Embed Size (px)
Citation preview
Part 1 - Advanced Issues in Consolidation: Practical Solutions for the Resolution of Common Consolidating Headaches
Friday, October 5, 2012 3:00-4:00 PM ET
Presenters: Gayle Harrold and Winell Belfonte
STRENGTH MATTERS® Best Practices in Financial Reporting Webinar Series Made possible by the generous support of
The John D. and Catherine T. MacArthur Foundation
Audio Conference InfoCall-in #: 866-363-6079Passcode: 851 497 0973
Audio Conference InfoCall-in #: 866-363-6079Passcode: 851 497 0973
Issues With Consolidated Financial Statements Webinar Series
About STRENGTH MATTERSA national collaborative sponsored by NeighborWorks® America, Housing
Partnership Network (HPN), and Stewards of Affordable Housing for the Future (SAHF), with ongoing support from The John D. and Catherine T. MacArthur
Foundation.
Our partners also include:
Calvert Foundation
Enterprise Community Loan Fund
F.B. Heron Foundation
Ford Foundation
Housing Assistance Council
Housing Partnership Fund
Local Initiatives Support Corporation
Low Income Investment Fund
Mercy Loan Fund
NeighborWorks® Capital
Website Info www.strengthmatters.net Please register if you have not already. Site provides access to over 20 financial
reporting best practices papers and other resources.
Upcoming Webinars and recordings of past sessions are posted.
www.strengthmatters.net
Getting Started All participant lines will now be muted. Have a question? Please use the Chat
feature and send the Presenter (Gayle Harrold) or the Host (Francie Ferguson) your question.
To ask via phone, please wait for a pause in the presentation and un-mute your phone to speak: #6.
Learning Objectives
Identify key challenges to consolidating financial statements.
Evaluate options to address common hurdles in consolidating.
Apply practical solutions learned today in your organization’s consolidating process.
So you are already consolidating… It seemed like it would be straight forward… Balance Sheet Eliminations-overview Income Statement Eliminations-overview Development Fees, Intercompany Receivables & Payables and
Investment Accounts Charts of Accounts Classification Issues Non-Controlling Interests Cash Flows Financial Statement & Implementation Issues Conclusion Strength Matters Web Site
Agenda
You have determined what you own, how much you own of it and whether or not you control the day to day decision making for each entity
You have identified your intercompany balances/transactions
The companies to be consolidated all have the same year end or are within 3 months of the parent company’s year end
When you consolidate, you lose a few brain cells over….
• eliminating entries
• controlling and non-controlling interests
So you are already consolidating…
It seemed like it would be straight forward…
And then…..Development Fees – are there options for eliminating these fees?Your intercompany receivables are reserved at the parent company levelYour investment in your subsidiaries does not align with the equity in the dealYou self-manage but the properties use a different chart of accountsYou use property management companies each of whom uses a different chart of accounts
AND….
…don’t forget…
Non-controlling interests – how should this be calculated & reflected in your financial statements
You know what you should eliminate….but it is a manual process or your audit firms pulls it together at year end.
Other issues to address? Are there other obstacles you have
encountered that you’d like us to discuss today?
Please use #6 to unmute your phone to ask a question, or use the Chat function via WebEx.
Notes Receivable/Payable
Development Fees Receivable/Payable
Interest Receivable/Payable
Asset Management Fee/Incentive Fees Receivable/Payable
Operating Deficit Loans Receivable/Payable
Due to/from accounts
Development Fees capitalized in Building Costs
Investment Accounts/Partnership Capital Accounts
Balance Sheet Eliminations
Income Statement Eliminations Interest Income/Expense
Asset Management Fee/Incentive Fee Income (Expense)
Resident Service Fee Income/Expense
Other fees between entities
Development Fee Income
Depreciation Expense for capitalized development fees
Distributions to partners
Development FeesRemoving your development fees from the project’s building costs – accounts potentially affected:
Property’s Books
•Building Costs
•Accumulated Depreciation
•Depreciation Expense
Sponsor’s Books
•Development Fee Revenue
•Net Assets
•Deferred Development Fees
Elimination of Development Fees Direct approach:
• Remove cost from building
• Remove accumulated depreciation
• Remove current year depreciation expense
• Remove undepreciated value of development fee from net assets
Elimination of Development Fees1996
Cumulative Fee capitalized by 2004 $ 1,144,615.00
Straight Line - 27.5 years 27.5
Depreciation per year $ 41,622.36
Years of service 1996 - 2011 15.67
Accumulated Depreciation 1997 - 2011 652,222.44
2007
Cumulative Fee capitalized in 2007 $ 134,123.00
Straight Line - 27.5 years 27.5
Depreciation per year $ 4,877.20
Years of service 1996 - 2011 4.17
Accumulated Depreciation 1997 - 2011 20,321.67
2009
Fee Capitalized in 2009 $ 36,579.00
Straight Line - 20 years
Depreciation per year $ 1,828.95
Years of service 1996 - 2011 $ 3.00
Accumulated Depreciation1997 - 2011 5,486.85
Total
Building - Total Capitalized Fee $ 1,315,317.00
Straight Line – see above
Depreciation per year $ 48,328.51
Accumulated Depreciation 678,030.95
Net Assets 685,614.56
December 31, 2011 dr cr
Building - Capitalized fee 1,315,317
Accumulated Depreciation 678,031
Depreciation Expense 48,329
Net Assets 685,615
total 1,363,646 1,363,646
Entry to Eliminate Un-depreciated Development Fee
Elimination of Development Fees Can you consider the margin on development fees
received?
If you have a history of tracking your overhead costs and have a means of determining what your profit on development fees are then you can consider eliminating only the profit, not the entire development fee.
If you can consider the margin, than only the profit is eliminated, not the cost of development fees ( actual overhead incurred by the sponsor).
Questions?
Please use #6 to unmute your phone to ask a question, or use the Chat function via WebEx.
Intercompany Receivables & Payables Sponsor has a note & interest receivable that is fully
reserved
• Eliminate the reserve against net assets, then eliminate the note & interest receivable against the payable
Sponsor records fees on a cash basis, property records them on an accrual basis
•Eliminate the fee recorded by the sponsor – will have portion of income/expense that remains un-eliminated
Investment Accounts Investment account on parent companies books does not
align with their equity in the underlying entity
• Misstated investment accounts result from a failure to record losses, excess losses have been recorded (tax basis used or losses in excess of investment recorded) or distributions have not been properly recognized by the parent
These findings may require a prior period adjustment
Sample Eliminations Worksheet12/31/2011 (DR) CR (DR) CR
Co 10 & 33 New Madison Park IV - Related Party Balances GL of GL of MPDC New MP IV LP Assets Buildings $ 1,315,317 Accumulated Depreciation $ (678,031)Investment New MPIV LP Note & Interest Receivable from NMPIV LP Development Fee & Interest Receivable $ 245,000 Due from New MPIV LP - Company 33 $ 30,000.00
Total Assets $ 275,000.00 $ 637,286
Liabilities & Fund Balance Note & Interest Payable from NMPIV LP Development Fee & Interest Payable $ 245,000 Sponsor Loan from Parent $ 30,000 Beginning Net Assets $ 685,615 $ - Contributed capital $ - $ 271,946 Impact on Net Income (Loss) $ 352,226 $ 128,609 Total Liabilities & Fund Balance $ 1,037,841 $ 675,555 Balance $ 1,312,841.00 1,312,841.00
Income Statement Neighborhood Network Fees pd to MPDC $ 57,780 $ 57,780 Property Distributions Received $ 271,946 Incentive Management Fee paid $ 7,500 $ 7,500 Interest Income/Expense recorded on Notes Payable Interest Income/Expense recorded on Developer Fees $ 15,000 $ 15,000 Subtotal $ 352,226 $ 80,280 Depreciation $ 48,329
Total Income Statement Impact $ 352,226 $ 128,609
Questions?
Please use #6 to unmute your phone to ask a question, or use the Chat function via WebEx.
Charts of Accounts
Your charts of accounts are not aligned
• While it would be ideal to have the same chart of accounts for all entities, it is not typical.
• Approach – consider grouping the companies with like charts of accounts and then prepare summary entries by financial statement line item only to accomplish the consolidation
Classification Issues
Reserves are recorded somewhere between current and long term assets on your properties’ financial statements• reserves for operations & escrows for insurance and taxes
should be classified as restricted current assets. • replacement reserves should be classified as restricted long-
term assets The property records certain expenses differently than you would
at the parent company level. –
e.g. - payroll is recorded within Repairs & Maintenance at the property level but should be recorded as payroll expense on the statement of functional expense by the non-profit parent• consider how material the classification issue is – if material,
calculate and post an entry to the consolidation to adjust
Classification Issues Classification of Cash
• If your financials present your properties in a column that is separate from your parent company, then all of the properties’ cash should be classified as non-restricted.
• If you issue single column consolidated statements, then the cash for those properties that are not wholly-owned should generally be classified as restricted
Non-Controlling Interests & Eliminations How much of your eliminating entry is to be made against your
net income and net assets and what is to be eliminated from the non-controlling interests’ share of net income and net assets?
Reporting requirements – Your statement of changes in net assets requires that both your net assets and the non- controlling interest in net assets is presented by net asset classification – unrestricted, temp restricted and perm restricted.
• Keep a roll-forward of your non-controlling interests and update it annually with their share of income/expense & distributions
Sample: Non-Controlling InterestsDecember 31, 2011 Parent Company New MP IV New MP IV New MP IVNew Madison Park IV - Related Party Balances Unrestricted GP LP
Net Assets Non-Controlling
Interest TotalImpact of Eliminations on Net Assets CR (DR) CR (DR) CR (DR) and Non-Controlling Interest
1% 99%
Items eliminated from Net Income (loss) impacting Net Assets
Depreciation Expense $ 483 $ 47,846 $ 48,329 Network Fees $ 57,780 $ 578 $ 57,202 $ 57,780 Incentive Fees $ 7,500 $ 75 $ 7,425 $ 7,500 Interest on Development Fees $ - $ 150 $ 14,850 $ 15,000 Distribution to MPDC $ 271,946 $ -
$ 337,226 $ 1,286 $ 127,323 $ 128,609
Impact of Items to be eliminated from Net Assets
Distribution from Partner's Capital to Parent by MPIV $ 271,946 $ - $ 271,946
Unamortized Developer Fee $ 733,944
Total Eliminations from Net Assets on Balance Sheet $ 1,071,170 $ 273,232 $ 127,323 $ 400,555
Net Asset Rollforward
Beginning Balance of Net Assets/Minority Interest $ (415,939) $ 250,846 $ (165,093)before net loss and eliminating entries (see cap rollforward)
Net Income $ 2,033 $ 201,257 $ 203,290 Distributions $ (271,946) $ (181,298) $ (453,244)
Ending Net Asset Balance, after Net Income $ (685,853) $ 270,806 $ (415,047)
Total Eliminations from Net Income $ 1,286 $ 127,323 $ 128,609 Elimination of Distribution from Net Assets $ 271,946 $ 271,946
$ 273,232 $ 127,323 $ 400,555
Ending Net Asset Balance, after eliminations $ (412,620) $ 398,129 $ (14,492)
Sample Roll-Forward of Net Assets
Questions?
Please use #6 to unmute your phone to ask a question, or use the Chat function via WebEx.
Cash FlowsEliminations & the Cash Flows
Use the cash flows prepared for each property and then layer on your eliminating entries
Eliminating entries = Change in related party balances last year =/- the change in the related party balance this year
Financial Statement/Implementation Issues
First Year Issues -
Will you present a single stand alone audit without comparative statements or restate the prior period presented?
If you present a stand alone audit, your opinion will refer only to that audit – may/may not be allowed by your external users. You will need to restate opening net assets so you will still have to consider the impact of consolidation on the prior year.
If you restate, you will restate the prior year’s financials, including opening net assets so you really need to look at consolidation issues/eliminating entries going back two years.
Financial Statement/Implementation Issues
Ongoing Issues –
Where do eliminations occur? – depends upon whether you issue single column consolidated financials or consolidating financials – this will change as your company grows/changes
What is the most efficient way to capture eliminating entries?• Set up eliminations company• Code all related party accounts so that you can easily run
reports to identify all accounts to be considered for consolidation/elimination purposes
Conclusion Consolidation of controlled entities can involve a significant
amount of upfront investigation to identify assets/liabilities & revenues/expenses to be eliminated
If your intercompany accounts are not in balance, you may have current or prior period adjustments to contend with
You may need to reconsider your consolidated financial statement format - new columns? Consolidating statements instead of consolidated for more transparent results
Although this presentation will show you how to consolidate using Excel, automation of the process is preferred and will depend upon your financial software. Excel, while useful, will not be your friend in the end.
Questions?
Please use #6 to unmute your phone to ask a question, or use the Chat function via WebEx.
www.strengthmatters.netVisit the Strength Matters Website, and REGISTER to access:
21 White Papers addressing numerous accounting and reporting topics• Consolidations White Papers – 3a, 3b & 4a, 7
Templates for • Management’s Discussion & Analysis• Cash Flow forecasting• Summary of Debt Template• Project Pipeline Template…..and more!
Contact InformationGayle Harrold: 617-849-6224,
Winell Belfonte: 301-961-5546, [email protected]
Frances Ferguson: 512-441-5441, [email protected]
Lindsay Wells, 617-821-0463, [email protected]
Stay Tuned!Upcoming Webinars: Parts 2 & 3 in the Issues With Consolidated Financial Statements Series•Part 2: Financial Statement Formats - Maximizing Readability for Your Board and External Users (Fall 2012 - date TBD) •Part 3: Consolidated Financial Statements 101 (early 2013 - date TBD)More Webinars coming in 2013!
Visit www.strengthmatters.net to view recorded Webinars and download presentations.
Evaluation
Please help us improve future sessions!
Complete the Evaluation in the Polling panel on the right side of your screen before you exit the WebEx meeting.
Thank you!
