Embed Size (px)
Citation preview
12/7/2017
1
COMMON NOT-FOR-PROFIT REPORTING ERRORS
PRESENTED BY: BKD, LLP
BKD NATIONAL NOT-FOR-PROFIT GROUP
Published 08/01/2017
AGENDA
2
About AICPA reportAbout AICPA report
Identification of contributionsIdentification of contributions
Classification of net assetsClassification of net assets
Presentation of cash & investmentsPresentation of cash & investments
Other common errorsOther common errors
QuestionsQuestions
12/7/2017
2
ABOUT AICPA REPORT
� Common Financial Statement Errors for
Not-for-Profit Entities
� AICPA Not-for-Profit Section Advisory
Council
� Published in 2015
� Common errors for small & medium NFPs
� Not comprehensive but representative
� Not all items will apply or be material
� Available to NFP Section members
3
IDENTIFICATION OF CONTRIBUTIONS
� Failure to properly classify transactions as
contributions or exchange transactions
� Contribution – unconditional, voluntary &nonreciprocal
� Exchange transactions - reciprocal & equal value
� Why is it important to properly classify transactions?
� Contributions can be restricted
� Exchange transactions cannot be restricted
� Tip: refer to ASC 958-605-55 – “Indicators Useful in Distinguishing Contributions from Exchange Transactions”
4
12/7/2017
3
IDENTIFICATION OF CONTRIBUTIONS
� Grant: Contribution or Exchange Transaction?
� No formal definition of “grant”
� Term is used interchangeably with both terms
“contribution” & “exchange transaction”
� It is important to determine classification as that will
determine accounting treatment of grant
� Tip: classification determines the timing of when the revenue is recognized & the treatment of any restrictions on the funds
� Tip: look at substance of agreement rather than term
5
IDENTIFICATION OF CONTRIBUTIONS
� Failure to properly classify conditional vs. unconditional
promises to give/pledges
� Pledge must be unconditional to recognize contribution revenue
� Conditional pledge – donor promises to contribute only if certain conditions are met
� Tip: consider the following factors if a promise to give is conditional
� Promise has explicit matching requirement
� Promise states that specific outcomes must be achieved
� Promise requires that amounts not be expended by a certain
date be returned to the donor
� Promise includes words “if”, “subject to”, “when”, etc.
6
12/7/2017
4
IDENTIFICATION OF CONTRIBUTIONS
� Failure to recognize contribution of services that meet
the recognition criteria or recognizing contributed
services that do not meet the criteria of p. 16-17 of ASC
958-605-25
� In-kind contributions (property, food, supplies, etc.)
� Record the estimated fair value of in-kind contributions as an
expense in the financial statements & similarly increase
contribution revenue by like amount
� Contributed services are recognized as revenue at their estimated fair value only when the services received
� Create or enhance nonfinancial assets; or
� Require specialized skills possessed by the individuals
providing the service & typically would need to be purchased if
not donated
7
IDENTIFICATION OF CONTRIBUTIONS
� Failure to recognize contribution of services that
meet the recognition criteria or recognizing
contributed services that do not meet the criteria
of p. 16-17 of ASC 958-605-25
� Tip: consider the quality & quantity of the assets received
� Tip: be alert of any pro-bono services provided (example: legal services)
� Tip: educate staff across the organization for when items (other than cash) are donated
8
12/7/2017
5
CLASSIFICATION OF NET ASSETS
� Improperly recording board designated net assets
as temporarily restricted or permanently restricted
net assets
� Net assets without donor restrictions subject to self-imposed limits by action of the governing board
� Board-designated net assets may be earmarked for future programs, investment, contingencies, purchase or construction of fixed assets or other uses
� Board-designated net assets are classified as unrestricted net assets on the face of the statement of financial position
� Tip: remember that only donors can restrict
9
CLASSIFICATION OF NET ASSETS
� Failure to properly record contribution revenue
related to pledges due in future periods as
temporarily restricted net assets
� Generally, there is an implied time restriction unless circumstances indicate the donor intended to support activities of the current period
� ASC 958-605-45-5 provides guidance for receipts of unconditional promises to give in future years –generally increase temporarily restricted net assets
� Tip: consider if the donor restricted the funds for use in a certain time period
� Tip: if pledges receivable is due in more than one year – look for it to be in temporarily restricted net assets
10
12/7/2017
6
CLASSIFICATION OF NET ASSETS
� Failure to identify & properly record net assets
released from restrictions
� Net assets released from restrictions results when a temporarily restriction (purpose or time) has been satisfied
� Generally, this results in a reduction in temporarily restricted net assets & a increase in unrestricted net assets
� Net assets released from restrictions on the face of the statement of activities should net to zero between unrestricted & temporarily restricted net assets
� Tip: keep track of what your restrictions are
� Tip: use disclosures of restrictions & releases
11
PRESENTATION OF CASH & INVESTMENTS
� Failure to separate restricted cash
� No formal definition of restricted cash
� Cash held temporarily in investment account
� Cash included in an endowment fund
� Cash restricted for a long-term purpose
� Tip: identify accounts with restricted cash
� Netting purchases & sales on cash flow
� Required to be gross unless certain criteria met
� Tip: look for use of word “net” on cash flow
12
12/7/2017
7
PRESENTATION OF CASH & INVESTMENTS
� Inconsistent valuation of “other” investments
� ASC 958-325-15 gives scope
� Generally investments that are not equity securities with readily determinable fair values or debt securities
� NFP may elect cost or fair value but must be used for all types of “other” investments
� Tip: review portfolio to identify “other” investments, review investment policy disclosure for inconsistencies
� Tip: consider electing fair value option for certain “other” investments
13
PRESENTATION OF CASH & INVESTMENTS
� Fair value disclosures
� Not including all fair value measurements (remember derivatives, beneficial interests in perpetual trusts, anything else measured at FV)
� Including cash & traditional certificates of deposit (not securities, not carried at fair value)
� Tip: search financials for any use of phrase “fair value” & make sure those items are included
� Endowment disclosures
� Failing to include them at all
� Missing board-designated endowments
� Tip: if permanently restricted net assets, likely should be endowment disclosures
14
12/7/2017
8
OTHER COMMON ERRORS
15
Improper
lease
classification
& not
straight-lining
rent when
required
Improper
lease
classification
& not
straight-lining
rent when
required
Not
identifying
split-interest
agreements
Not
identifying
split-interest
agreementsChecklist for
new lease
contracts to
include
classification
& rent terms
Checklist for
new lease
contracts to
include
classification
& rent terms
Investigate
regular
checks for
not-round
amounts
from bank or
trustee
Investigate
regular
checks for
not-round
amounts
from bank or
trustee
OTHER COMMON ERRORS
16
Improper
allocation of
functional
expenses &
joint
fundraising
costs
Improper
allocation of
functional
expenses &
joint
fundraising
costs
Missing
various
disclosures
Missing
various
disclosuresDevelop
policy, review
any expense
types not
allocated to
all functions
Develop
policy, review
any expense
types not
allocated to
all functions
Use a
disclosure
checklist
Use a
disclosure
checklist
12/7/2017
10
The information contained in these slides is presented by
professionals for your information only and 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.
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.
12/7/2017
1
PRACTICAL GUIDE TO IMPLEMENTING THE NEW NOT-FOR-PROFIT REPORTING MODEL
GOALS FOR TODAY
2
Refresher on Changes to Financial Statements Refresher on Changes to Financial Statements
How to Implement ChangesHow to Implement Changes
Example Statements of ActivitiesExample Statements of Activities
12/7/2017
2
ASU 2016-14 – PRESENTATION OF FINANCIAL STATEMENTS OF NOT-FOR-PROFIT ENTITIES
�Net asset classification scheme
� Improved disclosures about availability of
resources & liquidity
�Methods of presenting statement of cash flows
�Presentation of expenses by nature & function
�Presentation of net investment return
�Donor-imposed restrictions for the acquisition or
construction of long-lived assets
�Disclosures about self-defined operating
measures
3
FINANCIAL STATEMENTS OF NFPS – PHASE 2
�Intermediate measure
�Whether to require one
�If so, how should it be measured?
�Potential alignment with potential project
on financial performance reporting for
businesses
�Realignment of items in the statement of
cash flows
�Timing of Phase 2 – To be determined
4
12/7/2017
3
TRANSITION
�Effective for financial statements for fiscal years
beginning after December 15, 2017, and for interim
financial statements for periods after that date (early
adoption is allowed)
� If comparative financial statements are issued, NFP
may omit the following information in comparative
financial statements for any years presented before the
adoption year
� Analysis of expense by functional & natural classification
�Disclosures around liquidity & availability of resources
5
ADOPTION
�Should disclose nature of any reclassifications or
restatements, if any, on changes in net asset classes for
each period presented
�Changes in accounting principles represent underwater
endowments and placed in service approach for capital assets
6
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.
12/7/2017
4
NET ASSET CLASSIFICATION SCHEME
�Current GAAP
�Unrestricted
�Temporarily restricted
�Permanently restricted
�Updated GAAP
�Without donor restrictions
�With donor restrictions
�Underwater endowments netted with
donor restrictions
7
REQUIRED DISCLOSURES FOR NET ASSETS CLASSIFICATION SCHEME
8
Without Donor Restrictions With Donor Restrictions
Amounts & purpose of governing
board designations
Composition of net assets at
period’s end
Can be disclosed on face or in
the notes
How the restrictions affect
resource use
Can be disclosed on face or in
notes
12/7/2017
5
EXAMPLE FOOTNOTE DISCLOSURES ON NET ASSETS WITH & WITHOUT RESTRICTIONS
9
Net assets with donor restrictions are restricted for the following purposes or periods:
2016
Subject to expenditure for specified purpose:
Capital projects 4,250$
Educational programs 1,235
Financial aid 2,150
Other 2,815
10,450
Subject to the passage of time:
Beneficial interest in trusts 450
Assets held under split-interest agreements 1,200
Promises to give that are not restricted by donors, but which
are unavailable for expenditure until due 800
2,450
Endowments:
Subject to appropriation and expenditure when a specified event occurs:
Available for general use 1,000
Educational programs 1,120
Financial aid -
Underwater endowments (80)
2,040
Subject to endowment spending policy and appropriation:
General use 109,100
Educational programs 33,300
Financial aid 32,300
174,700
Total endowments 176,740
Total net assets with donor restrictions 189,640$
EXAMPLE FOOTNOTE DISCLOSURES ON NET ASSETS WITH & WITHOUT RESTRICTIONS
10
Note D
Net assets were released from donor restrictions by
incurring expenses, satisfying the restricted purposes or
by occurrence of the passage of time or other events
specified by donors.
12/7/2017
6
EXAMPLE FOOTNOTE DISCLOSURES ON NET ASSETS WITH & WITHOUT RESTRICTIONS
11
Purpose restrictions accomplished:
Program A expenses 4,350$
Program B expenses 3,450
Program C expenses 1,190
Total 8,990
Program A equipment acquired and place in service 1,500
Time restrictions expired:
Passage of specified time 850
Death of annuity beneficiary 400
1,250
Release of appropriated endowment amounts without
purpose restrictions 4,500
Release of appropriated endowment amounts with
purpose restrictions 3,000
Total restrictions released 19,240$
Note DD
Not-for-Profit Entity A's governing board has designated, from net assets
without donor restrictions of $92,600, net assets for the
following purposes as of June 30, 2016.
Quasi-endowment 36,600$
Liquidity reserve 1,300
Total 37,900$
ENDOWMENT FUNDS – ADDITIONAL DISCLOSURES
�Aggregate amount by which funds
are underwater (currently required)
�Aggregate of the original gift
amounts (or level required by donor
or law) for such funds
�Any governing board policies or
decisions to spend or not spend from
underwater funds
12
12/7/2017
7
ENDOWMENT DISCLOSURESEXAMPLE
13
UNDERWATER RECLASSIFICATION EXAMPLE
� Assuming adoption as of June 30, 2016
� Restatement amount would be equal to underwater value, as of
July 1, 2014
� Any change in underwater value attributed to 2015 activity would be
reflected as a change in 2015 investment return amount
14
Without Donor With Donor
Restriction Restriction Total
Change in Net Assets 150,000$ 50,000$ 200,000$
Net Assets, Beginning of Year, as Previously
Stated 3,000,000 2,000,000 5,000,000
Restatement applicable to prior year
underwater endowments 70,000 (70,000) -
Net Assets, Beginning of Year, Restated 3,070,000 1,930,000 5,000,000
Net Assets, End of Year 3,220,000$ 1,980,000$ 5,200,000$
Statement of Activities, abbreviated
2015
12/7/2017
8
ENDOWMENT DISCLOSURES
�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 $1,200,000, fair
values of $1,120,000, and deficiencies of $80,000 were reported in
net assets with donor restrictions.”
15
INFORMATION ABOUT AVAILABLE RESOURCES & LIQUIDITY
16
Qualitative Disclosures Quantitative Information
Strategy for addressing risks that
may affect liquidity
Include information that communicates
the availability of an NFP’s financial
assets at the balance sheet date to
meet cash needs within one year of the
balance sheet date
Policy for establishing liquidity reservesCan be on the face of the Statement of
financial position or in the notes
Information that communicates how
NFP manages its liquid resources
available to meet cash needs for
general expenditures within one year of
the balance sheet date
12/7/2017
9
EXAMPLE FOOTNOTE FOR LIQUIDITY DISCLOSURES
17
Note GThe following reflects Not-for-Profit Entity A’s financial assets, as of the
balance sheet date, reduced by amounts not available for general use
because of contractual or donor-imposed restrictions within one year of
the balance sheet date. Amounts not available include amounts set aside
for long-term investing in the quasi-endowment that could be drawn upon
if the governing board approves that action. However, amounts already
appropriated from either the donor-restricted endowment or quasi-
endowment for general expenditure within one year of the balance sheet
date have not been subtracted as unavailable.
LIQUIDITY – EXAMPLE FOOTNOTE
18
Financial assets, at year-end 237,965$
Less those unavailable for general expenditures within one year, due to
Contractual or donor-imposed restrictions
Restricted by donor with time or purpose restrictions (11,250)
Subject to appropriation & satisfaction of donor restrictions (176,740)
Investments held in annuity trust (1,650)
Board designations
Quasi-endowment fund, primarily for long-term investing (36,600)
Amounts set aside for liquidity reserve (1,300)
Financial assets available to meet cash needs for general
expenditures within one year 10,425$
12/7/2017
10
LIQUIDITY – EXAMPLE FOOTNOTE
19
their use, within one year of the balance sheet date, comprise the following:
Cash & cash equivalents 4,575$
Accounts receivable 2,130
Operating investments 1,400
Promises to give 1,825
Distributions from assets held under split-interest agreements 75
Distributions from beneficial interests in assets held by others 120
Endowment spending-rate distributions & appropriations 300
10,425$
Financial assets available for general expenditure, that is, without donor or other restrictions limiting
LIQUIDITY DISCLOSURE – OTHER NARRATIVE
Our endowment funds consist of donor-restricted endowments & funds designated by the board as endowments. Income from donor-restricted endowments is restricted for specific purposes, with the exception of amounts available for general use. Donor-restricted endowment funds are not available for general expenditure.
Our board-designated endowment of $36,600 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 & 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 & money market funds. Occasionally, the Board designates aportion of any operating surplus to its operating reserve, which was $1,300 as of June 30, 2016.
20
12/7/2017
11
METHOD OF PRESENTING STATEMENT OF CASH FLOWS FOR OPERATING ACTIVITIES
21
If direct is presented, the presentation of the indirect reconciliation is no longer required
Can present as indirect or direct
PRESENTATION OF EXPENSES
�Expenses have to be presented by natural
classification & functional classification in one
location
�Can be shown on face statements or notes
�Expenses on SOA can be shown by natural
classification or functional
�Voluntary health & welfare organizations are no
longer required to report a separate statement of
expenses of functional expenses but would have the
same flexibility as other NFPs
22
12/7/2017
12
EXAMPLE FOOTNOTE DISCLOSURE FOR EXPENSES
23
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, 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.
�New requirement to provide qualitative disclosure about
methods used to allocate expenses attributable to more
than one program
�ASU refines some definitions & enhanced guidance
�Management & General – includes additional examples
� Implementation guidance to help distinguish between direct
conduct & direct supervision of program or supporting services
EXPENSES – ADDITIONAL ITEMS
24
12/7/2017
13
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 $ - $ - $ - $ - $ - $ - $ - $ -
25
20X2
20X2
PRESENTATION OF NET INVESTMENT RETURN
�Presented net of external & direct internal
investment expenses (other than those from
programmatic investing)
�No longer required to disclose expenses netted
against investment return
�No longer required to display the investment return
components in the endowment net assets rollforward
26
12/7/2017
14
EXPIRATIONS OF RESTRICTIONS ON GIFTS OF LONG-TERM ASSETS
�Use the placed-in-service approach for reporting
expirations of restrictions
�Eliminates the option to release the donor-imposed
restriction over the estimated useful life
27
DISCLOSURES ABOUT OPERATING MEASURES
�For NFPs that present a self-defined
operating measure that also present
internal designations on the face of the
financial statements
�Required to report types of internal transfers
disaggregated & described by type
28
12/7/2017
15
EXAMPLE STATEMENTS OF ACTIVITIES
29
Format A
Information
presented in a
single column
Format A
Information
presented in a
single column
Format B
Information
presented in a
multicolumn
format
Format B
Information
presented in a
multicolumn
format
Format C
Information
presented in two
statements
Format C
Information
presented in two
statements
EXAMPLEA
30
12/7/2017
16
EXAMPLE B
31
Without Donor With Donor
Restrictions Restriction Total
Revenues, gains, and other support:
Contributions 8,640$ 8,390$ 17,030$
Fees 5,200 - 5,200
Investment return, net 6,650 - 6,650
Gain on sale of equipment 200 18,300 18,500
Other 150 - 150
Net assets released from restrictions (Note D): -
Satisfaction of program restrictions 8,990 (8,990) -
Satisfaction of equipment acquisition restrictions 1,500 (1,500) -
Expiration of time restrictions 1,250 (1,250) -
Appropriation from donor endowment and -
subsequent satisfaction of any related donor -
restrictions 7,500 (7,500) -
Total net assets released from restrictions 19,240 (19,240) -
Total revenues, gains, and other support 40,080 7,450 47,530
Expenses and losses:
Program A 13,296 - 13,296
Program B 8,649 - 8,649
Program C 5,837 - 5,837
Management and general 2,038 - 2,038
Fundraising 2,150 - 2,150
Total expenses (Note F) 31,970 - 31,970
Fire loss on building 80 - 80
Actuarial loss on annuity trust obligations - 30 30
Total expenses and losses 32,050 30 32,080
Change in net assets 8,030 7,420 15,450
Net assets at beginning of year 84,570 186,070 270,640
Net assets at end of year 92,600 193,490 286,090
2016
EXAMPLE CPART 1
32
12/7/2017
17
EXAMPLE CPART 2
33
TAKEAWAYS
� NFP’s need to be involved in drafting financial statements
� Early adoption?
� Most provisions can be adopted without adopting standard, except
underwater endowments, disclosure of netted investment expenses,
indirect reconciliation of SOCF
� Implementation considerations
� Training for teams
� Changes needed for tracking net assets or reports run out of system?
� Decisions where options are available
� SOA presentation
� Disaggregation on face of statements or notes
� Functional expenses
� Board designated information
� Endowment changes
� Liquidity Disclosures – need to develop policies
34
12/7/2017
19
The information contained in these slides is presented by
professionals for your information only and 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.
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.
