implementing the new nonprofit accounting standards

Biggest Change in 20 Years:Implementing the New Nonprofit Accounting Standards

Presenters

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Andy Maffia – Assurance Partner at Aldrich CPAs + Advisors- Specializes in audits of nonprofit organizations, single audits, agreed-upon

procedures and consulting work- Served over 100 nonprofits - Serves on the board of directors for a NFP Organization - Actively involved with many local nonprofit organizations.- [email protected]

Bobby LaCour – Assurance Partner at Aldrich CPAs + Advisors Specializes in audits of nonprofit organizations, agreed-upon procedures

and consulting work Specializes in investments and endowments Served over 100 nonprofits Serves on the audit committee for two NFP Organizations Actively involved with many local nonprofit organizations. [email protected]

Presenters

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Tariq Marji– Chief Financial Officer, CSU Fullerton Auxiliary Services Corporation- Responsible for financial stewardship, including financial planning,

reporting, investing, cash flow management, and overseeing operations- Actively involved in the AOA, including several standing committees- Serves as Treasurer for NACAS and as a Trustee for the Auxiliaries Multiple

Employer VEBA- [email protected]

Objectives

• Review the significant changes in the standard and implementation dates

• Provide and discuss sample policies and disclosures

• Discuss what ASC has implemented to date and the plan for implementing remaining pieces of the standard

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Recommendations from Early Adopter

• “Start early, because it takes time. It took time to rebuild reports. It took time to reclassify … Start preparing for it, before it’s upon you.”

• “Thoroughly review net asset reporting to make sure the classification is correct; keep financial reporting consistent with tax reporting on IRS Form 990, Return of Organization Exempt From Income Tax, as much as possible; and have a dialogue with the Audit Committee about the changes.”

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Details

• Effective date is fiscal years beginning after 12/15/2017• 6/30/19

• If presenting comparative for 6/30/19, must apply provisions to 6/30/18 as well (can choose not to present functional expense and liquidity disclosures for prior year)

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Improvements

• Complexity in net asset classification

• Clarity of information regarding liquidity and availability of cash

• Transparency in reporting of financial measures

• Consistency in reporting expenses by function and nature

• Utility of the statement of cash flows

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Implementation Questions

• Did your organization decide to early adopt or adopt at June 30, 2019?

• Have you drafted the change in accounting principle footnote? Restatement note? And Reclassification note?

• Have all the proper individuals attended training to understand the changes?

• Have you considered the impact to the timing and planning of the audit?

• Do you have people assigned to lead the implementation?• Are you going to want to present comparative statements?

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Liquidity and Availability

Required to provide:

• Qualitative information on how NFP manages liquid resources available to meet cash needs for general expenses within 1 year of balance sheet (notes)

• Quantitative information that communicates the availability of assets at the balance sheet date to meet cash needs for general expenses within 1 year of balance sheet date (face or notes)

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Step 1: Identify all financial assets and any limitation on availability for expenditure in the next 12 months

Step 2: Determine the format for the disclosure

-Display gross amounts and adjustments

-Display only the net amount available

Availability is affected by nature of the asset, donor limitations, contractual agreements, and board designations

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Questions:

1. Are you presenting classified balance sheet? If so, how does that impact the disclosure?

2. Do you have a policy for managing the organization’s liquidity? Must be disclosed in the notes

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Policy disclosure:

- How entity manages liquid assets and liquidity needs

- When can board designated net assets be undesignated

- Is there access to a line of credit or other financing

- Any other useful information to help reader understand how liquidity is managed

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How has ASC implemented the liquidity and availability standards?

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Net Assets

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Classes

Unrestricted

Without Donor Restriction

Temporarily Restricted

Permanently Restricted

With Donor Restrictions

Current

New

Net Assets - Disclosure

• Composition of net assets with restrictions

• Emphasis on how/when resources (net assets) can be used

• Quantitative and qualitative information on board designations

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Questions:• Do you need to adjust your GL to track new categories?

Or can you do it manually?

• How much disaggregation will you present?

• Will you present it on the face of statements or in the notes?

• Does the current tracking system allow for disclosure of the release of restrictions?

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• Example – Balance Sheet

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Net Assets:Without donor restrictions 153,256With donor restrictions 500,326

Total net assets 653,582Net Assets:

Without donor restrictionsUndesignated 53,256Designated by the Board (purpose ) 100,000

153,256With donor restrictions

Time restricted only, for periods after XX 104,652 Purpose restricted 145,674 Perpetual in nature 250,000

500,326 Total net assets 653,582

Minimum

Alternative


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Alternative


Board Designations• What is the purpose of the board designated funds?

• Are board designated endowments properly separated?

• When can board designated funds be made available? Need for liquidity disclosure

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Net Assets – Board Designated

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Net assets without donor restrictions:Undesignated 53,256Quasi‐endowment 50,000Operating reserve 100,000

203,256

Face or table

Statement of Activities

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Alternative

Statement of activities shall report the following amounts for the period: i) the change in net assets, ii) the change in net assets with donor restrictions, iii) the change in net assets without donor restrictions.

Reclassification of net assets, such as expirations of donor-imposed restrictions, shall be reported as separate line items.


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Alternative

Without Donor With DonorRestrictions Restrictions Total

Revenues, gains, and other support:Contributions 8,640$ 8,390$ 17,030$ Fees 5,200 ‐ 5,200 Investment return, net 4,678 20,272 24,950 Gain on sale of equipment 200 ‐ 200 Other 150 ‐ 150 Net assets released from restrictions:Satisfaction of program restrictions 21,990 (21,990) ‐ Satisfaction of equipment acquisition restrictions 1,500 (1,500) ‐ Expiration of time restrictions 1,250 (1,250) ‐ Appropriation from donor endowment 7,500 (7,500) ‐ Total net assets released from restrictions 32,240 (32,240) ‐ Total revenues, gains, and other support 51,108 (3,578) 47,530


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Alternative


Has ASC determined the impact of the Net Asset Standards yet? If so, what do you think the biggest change will be?

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Expense Reporting

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• Present an analysis of expenses by function and nature in one location• In notes, statement of activities, or

separate statement• Disaggregation of functional expense by

natural classification• Voluntary Health and Welfare no longer

required to do separate statement• Include description of methods

used to allocate costs between program and support

• Improved guidance about management and general expense

Expense Reporting

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• Program Services:• Activities that result in a good/service being distributed to

beneficiaries, customers, or members that fulfill the purposes or mission

• Represent direct conduct or direct supervision of program or other supporting activities

• Certain costs benefit more than one function and, therefore, shall be allocated.

Expense Reporting

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• What is a program and how should they be reported?• Guidance recommends that a program may be separately

reported if, among other things, it meets at least one of the following criteria:• a. Its revenues or expenses are 10% or more of the organization's

total revenues or expenses.• b. Its identifiable assets or liabilities are 10% or more of the

organization's combined identifiable assets or liabilities.

• In addition, if identified major program expenses constitute less than 75% of total program expenses, additional programs may be separately reported until at least 75% of total program expenses are separately reported.

Expense Reporting

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AICPA Financial Reporting Executive Committee (FinREC) states that it believes program information in the financial statements is most meaningful when it aligns with descriptions of the nonprofit organization's mission and programs used in public information, such as fund-raising materials, promotional materials, website descriptions, tax filings, and annual reports.

Expense Reporting - Example

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Based on a quantitative analysis:


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Based on a qualitative analysis:

Expense Reporting

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• Support Services:• Management and general activities include the following:

• Oversight• Business management• General recordkeeping and payroll• Budgeting• Financing• Soliciting funds other than contributions and membership dues, • Disseminating information to inform the public of the NFP’s

stewardship• Administering contracts (government, foundation, grants)• Employee benefits management and oversight (human resources)

Expense Reporting

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• Support Services:• Fundraising:

• Publicizing and conducting fund-raising campaigns.• Conducting special fund-raising events.• Maintaining donor mailing lists.• Preparing and distributing fund-raising manuals, instructions, and

materials.• Recruiting volunteers.• Participating in federated and federal service fund-raising

campaigns.• Soliciting bequests, foundation grants, and special gifts.• Conducting training for improving fund-raising techniques.

Expense Reporting

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Management Fund‐A B C Programs and General Raising Supporting Total Expenses

Salaries and benefits 7,400$ 3,900$ 1,725$ 13,025$ 1,130$ 960$ 2,090$ 15,115$ Grants to other organizations 2,075 750 1,925 4,750 ‐ ‐ ‐ 4,750 Supplies and travel 865 1000 490 2,355 240 560 800 3,155 Services and professional fees 160 1490 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 196 109 77 382 ‐ ‐ ‐ 382 Total expenses 13,296$ 8,649$ 5,837$ 27,782$ 2,038$ 2,150$ 4,188$ 31,970$

The financial statements report certain categories of expenses that are attributable to morethan 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, and office and occupancy, which are both allocated on a square footage basis, as wellas salaries and benefits, which are allocated on the basis of estimates of time and effort.

Program Activities Supporting Activities

Expense Reporting

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Operating expenses:Program A X,XXXProgram B X,XXXProgram C X,XXXManagement and general X,XXXFundraising X,XXX

Total operating expenses X,XXX

Expense Reporting

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The financial statements report certain categories of expenses that are attributable to one or moreprogram or supporting functions of the Organization. Those expenses include depreciation andamortization, the president's office, communications department, and information technologydepartment. Depreciation is allocated based on a square footage basis, the president's officeis allocated based on estimates of time and effort, certain costs of the communications departmentare allocated based on the benefit received, and the information technology department is allocatedbased on estimates of time and costs of specific technology utilized.

Note Disclosure example

Expense Reporting

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Questions:• How and where will you present expenses by nature and

function?• Do you have a formal allocation methodology for allocating

expenses?• Are employees allocating time correctly based on the

guidelines?• What programs should be reported separately?

Expense Reporting

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Allocation example

• CFO• Accounting and reporting• Budgeting and planning• Cash management• Oversight of endowment

How should time be allocated?

Expense Reporting

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Allocation example

• HR Department• Recruiting of all personnel• All other HR functions


Expense Reporting

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Allocation example

• Grant Accounting and Reporting• Fiscal reporting• Program specific reporting


Expense Reporting

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What has been ASC’s biggest challenge in determining how expenses should be reported?

Endowments

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Questions:• Can the current tools be used to provide the necessary disclosure information?

• Are board designated endowment funds properly segregated?

Endowments

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• Underwater Endowment Disclosures• Interpretation of the ability to

spend from underwater funds• Policy and any actions taken

concerning appropriation• For each period presented for all

underwater funds:• The fair value• Original give amount or level to

be maintained• Amount of deficiencies (#1-#2)

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Endowments

Endowment - Disclosure

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Alternative

Endowment

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Alternative

So… what do we do:

• Rewrite your endowment footnote to only have the two categories

• Evaluate all funds to determine if you have any underwater

• Review the tracking methodology to ensure that you will be able to provide all the necessary disclosure information

• Investment return is not presented net so no need to break out components

• Determine if you need to implement any changes to properly identify direct internal investment expenses

Endowment

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Alternative

How will ASC be impacted by the new endowment standard, if at all?

Investment Return

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• Net presentation• Both external and internal expenses• No requirement to disclose

• Direct internal investment expenses• Direct conduct or supervision of strategic and tactical

activities that generate return

• Does not apply to programmatic investments (loans)

Statement of Cash Flows

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Questions to ask:

• Would the cash flow statement be more meaningful to the users if we used the direct method?

• Can we provide the necessary information for the direct method?


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20X1 20X0Cash Flows from Operating Activities

Program service payments received 13,410,429$ 12,458,235$ Membership receipts 373,781 355,044 Gift shop sales receipts 112,364 107,677 Receipts from federal and state contracts and grants 256,663 285,129 Contributions received, net of amounts restricted for

long-term purposes 4,264,113 2,647,976 Receipts from special events 114,989 272,402 Distributions from beneficial interests and assets held by others 182,521 155,717 Other cash receipts 101,275 82,710 Grants paid (294,261) (288,376) Payments for salaries, benefits and payroll taxes (10,964,676) (10,734,090) Payments to vendors (3,935,150) (4,086,056) Interest paid (441,514) (493,767)

Net Cash from Operating Activities 3,180,534 762,601


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What method of presentation of statement of cash flows does ASC use, direct or indirect? Will ASC be changing its presentation method?

Chart of Accounts Recommendations

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• Should you have accounts to show current and long term portions of balances? (liquidity)

• How are external limits recorded and tracked? (liquidity)

• How will you track assets with donor restrictions? Roll into one account with groups? Keep the same detail and just manually combine? (Net Assets)

• Do you need accounts for board designations? (Net Assets)

• Do you have internal investments expenses and should they be allocated? (Investment Return)

Transition

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• Must adopt all provisions in year of adoption

• Comparative years:• Must apply provisions to both years except:

• Can choose not to present functional expense and/or• Liquidity disclosures

• In year of adoption, disclosure nature of reclassifications/ restatements and effects on net assets

• Emphasis of matter paragraph in opinion

Things to consider

• Should you prepare two versions of the 6/30/18 statements, one under ASU 2016-14 and one as usual?

• What training/education should be provided to accounting team and board members prior to the implementation?

• Do you have all the necessary policies in place?

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What Other Changes are Coming?

• FASB• Revenue Recognition (ASU 2014-09 and all subsequent amendments):

Effective for the fiscal year ended June 30, 2020.• ASU 2018-08 Clarifies Revenue Accounting for Nonprofit Grants and

Contracts• Leases (ASU 2016-02 and all subsequent amendments): Effective for the

fiscal year ending June 30, 2021. • Retirement Benefits (ASU 2017-07): Effective for the fiscal year ending June

30, 2019.

• GASB• Leases (GASB Stmt. No. 87): Effective for the fiscal year ending June 30,

2021. • Debt (GASB Stmt. No. 88): Effective for the fiscal year ending June 30, 2020. • Construction Interest Costs (GASB Stmt. No. 89): Effective for the fiscal year

ending June 30, 2021.

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Questions?

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• Email if you would like a copy of the implementation checklist.

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Additional Information - Liquidity and Availability

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May be used for unclassified balance sheet


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Qualitative disclosure to supplement a classified balance sheet


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Additional Information - Liquidity and Availability (Exercise)

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AssetsCash and cash equivalents 5,821,340$ AOperating investments 723,006 BAccounts receivable, net 312,216 CPromises to give, net 1,990,615 See FootnoteGift shop inventory, net 21,672 NAPrepaid expenses and other assets 290,813 NACash restricted to building project 500,000 DProperty and equipment, net 30,810,802 NAAssets held under split‐interest agreements 1,977,102 EBeneficial interests in charitable trusts held by others 812,850 Beneficial interest in assets held by community foundation 1,094,842 4,502,751 FBeneficial interests in perpetual trusts 2,595,059 Endowment

Promises to give, net 336,999 Investments 47,027,131 47,364,130 GTotal assets 94,314,447$

Example provided by the AICPA


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Note 4 ‐ Promises to GiveUnconditional promises to give are estimated to be collected as follows at December 31, 20X1 and 20X0:

20X1Within one year $1,165,958 HIn one to five years 980,189Over five years 500,000

$2,646,147Less discount to net present value atrates ranging from 2.96% to 4.70% ‐112,994Less allowance for uncollectable promises to give ‐205,539

$2,327,614


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Gross Amount Less unavailable Available in 1 yrCash and cash equivalents A 5,821,340$ (970,109) 4,851,231$ cash w/o donor restrictionsOperating investments B 723,006 ‐ 723,006 Accounts receivable, net C 312,216 ‐ 312,216 Promises to give H 1,165,958 (180,112) 985,846 promises w/o donor restrictionsCash restricted to building project D 500,000 (500,000) ‐ Split‐interest agreements E 1,977,102 (1,832,102) 145,000 Expected to be collected in 1 yearBeneficial Interest F 4,502,751 (4,322,641) 180,110 Estimated distributions within 1 yearEndowment G 47,364,130 (46,248,466) 1,115,664 Estimated based on spending rate

62,366,503$ 8,313,073$


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From Endowment Footnote to calculate expected distributions

Additional Information - Net Assets (Sample Disclosure)

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Alternative

Subject to expenditure for specific purpose:Program A activities:Purchase of equipment 1,530$ Research 2,128 Educational seminars and publications 760

Program B activities:Disaster relief 1,120 Educational seminars and publications 1,079

Program C activities, general 1,484 Buildings and equipment 1,075 Annuity trust agreements for research 1,425

10,601 Subject to passage of time:For periods after June 30, 20XX 3,140


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Alternative

Subject to NFP spending policy and appropriation:Investment in perpetuity (including amounts aboveoriginal gift amount of $22,377), the income fromwhich is expendable to support:Program A activities 27,524 Program B activities 27,403 Program C activities 13,662 Any activities of the organization 105,793

174,382 Subject to appropriation and expenditure when a specific event occurs:Endowment requiring income to be added to original giftuntil fund's value is $2,500 2,210 Paid‐up life insurance policy that will provide proceedsupon death of insured for an endowment to supportgeneral activities 80

2,290 Not subject to appropriation or expenditure:Land required to be used as a recreation area 3,000

Continued:


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Alternative

Net assets were released from donor restrictions by incurring expenses satisfying the restricted purposesor by occurrence of the passage of time or other events specified by donors as follows for the yearended June 30, 20XX:

Purpose restrictions accomplished:Program A expenses 15,800$ Program B expenses 4,600 Program C expenses 1,590

21,990 Program A equipment acquiredand placed in service 1,500

Time restrictions expired:Passage of specified time 850 Death of annuity beneficiary 400

1,250 Release of appropriated endowment returns without purpose restrictions 7,500

Total restrictions released 32,240$

implementing the new nonprofit accounting standards

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