Leading Excellence in Research Costing Practices An Overview of Standards Issued by the: Financial Accounting Standards Board (FASB) Governmental Accounting Standards Board (GASB) Review of Capital Asset Reporting in Accordance w/OMB Presented by Kevin J. McHugh Leading Excellence in Research Costing Practices General Conference: 11/2 – 11/4, 2016

Financial Accounting Standards Board (FASB)

FASB Lease Accounting Standard Update – ASU 2016-02, Issued February 25, 2016 The Financial Accounting Standards Board (FASB) initiated a joint project with the International Accounting Standards Board (IASB) in 2006 with the purpose of revising lease accounting standards. After approximately 10 years, both Boards finalized their respective lease accounting standards earlier this year. These new standards fundamentally change the rules that govern all accounting for all leases, which include both real and personal property leases. This new standard may have far reaching implications in areas such as: Accounting/Financial Reporting Real Estate Tax Technology Asset Management

FASB New Lease Standard is Here – Next Steps? Step one: Identify your leases and perform a Data Gap Analysis Review Service Agreements that may contain embedded leases. Historically, Services Agreements and Operating Leases were ‘off balance sheet’ – now no longer the case To determine if an arrangement contains lease, you should determine if there is an ‘identifiable’ asset that the supplier cannot substitute and that your institution controls.

FASB New Lease Standard is Here – Next Steps? Step Two: The ‘Lessee’ needs to classify each lease as either a ‘Finance’ lease or an ‘Operating’ lease. If the asset is deemed to be ‘specialized’ and not expected to have an alternate use at the end of the term, it should be considered as a finance lease. This effort is important as the classification determines the two lease categories will have an impact on the income statement, with expenses being recognized on a straight line basis for Operational leases and front end loaded for Finance leases. Develop an implementation ‘roadmap’ that would include all impacted areas.

FASB New Lease Standard is Here – Next Steps? Other Credentials: This new Standard impact extends beyond the financial statements For treasury, leases are no longer considered to be off balances sheet financing, thus adding to the balance sheet might impact debt covenants. With the implementation on this new Standard, along with on-going allowance and disclosure requirements might necessitate new or updated processes, systems & controls that could impact IT and Operations. You should have discussions with your Independent Auditors F&A Compliance Consultants and Federal Cognizant Agency, regarding this new standard.

What is the effective date What is the effective date? The FASB Accounting Standard Update, ASU 2016-02 Leases, was issued on February 25, 2016 The new Guidance is effective as follows: For Public Business Entities, the standard is effective for annual periods beginning after December 15, 2018 (i.e., calendar periods beginning after January 1, 2019). For all other entities, the standard is effective for annual periods beginning after December 15, 2019 (i.e., calendar periods beginning after January 1, 2020). Early adoption would be permitted for all entities.

Governmental Accounting Standards Board (GASB) Overview

GASB Statement No. 81, Irrevocable Split – Interest Agreements On March 29, 2016, the Governmental Accounting Standards Board (GASB) issued Statement No. 81, Irrevocable Split Interest Agreements. Split – Interest agreements are a type of giving agreement used by donors to provide resources to two or more beneficiaries, include a public college, university or hospital. These agreements can be created through trusts, or other legally enforceable agreements, in which a donor transfers resources to an intermediary to hold and administer fro the benefit of the institution and at least one other beneficiary. Examples of split – interest agreements include: Charitable Lead Trusts Charitable Remainder Trusts Life interests in real estate The GASB states: “The types of agreements addressed by statement 81 can represent significant resources for certain public colleges, universities, and hospitals. This guidance will lead to more constant accounting for these agreements, which will allow users to access more comparable information about them.

GASB Statement No. 81, Irrevocable Split – Interest Agreements This Satement provides recognition and measurement for situations in which a Public Institution is a beneficiary of the agreements by requiring the institution to recognize assets, liabilities and deferred inflows of resources at the inception of the agreement. In addition: Requires that a Public Institution recognize assets that represent a beneficial interest, need to be administered by a third party, if the institution controls the present service capacity of beneficial interests. The overall objective is to enhance the transparency and decision – usefulness of external financial reports. Lastly: The requirements are for reporting periods beginning after December 15, 2016 and should be applied retroactively, with earlier implementation encouraged.

More GASB Statements to be Issued: May, 2017 – Lease Accounting Standards For Public Institution Of Higher Education January, 2018 – Other Post Employment Benefits (OPEB) Standard to be issued

Review of Capital Asset Reporting in Accordance with OMB

Internal Controls – Real and Personal Property Internal Controls for Property and Equipment Property and Equipment asset classifications represent a significant investment by your institution for its overall day to day operations and represents a major portion of your Institutions balance sheet. There are several requirements for financial reporting, insurance, Facilities & Administrative (F&A) Cost Reporting, OMB’s Uniform Guidance, stewardship requirements and the like that dictate that proper Internal Controls are indeed in place and working at your Institution. Some examples of effective Internal Controls for Property and Equipment include: Property identifying moveable equipment. Properly labeling equipment with an asset tag (Barcode/RFID). Using proper asset classification codes. Notifying your Property Control department/manager of equipment acquired other than through the standard University procedures. Alerting Property Control of equipment traded/exchanged, transferred, lost, stolen, salvaged, or scrapped. Conducting periodic inventories annually/biannually depending upon your institution’s policies.

Internal Controls – Real and Personal Property To determine your higher education organization has effective Internal Controls Navigant recommends the following eight steps in assessing your institution’s Internal Controls for property and equipment: Design a questionnaire comprising approximately 25 to 30 questions to address the basics with the five control components. Conduct interviews either as a ‘focus group’ or ‘individually’ depending upon the size of your departments. Summarize the results based upon the interviews and identify strengths and weaknesses in each of the five control components. Determine if your department managers share the same belief that internal controls are important and active in their respective areas. If so, your risk should not be as great. If they do not share in that belief, your risk may rise significantly. Make your institution’s executive management team aware of any reportable conditions or concerns identified in the assessment process. Validate your internal assessment/review processes in the event of probable audit review. Document your final assessment and identify your institutions strengths and weaknesses and document corrective action plan(s), as and if necessary. Document your new or updated policies for implementing periodic and consistent monitoring plans to ensure compliance.

Internal Controls – Real and Personal Property If proper Internal Controls are not in place, your institution will run the risk of being non-complaint and may face the following additional risks: Equipment not identified in the inventory process, but still ‘on your books’ (unrecorded retirements) Equipment identified in the inventory process, but not tagged or identified within your inventory system (unrecorded additions) Lack of support or inaccurate representation of your overall asset base, resulting in an audit finding or, in the event of an insurance loss, lack of proof of loss for any potential insurance claims. Reduced value of the inventory system which effects depreciation, which impacts the [F&A] cost rates, and might result in an internal/independent or Federal audit finding. Equipment inventory overstated would result in potential over insurance and/or potential independent or internal audit finding.

Overview/Review of the Importance of Building Componentization and Moveable Equipment Inventories

If you are considering a Building Componentization study, or update to your current study: What are the Next Steps? Determine the Buildings to be Included Identify the Building Components Perform a Lifing Analysis Based Upon Your Institutions Experience Review Existing and Determine Historical Cost Information Identify and Deduct Federal Contribution

What are the Next Steps? Identify and Segregate The Fixed Equipment Costs Review Use Allowance/Depreciation Already Taken Calculate Depreciation for Each Component Implement Perpetuation Policies/Procedures to Capture Construction Activity

How do I know if this is best for my institution? Consider a Diagnostic Review Study: Select three (3) buildings used in Organized Research Determine Federal Contribution The three buildings should be of different vintages: Old Middle Aged New Perform a comparison analysis of the results of the three buildings (calculation of depreciation)

How do I know if this is best for my institution? If the analysis is towards implementation of componentized depreciation, then move forward with those remaining buildings used in Organized Research Be consistent in your selection of buildings to be componentized (Typically all buildings with _X_% and greater of organized research activity) Do not cherry pick!

BUILDING COMPONENTIZATION Why is it important to have an accurate Building Componentization Study?

Why Maintain an Accurate Building Componentization Study? Federal & State Financial Reporting Requirements Possible Misleading Financial Statements Qualified Auditor’s Report Uniform Guidance ( Former A-133) Stewardship of your Current Assets Inadequate Maintenance Management Risk Management – Property Insurance Basis for Capital Budgeting

Why is it important to have an accurate and complete inventory? Moveable Equipment Why is it important to have an accurate and complete inventory?

Why Maintain an Accurate Moveable Equipment Inventory? Federal & state financial reporting requirements Possible misleading financial statements Qualified Auditor’s Report Uniform Guidance(Former A-133) Stewardship of fixed assets Inadequate maintenance management Risk management – property insurance Basis for capital budgeting Possible purchase of unneeded assets Disposal of surplus property Public scrutiny

Problems Controlling Fixed Assets Budget cut-backs, thus staff reductions Assets are not fixed Staff turnover People do not think it is important People protective of “their” assets, purchased under “their” grants Assets transferred from another institution

Benefits of a Good Fixed Asset System Financial Reporting

Asset Control Capitalized Controlled Expensed Distinction is Important

Capitalization Policy Considerations What to Capitalize Useful Life Cost (Threshold) Considerations Number of Assets to be Recorded Volume of Transactions Materiality – Effect on Financial Status Periodic Review

Capitalization Threshold Considerations Issues to Consider Uniform Guidelines Institutional Controls Prior approval of cognizant agency Impact on direct costs in future years Disclose changes in policy in to your cognizant Federal Agency as well as your Institutions Independent Auditors Educate your auditors as to Federal Reporting Issues (Componentization/Lifing/Capitalization Thresholds in Particular) Lifing (realistic) needs to be reflected in their workpapers

Capitalization Threshold Considerations Issues to Consider Impact upon F&A – What will be the effect with the “GAP” assets? Property Record Maintenance Higher capitalization threshold equates to accounting for big items Easier Sophisticated, recognizable items Less movement Fewer items Economies Efficiencies Auditability

Capitalization Threshold Considerations Do we go from $500 to $5,000; or look at impact at lower thresholds? Minimum dollar or historical cost amount to “qualify” as a fixed asset Reconsideration of “major” vs “minor” equipment designations

Capitalization Threshold Analysis From To Result $500 $2,500 Typically reduced assets by 70% and Basis decreased by 15% $5,000 Typically reduced assets by 85% Basis decreased by 20%

Property Accounting Guidelines – Your Institution Needs One! Policies and Procedures Responsibilities Policy Timing Leased Assets Capitalization Costing Donated Assets Tagging Procedures Transaction Forms Coding Structures Introduction Internal Controls Transaction Types Additions Changes Retirements Adjustments

Other Important Considerations

Other Important Considerations Asset Lifing – Needs to be based upon “Institutional” experience, not “Industry Standards,” or “Publications.” Our experience indicates the need for significant collaboration between your Independent Auditors and your F&A Consulting Team and your Valuation Consultants.

Questions?

Contact Information Kevin J. McHugh Managing Director Navigant Consulting, Inc. 685 Third Avenue, 14th Floor New York, NY 10017 Main Number +1 646 227 4701 Fax +1 646 227 4299 kevin.mchugh@navigant.com