Ultimate Finance and Legal Conference GAAP Update Ultimate Finance and Legal Conference Vonna Laue

Agenda Nonprofit financial statements – ASU 2016-14 Restricted cash – ASU 2016-18 Revenue recognition – ASU 2014-09 Leases – ASU 2016-02 Consolidation – ASU 2017-02 Clarification of Contributions Received and Made – Proposed ASU

Nonprofit Financial Statements A generation since the last major change

Specifics Title: Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities Issue date: August 18, 2016 Effective date: Fiscal years beginning after Dec 15, 2017 Length: 270 pages Early adoption: Permitted Retrospective transition: Required for all but functional and liquidity disclosures

Key Elements Net asset classification: With and without donor restrictions Financial statement presentation Required disclosures – analysis by time, purpose, and perpetual restrictions Day-to-day accounting

Key Elements Underwater endowments: Endowments with a current fair value below the original gift amount Classified with donor restrictions Expanded disclosures Original amount of endowment Policy related to spending from these funds Whether the policy was followed

Key Elements Board-designated net assets: Net assets without donor restriction but set aside by governing board Disclosures required for nature and amounts of designated balances Board may allow management to designate Examples would be capital or operating reserves or quasi-endowments Should consider policy on designating net assets

Key Elements Long-lived assets: Gifts for construction or acquisition of property and equipment Restriction released when asset placed in service No longer able to release over useful life of asset Exception for donor giving explicit instructions

Key Elements Transparency and liquidity: Quantitative and qualitative information to help readers understand: Entity’s exposure to risks How the entity manages liquidity risk Information about availability of assets to meet cash needs for the next year Information could include budgeting, reserve policies for qualitative and current ratio for quantitative.

Key Elements Presentation of investment expenses: Includes external and direct internal costs Eliminates need to identify imbedded fees Results in expenses being reflected in net asset category related to the investment income

Key Elements Expense reporting: Functional AND natural classification required May use statement of functional expense (SFE), statement of activities (SOA), or footnote Voluntary health and welfare organizations will no longer be required to have a separate SFE

Key Elements Cash flow information: May now use direct or indirect method of cash flows with no required reconciliation if the direct method is used.

A clarification in reporting cash and cash equivalents Restricted Cash A clarification in reporting cash and cash equivalents

Specifics Title: Statement of Cash Flows (Topic 230): Restricted Cash Issue date: November 17, 2016 Effective date: Fiscal years beginning after Dec 15, 2018 Length: 41 pages Early adoption: Permitted Retrospective transition: Required

Key Elements Statement of cash flows (SCF): Cash and restricted cash shown in total Transfers no longer reflected on SCF Nature of restrictions must be disclosed Purpose - Duration Source - Amount Reconciliation of cash on SCF and statement of financial position (SFP) required Minimum balance requirements Bond sinking funds Grants

The big question is “Does it apply to us?" Revenue Recognition The big question is “Does it apply to us?"

Specifics Title: Revenue from Contracts with Customers (Topic 606) Issue date: May 28, 2014 Effective date: Fiscal years beginning after Dec 15, 2018 Length: 156 pages Early adoption: Prohibited Retrospective transition: Required

Key Elements What is covered? Membership Tuition Public grants Conferences Sponsorships Subscriptions

Key Elements What is NOT covered? CONTRIBUTIONS

Key Elements Five-step process: Identification of contract with customer Identification of performance obligations Determination of transaction price Allocation of the transaction price to separate performance obligations Determination of when a performance obligation is satisfied and revenue recognized 1 - Contract may be oral or written 2 – what does NFP have to do 3 – what does NFP expect to receive both cash and noncash 4 – especially if there are multiple performance obligations 5 – point in time (sale of good, conference) or over time (membership dues, subscriptions, royalties. Over time may be done based on outputs, inputs, or time based/straight line

Prepare to Implement Discuss with your CPA Inventory all revenue streams Determine what may need modified Determine point in time vs over time Determine if there are costs to acquire contracts that may need capitalized Train boards and finance committees early 1 - Contract may be oral or written 2 – what does NFP have to do 3 – what does NFP expect to receive both cash and noncash 4 – especially if there are multiple performance obligations 5 – point in time (sale of good, conference) or over time (membership dues, subscriptions, royalties. Over time may be done based on outputs, inputs, or time based/straight line

SFP – Big changes SOA – Virtually the same Leases SFP – Big changes SOA – Virtually the same

Specifics Title: Leases (Topic 842) Issue date: February 25, 2016 Effective date: Fiscal years beginning after Dec 15, 2019 Length: 191 pages Early adoption: Permitted Retrospective transition: Required

Key Elements Most leases become finance leases (capital) Leases of 12 months or less with no purchase option can be expensed Asset and liability recorded SOA will include amortization of asset cost and interest expense from lease which will approximate previously expensed payments

Prepare to Implement Evaluate all current and future leases Be aware of retrospective presentation Consider early adoption if there are leases that will extend beyond the implementation date

Consolidation Limited audience – nonprofits that are involved in limited partnerships

Specifics Title: Not-for-Profit Entities - Consolidation (Topic 958-810): Clarifying When a Not-for-Profit Entity That Is a General Partner or a Limited Partner Should Consolidate a For- Profit Limited Partnership or Similar Entity Issue date: January 2017 Effective date: Fiscal years beginning after Dec 15, 2016 Length: 44 pages Early adoption: Permitted Retrospective transition: Required

Key Elements Nonprofits that are general partners in a limited partnership should consolidate the partnership unless there are specific rights of the limited partners such as kick-out rights or substantive participating rights. This would also apply to managing members of limited liability companies.

You have the ability to speak into a proposed change – NOW! Proposed ASU You have the ability to speak into a proposed change – NOW!

Specifics Title: Not-for-Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made Issue date: August 3, 2017 Comment period: Ends November 1, 2017 Effective date: Fiscal years beginning after Dec 15, 2018 Early adoption: Permitted

Key Elements Evaluate whether the resource provider is receiving value in return for the resources transferred Yes, then exchange transaction On behalf of someone else, then exchange transaction (Medicare) No, then contribution

Key Elements Requires organizations to determine conditional vs. unconditional A barrier must be overcome and Right of return of assets or release of obligation

Key Elements Expected this could result in more grants and contracts being treated as contributions After a contribution is deemed unconditional, it may still have donor-imposed restrictions

It is a nonreciprocal transaction. Apply contribution guidance. Is the transaction one in which each party directly receives commensurate value? Yes It is an exchange transaction. Apply Topic 606 on revenue from contracts. No Is the payment from a third-party payer on behalf of an existing reciprocal transaction? Yes It is a balance-sheet only transaction. No effect on an entity’s revenue recognition. No It is a nonreciprocal transaction. Apply contribution guidance. Are there conditions present (a barrier and a right to return or release)? It is unconditional. Recognize revenue in appropriate net asset class. No Yes Meeting of condition It is conditional. Recognize revenue when the condition is met. Are restrictions present (purpose or timing)? Yes No It is unconditional and with donor restrictions. It is unconditional and with donor restrictions.

How to Respond www.fasb.org/draft Would the amendments in this proposed Update provide clarifying guidance that would be operable in practice? If not, why not? Would the proposed amendments clarify whether a resource provider is receiving commensurate value in return for assets transferred and when a transaction is within the scope of Subtopic 958-605? If not, why not?

Be prepared and don’t turn your back on these upcoming changes.

Resources FASB Implementing new standards page: www.fasb.org/implementation BDO flash alerts EY “To the Point” October 31 ECFA webinar with Andrew Prather