faculty chairs 16,355,038 Charitable annuity and trust agreements 296,155 Lectureships 162,854 32,413,185 $

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NET ASSET DISCLOSURES – NEW STANDARD TEMPLATE

Net assets with donor restrictions are restricted for the following purposes or periods: 2016 Subject to expenditure for specified purpose: Scholarships 856,494 $ Athletics, development and other purposes of the University 3,917,013 4,773,507 Subject to the passage of time: Charitable trust agreements 109,216 Promises to give that are not restricted by donors, but which are unavailable for expenditure until due 174,965 284,181 Endowments: Subject to appropriation and expenditure when a specified event occurs: Scholarships 2,357,797 Faculty chairs 1,035,925 Underwater endowments (12,068) 3,381,654 Subject to endowment spending policy and appropriation: Scholarships 15,599,138 Faculty chairs 16,355,038 Charitable annuity and trust agreements 296,155 Lectureships 162,854 32,413,185 Total endowments 35,794,839 Total net assets with donor restrictions 40,852,527 $

ENDOWMENT DISCLOSURES – CURRENT STANDARD

Temporarily Permanently Unrestricted Restricted Restricted Total Donor-restricted endowment funds (12,068) $ 3,393,722 $ 32,413,185 $ 35,794,839 $ Quasi endowment funds 9,592,091

• 9,592,091

Total endowment funds 9,580,023 $ 3,393,722 $ 32,413,185 $ 45,386,930 $ Temporarily Permanently Unrestricted Restricted Restricted Total Endowment net assets, beginning of year 11,132,999 $ 7,118,787 $ 32,207,449 $ 50,459,235 $ Investment return Investment income 125,276 480,527 7,549 613,352 Transfer of net assets for underwater endowments Net depreciation (637,468) (2,016,812) (21,210) (2,675,490) Total investment return (512,192) (1,536,285) (13,661) (2,062,138) Contributions

• 450

219,397 219,847 Appropriation of endowment assets for expenditure (1,040,784) (2,189,230)

• (3,230,014)

Endowment net assets, end of year 9,580,023 $ 3,393,722 $ 32,413,185 $ 45,386,930 $ 2016 2016

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ENDOWMENT DISCLOSURES – NEW STANDARD TEMPLATE

Without Donor With Donor Restriction Restriction Total Board-designated endowment funds 9,592,091 $

• $

9,592,091 $ Donor-restricted endowment funds Original donor-restricted gift amounts required to be maintained in perpetuity by donor

• 32,413,185

32,413,185 Accumulated investment gains

• 3,381,654

3,381,654 Total endowment funds 9,592,091 $ 35,794,839 $ 45,386,930 $ Without Donor With Donor Restriction Restriction Total Endowment net assets, beginning of year 11,132,999 $ 39,326,236 $ 50,459,235 $ Investment return Investment income 137,344 476,008 613,352 Transfer of net assets for underwater endowments Net depreciation (637,468) (2,038,022) (2,675,490) Total investment return (500,124) (1,562,014) (2,062,138) Contributions

• 219,847

219,847 Appropriation of endowment assets for expenditure (1,040,784) (2,189,230) (3,230,014) Endowment net assets, end of year 9,592,091 $ 35,794,839 $ 45,386,930 $ 2016 2016

STATEMENT OF ACTIVITIES & EXPENSES

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• Eliminates distinction between temporary & permanent

restrictions

• Retains current GAAP requirements to disclose nature & amounts of

donor-imposed restrictions

• New disclosures highlight how & when resources can be used & not

distinction between temporary & permanent restrictions

STATEMENT OF ACTIVITIES

• Two net asset requirement is minimum disaggregation
• May choose to further disaggregate, but …
• Standard requires total for each of two net asset classes
• New standard permits flexibility in presentation as long as

requirements are satisfied

• Single column, multiple columns, two separate statements

STATEMENT OF ACTIVITIES

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New presentation

• Net presentation – investment return is presented net of expenses
• n face of statement of activities
• Amount limited to external & direct internal expenses
• May report net return on multiple lines – different net asset classes or
• perating vs. nonoperating

Disclosure impact

• Disclosure of expenses no longer required

STATEMENT OF ACTIVITIES – INVESTMENT RETURN

STATEMENT OF ACTIVITIES NEW FORMAT EXAMPLE

Without With Donor Restrictions Donor Restrictions Total Revenue, Gains (Losses) and Other Support Tuition and fees Institutional scholarships Net tuition and fees Contributions Auxiliary enterprises Investment return designated for operations Net assets released from restrictions Change in value of split-interest agreements Total revenue, gains (losses) and other support

• Expenses

Program Activities Instruction Academic support Student service Operation and maintenance Institutional support Auxiliary enterprises Supporting Activities Mangagement, general, and adminisitrative Fundraising Total expenses

• Change in Net Assets Before Other Activities
• Other Activities

Investment return less amounts designated for operations

• Change in Net Assets
• Net Assets, Beginning of Period
• Net Assets, End of Period
• $
• $
• $

2016

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STATEMENT OF ACTIVITIES NEW FORMAT EXAMPLE STATEMENT OF ACTIVITIES NEW FORMAT EXAMPLE PART 1 OF 2

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STATEMENT OF ACTIVITIES NEW FORMAT EXAMPLE PART 2 OF 2

• Required to report expenses by function & nature in one

location

• Statement of Activities
• Footnotes
• Schedule of Functional Expenses
• Required to show relationship between functional area &

natural class

• No prescribed format by ASU

EXPENSES

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• New requirement to provide qualitative disclosure about

methods used to allocate expenses attributable to more than

• ne program
• ASU refines some definitions & enhanced guidance
• Mgmt & Gen – includes additional examples
• Implementation guidance to help distinguish between direct conduct &

direct supervision of program or supporting services

EXPENSES – ADDITIONAL ITEMS

Program Activities Supporting Activities Program Fund- Support Total A B C Subtotal MG&A raising Subtotal Expenses Salaries/benefits $ - $ - $ - $ - $ - $ - $ - $ - Rent/utilities Professional fees Supplies Depreciation Interest Total expenses $ - $ - $ - $ - $ - $ - $ - $ -

EXPENSES BY NATURE & FUNCTION

Program Activities Supporting Activities Academic Student Auxiliary Educational Fund- Support Total Instruction Support Services Enterprises Programs MG&A raising Subtotal Expenses Salaries/benefits $ - $ - $ - $ - $ - $ - $ - $ - Rent/utilities Professional fees Supplies Depreciation Interest Total expenses $ - $ - $ - $ - $ - $ - $ - $ -

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• Cash Flow Statement
• You have choice between Direct Method or Indirect Method (same

as past)

• NEW! Indirect reconciliation no longer required if you utilize Direct

Method cash flow statement

PHASE 1 – OTHER CHANGES

DISCLOSURES

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LIQUIDITY

Qualitative Disclosures

• Information on how you

manage liquid resources (in footnotes)

• Strategy for addressing risks that

may affect liquidity

• Policy for establishing liquidity

reserves

Quantitative Information

• Information that communicates

availability of financial assets at financial statement date to meet cash needs within one year

• Can be on the face of the

Statement of Financial Position

• r in the notes

EXAMPLE FOOTNOTE FOR LIQUIDITY DISCLOSURES

Note G

• The following reflects Not-for-Profit Entity A’s financial assets as of the balance

sheet date, reduced by amounts not available for general use because of contractual or donor-imposed restrictions within one year of the balance sheet

• date. Amounts not available include amounts set aside for long-term investing in the

quasi-endowment that could be drawn upon if the governing board approves that

• action. However, amounts already appropriated from either the donor-restricted

endowment or quasi-endowment for general expenditure within one year of the balance sheet date have not been subtracted as unavailable

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Financial assets, at year-end* XXX,XXX Less those unavailable for general expenditures within one year, due to: Contractual or donor-imposed restrictions: Restricted by donor with time or purpose restrictions (XX,XXX) Subject to appropriation and satisfaction of donor restrictions** (XXX,XXX) Investments held in annuity trust (X,XXX) Board designations: Quasi-endowment fund, primarily for long-term investing** (XX,XXX) Amounts set aside for liquidity reserve (X,XXX) Financial assets available to meet cash needs for general XX,XXX expenditures within one year

LIQUIDITY – EXAMPLE FOOTNOTE

*Total assets, less nonfinancial assets (e.g., PP&E, inventory, prepaids, etc. **Excludes amounts that have been appropriated for next 12 months that do not have purpose restrictions Financial assets available for general expenditure, that is, without donor or other restrictions limiting their use, within one year of the balance sheet date, comprise the following: Cash and cash equivalents XX,XXX Accounts receivable X,XXX Operating investments X,XXX Promises to give X,XXX Distributions from assets held under split-interest agreements X,XXX Distributions from beneficial interests in assets held by others X,XXX Endowment spending-rate distributions and appropriations XX,XXX XX,XXX

LIQUIDITY – EXAMPLE FOOTNOTE

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LIQUIDITY DISCLOSURE – OTHER NARRATIVE

Our endowment funds consist of donor-restricted endowments and funds designated by the board as

• endowments. Income from donor-restricted endowments is restricted for specific purposes, with the

exception of the amounts available for general use. Donor-restricted endowment funds are not available for general expenditure. Our board-designated endowment of $XXX,XXX is subject to an annual spending rate of 4.5 percent as described in Note X. Although we do not intend to spend from this board-designated endowment (other than amounts appropriated for general expenditure as part of our Board’s annual budget approval and appropriation), these amounts could be made available if necessary. As part of our liquidity management plan, we invest cash in excess of daily requirements in short-term investments, CDs, and money market funds. Occasionally, the Board designates a portion of any

• perating surplus to its operating reserve, which was $XXX,XXX as of June 30, 2016.

LIQUIDITY EXERCISE

• Example

Financial assets, at year-end 39,250,000 $ Less those unavailable for general expenditures within one year, due to: Contractual or donor-imposed restrictions: Restricted by donor with time or purpose restrictions (7,000,000) $ Subject to appropriation and satisfaction of donor restrictions (18,000,000) $ Investments held in annuity trust

• $

Board designations: Quasi-endowment fund, primarily for long-term investing (5,000,000) $ Amounts set aside for liquidity reserve

• $

Financial assets available to meet cash needs for general expenditures within one year 9,250,000 $

2016

Assets

Cash and cash equivalents $ 500,000 Student accounts receivable, net 1,500,000 Contributions receivable 1,000,000 Other receivables 500,000 Prepaid expenses and other assets 250,000 Loans receivable, net 2,500,000 Investments 35,000,000 Assets held in trust 750,000 Property and equipment, net of accumulated depreciation 48,000,000 Total assets $ 90,000,000

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NEXT STEPS, ADOPTION & OTHER IMPLICATIONS

• Should be applied on retrospective basis in year first applied
• However …
• If presenting comparative statements, have option to omit following for any periods

presented before period of adoption

• Disclosures about liquidity & availability of resources
• Analysis of expenses by both natural classification & functional classification

ADOPTION

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• Should disclose nature of any reclassifications or restatements, if any, on

changes in net asset classes for each period presented

• Changes in accounting principle represent – underwater endowments & placed in

service approach for capital assets

ADOPTION

Emphasis of Matter As discussed in Note __ to the financial statements, in 2016, the entity adopted new accounting guidance for the financial statements of Not-for-Profit Entities. Our opinion is not modified with respect to this matter.

• Apply all provision for FY 2016–2017
• If choose to present comparative financials for FY 2016–2017 you

would

• Apply all provisions to FY 2015–2016 financials, except
• Analysis of expenses by nature & function
• Liquidity disclosures

ADOPTION – EARLY EXAMPLE

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• Ratios & covenants
• “Expendable Net Assets” in covenant calculations
• Department of Education Composite Score
• Moody’s & other rating agencies ratio definitions

OTHER IMPLICATIONS FOR HIGHER ED

• Discuss internally to early adopt or not
• Evaluate any system changes needed
• Natural expense presentation
• G/L or Chart of Account changes
• Perform “test run” or prepare pro-forma statements under new

guidance

• Develop plan to educate board or committee on financial

statement presentation changes

NEXT STEPS

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QUESTIONS CONTINUING PROFESSIONAL EDUCATION (CPE) CREDITS

BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.nasbaregistry.org The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered.

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the BKD Learning & Development Department at training@bkd.com

CPE CREDIT

THANK YOU!

FOR MORE INFORMATION

Kieth McGovern | 816.221.6300 | kmcgovern@bkd.com Dustin Haywood | 816.221.6300 | dhaywood@bkd.com

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