Not-For-Profit Update

Shelly L. HammondVice President, Assurance Services

Allen, Gibbs & Houlik, L.C. shelly.hammond@aghlc.com

WSU Accounting & Auditing Conference

Objectives

• FASB updates: new for 2010

• FASB updates from 2009: reminders and best practices

• New OMB Circular A-133 & related compliance guidance

FASB update: ASC 740 (FIN 48)

• Uncertain tax positions• Effective date: years ending December 31,

2009• Model for recognizing, measuring,

presenting and disclosing tax positions• Application to NFPs: two universal tax

issues:– Exempt status– Unrelated business income tax (UBIT)

FIN 48

• Exempt status– Claiming tax exempt status without

corresponding proof of recognition of exempt status from federal / state authorities

– Substantial activities not related to activities that formed basis of original exemption

– Egregiously high compensation to insiders– Egregiously undervalued asset sales to insiders– Website links to political campaign activity

websites outside scope of allowable lobbying activities

– Other substantial lobbying activities where entity does not have a 501(h) election in place

FIN 48

• UBIT– Treatment of an income flow as exempt when

it should be subject to tax – Over-allocation of expenses against UBI– Not filing returns in local, state or other

jurisdictions for UBI– Dual use of facilities and personnel; expenses

not allocated on a reasonable basis– Positions taken related to use of NOLs

generated from UBI

• Step 1: Recognition– Determination of whether it is more likely than

not (MLTN = >50%) that a tax position will be sustained on taxing authority examination

• Step 2: Measurement– If tax position meets MLTN threshold, measure &

recognize the largest amount of benefit that is greater than 50% likely of being realized upon settlement by taxing authorities

– Tax positions not meeting the MLTN threshold should not be recognized

FIN 48

FASB update: ASC 958-805 and 810 (FAS 164)

• NFP entities: mergers & acquisitions

• Effective date: – For mergers where merger date is on or after

a reporting period beginning December 31, 2009

– For acquisitions where acquisition date is on or after annual reporting period beginning after December 31, 2009

FAS 164

• Guidance on how an NFP determines if a transaction is a merger vs. acquisition

• Applies “carryover method” in accounting for a merger

• Applies “acquisition method” in accounting for an acquisition, including determination of which entity is the acquirer

• Provides for additional disclosures

FAS 164

• Merger• The governing bodies of two or more NFPs

cede control of those entities and create a new NFP entity

• Acquisition• An NFP obtains control of a NFP or business

FAS 164

• Carryover method: combining the assets and liabilities recognized in the separate F/S of the merging entities as of the merger date

• Acquisition method: same as that described in Topic 805 (Business Combinations)

FAS 164 Disclosure & Presentation

• Merger: Forms a new reporting entity, which had no activities prior to the merger date– Merger itself shall not be reported as an activity

of the new NFP’s initial reporting period.– Disclose name of merging entities, merger

date, reasons for the merger, amounts of assets / liabilities recognized on merger date, any adjustment made to conform accounting policies.

• Acquisition: Similar to disclosures under ASC 805– Additionally: qualitative factors, such as

expected synergies from combining operations; conditional promises to give acquired or assumed

FASBs from 2009: reminders

• FAS 165 (ASC 855) – Subsequent Events– Effective for periods ending after June 15,

2009

• FAS 157 (ASC 820) – Fair Value Measurements

• FSP 117-1 (ASC 958-205-45/50) – Endowments

FAS 157

• NFP resources:– ASU 2009-12 on alternative investments

• Use of Net Asset Value (NAV) for fair value

– AICPA draft Issues Paper from January 2010: addresses unconditional promises to give, beneficial interests in perpetual trusts, split interest agreements

FAS 157

• Not all assets / liabilities measured at FV must be included in the tabular disclosures– Only those subject to subsequent re-measurement

• Yes: investments, beneficial interests, asset impairments

• No: contributions (pledges) receivable, split-interest obligations (generally)

• No need to “look through” to how underlying investments categorized by investment manager– Determine “unit of account” – which is the actual

investment held (not the underlyings) – generally ownership interest in the fund

• ASU 2009-12: allows use of NAV as practical expedient for FV if NAV is as of the entity’s balance sheet date, and is computed in accordance with Investment Companies Guide– Use for hedge funds, private equity funds– Provides guidance on Level 2 vs. 3 classification

(redeemable vs. not)– Requires disclosure about attributes of investment:

redemption restrictions, investment strategies– Effective for period ending after December 15, 2009

FAS 157

FAS 157

• AICPA Draft Issues Paper:– Contributions (pledges) receivable

• Discussion of valuation techniques and factors to consider in determining FV, including risk factors to be considered if using a present-value technique (i.e., risk-adjusted discount rate)

– Split interest agreements / obligations• Prior to FAS 157, FV estimated using income approach

(present-value techniques) – Issues Paper discusses other approaches, and appropriate discount rates if using PV technique

– Perpetual trusts• FV measured using the FV of assets contributed to the

trust – Issues Paper addresses situations where this may not be the case

FSP 117-1

• Endowments / classification of net assets

• Application of UPMIFA

• Donor-restricted endowments vs. board-designated endowments

• New disclosure requirements

FSP 117-1

• Donor-restricted endowments:– Permanently restricted portion– Amounts in excess of permanent restriction

are all temporarily restricted• Net appreciation is time-restricted until

appropriated• Reclass to unrestricted upon appropriation, if no

purpose restriction by donor• If purpose-restricted, reclass to unrestricted net

assets only when spent or deemed spent

FSP 117-1

• Disclosures:– Description of governing board’s interpretation of laws

(may require legal advice on application of UPMIFA laws)

– Description of the entity’s spending policy– Description of the entity’s endowment investment

policies– Composition of endowment funds (separating donor-

restricted from board-designated)– Reconciliation of beginning / ending balances– Nature and types of restrictions– Information on deficiencies (where FV of assets is less

than the level required by donor stipulations)

FSP 117-1

• Under-water funds:– In the absence of donor stipulations or law, losses on

investments of donor-restricted endowment funds shall reduce temporarily restricted net assets, with remaining losses reducing unrestricted net assets.

– Gains that restore donor-restricted endowments shall be classified as increases in unrestricted net assets.

– For board-designated endowments, losses are classified as reductions in unrestricted net assets (no donor restrictions).

OMB Circular A-133 update

• Resources:– GAQC website– GAQC Recovery Act Resource Center

• Implementation of SAS 115: changes to GAS and A-133 opinion language

• New AICPA sampling chapter issued in December 2009

OMB Circular A-133

• New Compliance Supplement to be issued in May

• Expect clarification on major program determination for ARRA programs.– Specific Type A and B criteria

• Official statement of no low-risk auditee status when filing late (no extensions either)

Questions?

Thank you!

Shelly L. Hammond

Vice President, Assurance Services

(316) 267-7231

shelly.hammond@aghlc.com