Key Accounting Updates for Convention and Visitor Bureaus Presented by: MARIE BRILMYER, CPA, PARTNER Tina Dzik, CPA, PARTNER April 12, 2018

Welcome & Introductions

Contact Information MARIE BRILMYER, CPA PARTNER mbrilmyer@cohencpa.com 330.255.4348 TINA DZIK, CPA, MBA PARTNER tdzik@cohencpa.com 216.774.1125

Accounting Standards Update (ASU) 2016-14 Not-for-Profit Entities (Topic 958) Presentation of Financial Statements of Not-for-Profit Entities

Background Refresh after 20 years Update, not a complete overhaul FASB debated, solicited comments, and revised the provisions of the ASU over the past 3 years Why did the FASB seek to take on this project? Does GAAP continue to meet users’ needs? To better enable not-for-profit organizations to tell their story

Phase 1 Phase 2 Phases ASU 2016-14 Operating measures Alignment of measures between statements No set timeframe

Key Objectives – Overview To improve the current net asset classification requirements (unrestricted, temporarily restricted and permanently restricted) To improve information in the financial statements and footnotes useful in assessing an organization’s: Liquidity Financial performance Cash flows

Key Objectives – Overview Specifically to address the following issues: Net asset classifications are too complex It is impossible to figure out an organization’s liquidity and its availability of resources All are organizations are doing something different when it comes to reporting Expenses Investment returns The cash flow statement is cumbersome

Issue 1: Net Asset Classifications Are Too Complex Instead of having three classes, there are now only two (minimum requirement) Net assets with donor restrictions Net assets without donor restrictions Required disclosures Composition of net assets with donor restrictions at end of period Show an analysis of time, purpose and perpetual restrictions Disclose how the restrictions affect the use of resources Temporarily Restricted Net Assets Permanently Restricted Net Assets Net Assets with Donor Restrictions

Example Statement of Activities

Example Statement of Financial Position

Example Disclosure

Board Designated Net Assets New required disclosures of nature and amounts of board designated net assets New FASB ASC Master Glossary definition:

Board Designated Net Assets Enhanced Disclosure Example

Implementation of Net Asset Changes Develop policies and/or practices regarding board designations on net assets; even if no designations Determine whether you need to adjust your general ledger, excel spreadsheet or other tracking mechanism to accommodate new terminology and presentation for net assets (but remember 990 still requires the three classifications of unrestricted, temporarily restricted and permanently restricted net assets) Determine the appropriate level of disaggregation of net assets you wish to present among: Net assets without donor restrictions; Those with donor restrictions that will be satisfied over time and/or by expenditure for a particular purpose; And those that will be maintained in perpetuity Decide the degree of disaggregation you wish to present on the face of the statement of financial position vs. in the notes

Issue 2: Liquidity and Availability of Resources Report qualitative information How the organization manages its liquid available resources to meet cash needs over the next year Also report quantitative information that communicates the availability of a NFP’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year Simple way to meet many of the requirements Present a classified statement of financial position If your organization is more complex The amount of financial assets at the end of each period Restrictions on financial assets, such that they are not available for near- term cash needs The amount of financial liabilities that require cash in the near term

Liquidity Example #1

Liquidity Example #2

Liquidity Example #3

Implementation of Liquidity Requirements Determine the format to present the required quantitative disclosure of liquidity information Display gross amounts of financial assets, then adjustments to arrive at available for expenditure amounts, or Display only the net amounts available for expenditure Remember availability is affected by nature of assets, external limitations, imposed by donors, contractual agreements, and board designations Develop a formal policy for managing the organization’s liquidity needs Begin drafting the new disclosure describing how the entity manages its liquid assets and liquidity needs, including conditions under which certain board-designated net assets may be undesignated, access to the lines of credit or other financing sources, and any information useful in understanding the entity’s liquidity

Issue 3: Reporting Expenses and Investment Returns All not-for-profits will report expenses by nature and function and an analysis by nature and function (currently only Voluntary Health and Welfare entities must report in this way) Program Management and General Fundraising Some choices: On the face of the statement of activities As a separate statement (but not a supplemental one) In the notes to the financial statements Disclose methodologies to allocate costs

Expense Reporting – Face of Statement of Activities

Expense Reporting – Separate Schedule

Disclosure Example for Expense Allocations:

Issue 3: Reporting Expenses and Investment Returns Investment return will be net of related external and direct internal expenses Do not disclose the netted expenses

Issue 4: Cash Flow Statement is Cumbersome It was on the table to require all not-for-profit organizations to use the direct method of reporting cash flows If the direct method was used, then indirect method reconciliation required ASU allows a choice between direct and indirect method If direct method, then no more reconciliation required

Effective Dates and Transition If you are a December 31 year end, then your December 31, 2018 financial statements If you are a June 30 year end, then your June 30, 2019 financial statements Early adoption permitted In the year of adoption  apply retrospectively All not-for-profit organizations are affected

FASB ASU 2014-09 Revenue From Contracts with Customers (ASC 606)

ASU 2014-09 Revenue From Contracts with Customers Core principle Recognize revenue to depict transfer of good/service (G/S) in amount that reflects consideration expected to be entitled to receive in exchange for those G/S Transfer based on control Ability to direct use of and receive benefit from asset transferred Concept of earnings process and realization are eliminated New concepts Transfer = Delivery Entitlement = Fixed or Determinable / Collectability / Evidence of Arrangement

ASU 2014-09 Revenue From Contracts with Customers Customer = counterparty to a contract Contracted with an entity to obtain G/S G/S are an output of entity’s ordinary activities Consideration must be exchanged If a counterparty shares in risks and benefits that result from the activity or process = not a customer Example – developing an asset in a collaborative arrangement

ASU 2014-09 – Five Step Process 11/22/2013 ASU 2014-09 – Five Step Process The final standard will include the five step assessment process proposed in the ED. The proposed model is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration the vendor receives. To accomplish this objective, the guidance requires the application of the following five steps:   Identify the contract with the customer. Identify the separate performance obligations in the contract. Determine the transaction price. Allocate the transaction price to the separate performance obligations in the contract. Recognize revenue when (or as) the company satisfies a performance obligation.

Convention Center Revenues Impacted by the new standard Membership or partnership dues Sales of products or services (e.g. advertising, publication spots, etc.) to third parties Hotel registration fees Not impacted by the new standard Contributions

Partnership Dues Revenue Example The CVB enters into a partnership contract with Company A for $2,500 for the calendar year 2017. The CVB provides the following under this contract to Company A: An enhanced description on the CVB website Listings in CVB’s owned publications A 5% advertising discount Admission to the CVB networking events for partners Connections with more than 1,000 partner organizations Access research on travel and tourism

Partnership Dues Revenue Example 5 Step Process Step 1: Does the CVB have a contract for the partnership it has with Company A? Enforceable right to payment? Step 2: What are the performance obligations under the contract? Step 3: What is the price? Step 4: If there is more than one performance obligation, how is the price allocated to the separate performance obligations under the partnership contract? Is there a standalone selling price for each performance obligation and if not, can it be estimated? Step 5: Should revenue be recognized at a point in time or over time?

Partnership Dues Revenue Example Recognize over time if one of the following criteria is met: The Company simultaneously receives and consumes the benefits provided by the CVB’s performance as the CVB performs. The CVB’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced. The CVB’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date.

Nonrefundable Fees Nonrefundable fees charged upfront Current GAAP Guidance is not clear. Can take the position to recognize when received. New GAAP Do nonrefundable fees relate to promised good or service? If so, you would recognize nonrefundable fee over the service period. The period could extend beyond the initial service period if the nonprofit can renew service at no additional cost.

Implementation of the New Revenue Recognition Standard Revise your revenue recognition policies in accordance with the new standard (new terminology and core principles). Also update policies to incorporate changes in the proposed ASU re: contributions (to be covered next). Assess your revenue contracts and determine whether any changes will need to be made to your revenue recognition under the new standard and have conversations with your Board of Directors

Effect Dates and Transition If you are a December 31 year end, then your December 31, 2019 financial statements If you are a June 30 year end, then your June 30, 2020 financial statements All not-for-profit organizations are effected

Proposed ASU Not-for-Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made

Purpose The amendments were made in an attempt to Eliminate the diversity in practice in recognizing grants received, particularly those from governmental sources, as either exchange transactions or contributions Distinguish between conditional and unconditional contributions. The FASB also sought to clarify whether grants or contracts fall under the scope of ASU 2014-09, Revenue from Contracts with Customers. Applies to both contributions received by a recipient and contributions made by a resource provider (which could be CVBs)

Reciprocal (Exchange) vs Reciprocal (Exchange) vs. Nonreciprocal (Nonexchange/Contribution) Transactions

Key Clarifications The resource provider is not synonymous with the general public, even a governmental entity. If a resource provider receives value indirectly by providing a societal benefit, this would be considered a nonreciprocal transaction If the primary beneficiary of a grant or contract is a third party, a NFP must use judgment to determine if the transaction is reciprocal or nonreciprocal Furthering a resource provider’s mission or “feel good” sentiment does not constitute commensurate value received The type of resource provider should not override the substance of the transaction

NFP Revenue Recognition Decision Making Process

Indicators to Determine Barrier To determine what is a barrier, a NFP would consider indicators, which would include, but are not limited to, the following: The inclusion of a measurable performance-related barrier or other measurable barrier Whether a stipulation is related to the purpose of the agreement The extent to which a stipulation limits discretion by the recipient The extent to which a stipulation requires an additional action or actions

Impacts on CVBs Bed tax revenue – no changes Funding CVBs provide to other organizations Likely to be classified as contributions, conditional or unconditional Would be classified as an exchange transactions in cases where the CVB provides funding to a third party to perform research where the CVB will benefit. Exchange transactions fall under the new revenue recognition standard.

Effect Dates and Transition Same as the new revenue recognition standard If you are a December 31 year end, then your December 31, 2019 financial statements If you are a June 30 year end, then your June 30, 2020 financial statements

The New Lease Standard (ASC 842)

High-Level Insights Will add lease-related assets and liabilities to the balance sheet that weren’t there before (for operating leases) Will most likely impact compliance with contractual agreements and loan covenants Two types of leases still remain, although now called finance leases (vs capital) and operating leases

Lessee Accounting – Overview Balance Sheet Income Statement Statement of Cash Flows Finance Right-of-use (ROU) asset Lease liability Amortization expense Interest expense Principal payments –financing activities Interest payments – operating activities Operating Single lease expense on a straight-line basis Lease expense – usually operating activities No substantial changes to how recognized in income statement vs Topic 840 FASB expects in general that most leases that were classified as capital under 840 to be finance lease under 842 and most operating leases under 840 to be operating leases under 842

Lessee Accounting – Operating Leases Recognize right-of-use asset and lease liability Measured at PV of lease payments (including renewal option periods if it is reasonably certain that they will be exercised) Recognize a single lease cost Calculated so that the cost of the lease is allocated over the lease term on generally a straight-line basis Classify all cash payments in operating activities in statement of cash flows

High-Level Insights Leases with 12 month term or less, an accounting policy election can be made not to recognize lease assets or liabilities Needs to be applied consistently for similar leases Would recognize lease expense on straight-line basis over lease term If it is reasonably certain the lessee will exercise an option to extend – does NOT qualify Practical expedient allows lessees to account for non-lease components (CAM charges) with lease components Recognition and measurement of related party leases should be applied based on legally enforceable terms. Principles based vs rules based Election is made by class of underlying assets (office equipment, manufacturing equipment, etc.) Only for lessees. For leases that on the commencement date have a maximum term of 12 months including any renewal options that the lessee is reasonably certain to exercise

Lease Accounting – Operating Leases Example 1 – Fact Pattern The SiSock Sandblasting Company (Lessee) and the Sarah Leasing Company (Lessor) executed a 10 year lease of a building with the following terms with a commencement date of 1/1/2020: Annual rent - $120,000 Lessee prepaid rent of $10,000 in 2019 Lease incentives - $100,000 Initial direct costs Lessee incurred - $15,000 What is the value of the right-of-use asset and the lease liability SiSock Sandblasting Company will record at 12/31/2019?

Lease Accounting – Right-of-Use Asset Amount of the initial measurement of the lease liability Any lease payments made to the lessor at or before the commencement date, minus any lease incentives received Any initial direct costs incurred by the lessee PV Lease payments + Payments made to lessor prior to commencement (prepaid rent) - Lease incentives + Initial direct costs incurred by lessee Right-of-use asset

Lease Accounting – Operating Leases

Lease Accounting Example Amortization Schedule $10,000 annual lease payments over 10 years. Discount rate is 5%.

Lessee Accounting – Finance Leases Criteria for finance lease classification (meets ANY of the following) Transfer of ownership of the underlying asset to the lessee by the end of the lease term Grants the lessee the option to purchase the underlying asset that the lessee is reasonably certain to exercise Lease term is the major part of the remaining economic life of the underlying asset PV of sum of lease payments and any residual value guarantees equals or exceeds substantially all of the fair value of the underlying asset Underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term

Implementation of the New Lease Standard Maintain an inventory of all leases with expiration dates after December 31, 2018, which includes all data needed for recording and disclosure Determine whether or not to elect the optional practical expedients Assess how the new lease standard will affect your organization’s financial statements and have conversations with your board of directors

Effect Dates and Transition For nonpublic entities, effective for fiscal years beginning after December 15, 2019 Some financial statement users may be surprised by addition of several operating leases to the balance sheet If you are a December 31 year end, then your December 31, 2020 financial statements If you are a June 30 year end, then your June 30, 2021 financial statements

Other CVB Accounting Issues

Research and Marketing Costs CVBs spent a significant amount of funds for research and marketing Generally those costs should be charged to expense when incurred, rather than deferred to future periods Certain costs to develop a website are able to be capitalized and amortized over future periods Costs relating to developing the applications and infrastructure of the website Costs to develop graphics Developing content for a website does not qualify for capitalization Costs to operate a website does not qualify for capitalization

Capital Improvements Under GAAP, these generally would fall under tangible long-lived assets which include property and equipment and other assets held for investment or used in a company’s operations that have an estimated useful life longer than one year The cost of the tangible long-lived assets should include an asset’s purchase price, sales tax, freight, installation costs, and direct and indirect costs (including interest) incurred by the organization in constructing its own assets Routine repairs and maintenance cost that do not add to the utility of the asset should be expensed

Unrelated Business Income (UBI) - Publications Lots of specific rules and exceptions Publication may be an exempt activity but if it contains advertising there is potential UBI Specific rules in relation to organizations with members like CVBs Refer to IRS publication 598

Resources FASB website AICPA and the Center for Plain English Accounting editorial and presentation material

Questions?

Thank you. Information presented is not meant to constitute legal, accounting or other professional advice. Any action taken based on information in this presentation should be taken only after a detailed review of the specific facts and circumstances. Information is current as of the date presented. April 12, 2018