Financial Reporting Matters Non-Profit Organizations Should be Focused on in 2018 Matt VanDerbeck, CPA

Board member for local non-profits and a community bank Expertise 20 years of non-profit and public accounting experience specializing in audit and financial statements Full service, mid-size firm with 5 offices throughout the Hudson Valley and Albany Variety of expertise within non-profit industry including: risk assessment, internal controls including IT, governance, and tax preparation Board member for local non-profits and a community bank

Participants will be able to: Overall Objectives Participants will be able to: Understand how FASB ASC No. 2016-14 “Not-for-Profits Entities (Topic 958) Presentation of Financial Statements of Not-for-Profits Entities” impacts the presentation of their financial statements beginning with calendar year ends ending on or after December 31, 2018. Understand how the Organization should prepare for the implementation of ASC 2016-14. Access examples of the key components of ASC 2016-14. Understand some of the hot topics that ASC 2016-14 has brought to light. Anticipate the implementation of the new revenue recognition (ASC 606) and lease accounting (ASC 842) standards in 2019 and 2020, respectively.

Applicability of FASB ASC No. 2016-14 All non-profit or not-for-profit organizations (that do not provide economic benefits directly or indirectly to stakeholders) that apply FASB and prepare financial statements IRS requirements and 501(c) 3, 4, 5 or 6 Organizations IRS Form 990 tax return New York State Charities Bureau Exemptions Audit and review thresholds

Today's Agenda FASB ASC No. 2016-14------------------------------------------------(10:15am - 10:20am) Deeper dive into hot topics----------------------------------------(10:20am - 10:40am) Eg. Financial Statements Presentation & Disclosures-------(10:40am - 10:55am) What you need to do now------------------------------------------(10:55am - 11:00am) On the horizon---------------------------------------------------------(11:00am - 11:05am) Conclusion---------------------------------------------------------------(11:05am - 11:10am)

FASB ASC No. 2016-14

Why is FASB issuing this Accounting Standards Update? FASB ASC No. 2016-14 Why is FASB issuing this Accounting Standards Update? Standards for NFP financial statements could be improved to provide more useful information to donors, grantors, creditors, and other users. What is going to be improved? The current net asset classification requirements The information presented in the financial statements and notes about NFP’s liquidity, financial performance, and cash flows.

: Key Objectives: Issued August 18, 2016 Update the Current Model : 2 Improve Net Asset Classification 3 Improve information in Financial Statements and Notes about: 4 NFP’s to better “tell their financial story” Financial performance, Cash Flows, and Liquidity Issued August 18, 2016

Fiscal years beginning after 12/15/2017 FASB ASC No. 2016-14 Effective date: Fiscal years beginning after 12/15/2017 Calendar year 2018 or fiscal year 2018-19 Early adoption permitted but must apply transition provisions Transition: For year of adoption : apply all provisions For comparative years presented : apply all provisions, except can choose not to present: Analysis of expenses by nature and function and/or Disclosures around liquidity and availability of resources

Deeper Dive into Hot Topics

New liquidity and availability disclosures required ASU 2016-14 Changes Liquidity New liquidity and availability disclosures required Net Assets and Endowments Net Asset classes reduced from three to two Additional disclosures for endowments Functional Expenses All NFPs must : report expenses by nature and function in one place AND describe the methods used to allocate among functional categories Investment Return Net investment return replaces other alternatives Statement of Cash Flows NFPs who choose the direct method of cash flows no longer have to perform a reconciliation with the indirect method.

Liquidity

NFPs Required to Provide Liquidity and Availability of Resources Qualitative information on how an NFP manages its liquid available resources and its liquidity risk (in the notes) NFPs Required to Provide Quantitative information that communicates the availability of the NFP’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year (on the face and/or in the notes)

Implementation - Liquidity Identify financial assets and any limitations on availability for expenditure in the next 12 months. 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 Availability is affected by nature of the assets, external limitations imposed by donors, contractual agreements, and board designations.

-Will be disclosed in the quantitative portion of the note disclosure Implementation Continued... Determine whether presenting a classified statement of financial position (SOFP) could enhance or simplify the quantitative disclosure requirements (considering other effects elsewhere in the FS and notes) Develop a format policy for managing the organization’s liquidity needs -Will be disclosed in the quantitative portion of the note disclosure Draft the note disclosure describing how the entity manages its liquid assets and liquidity needs. This includes: -Conditions under which certain board-designated net assets may be undesignated -Access to the lines of credit or other financing sources -Any other information useful in understanding the entity’s liquidity

Net Assets and Endowments

Temporarily Restricted Permanently Restricted Unrestricted Net Assets Current GAAP Temporarily Restricted Permanently Restricted Unrestricted Without Donor Restrictions* Revised GAAP With Donor Restrictions* Amount purpose, and type of board designations** Disclosures Nature and amount of donor restrictions * NFPs may choose to disaggregate further ** New disclosure requirement

Net Asset Classification Requirements Two Classes: With donor/grantor-imposed restrictions; and time restrictions Includes perpetual and temporary Without donor/grantor-imposed restrictions Includes board-designated Example:

Net Asset Classification Requirements Continued Eliminates the options to imply a time restriction on long-lived assets, in favor of releasing the restriction when the asset is placed in service. Disclosure requirements Composition of net assets with donor/grantor restrictions Emphasis on how/when resources (net assets) can be used Specified purpose(s) Specified time(s) Perpetual (endowment, ex. “Funds of perpetual duration”) Quantitative and qualitative information about board designations

Implementation - Net Assets Determine whether : You will need to adjust your tracking mechanism (G/L, spreadsheet, etc) to accommodate the new terminology and presentation. In-service long-lived assets have implied time restrictions that will need to be released upon adoption of the ASU. The appropriate presentation among net assets : Without donor restrictions With donor restrictions Maintained in perpetuity To present on the face of the financials vs in the notes.

Implementation - Board-Designations Assemble information about the amounts and purposes of board designations of the net assets without donor restrictions. For presentation in notes and/or on the face of the SOFP Determine proper presentation of any board-designated endowment funds in the related endowment note. Draft language to include in the liquidity and availability note. Self-imposed limitations on board-designated funds Conditions under which such funds would be made available to meet expenditure needs

Underwater Endowments Now defined in Master Glossary: Donor-restricted endowment fund for which the fair value of the fund at the reporting date is less than either the original gift amount or the amount required to be maintained by the donor or by law that extends donor restrictions. The entire balance of the endowment fund is reported in the “with donor restrictions” class of net assets.

Underwater Endowments Continued New disclosure requirements: –Interpretation of the NFP’s ability to spend from underwater endowment funds –NFP’s policy, and any actions taken during the period, concerning appropriation from underwater endowment funds –For each period presented – each of the following, in the aggregate, for all underwater endowment funds: 1) The fair value of the underwater endowment funds 2) The original endowment gift amounts (or level required to be maintained by donor stipulations or by law that extends donor restrictions) 3) The amount by which the original gift amounts exceeds the fair value (the deficiency = 2 less 1)

Implementation - Endowments Change your endowment note to conform to the new two-net-asset categories presentation. For underwater endowments, determine : –The fair value of underwater funds –The original gift amount or level required by donor stipulations or law that extends donor restrictions –The aggregate amount of the deficiencies of each underwater fund Note: Underwater portion of endowments now presented entirely in funds with donor restrictions.

Functional Expenses

Requirements for Reporting Expenses All NFPs, including Voluntary Health and Welfare Entities, must present an analysis of expenses by function and nature in one location. Options include: Present a separate statement of functional expenses Present a table in the notes Incorporate into the statement of activities Include a description of the method(s) used to allocate costs among program and support function. The ASU includes improved and expanded guidance about management and general expenses.

Investment Return

Net Investment Return Presented on a net basis, with all external and direct internal investment management and custodial expenses netted against the return No longer required to report investment income components and related expenses separately Internal expenses include the direct conduct or direct supervision of the strategic and tactical activities involved in generating investment return Salaries, benefits, travel, and other costs, including allocable internal costs relating to oversight of external management firms Excludes costs not associated with generating investment return

Programmatic Investments Excluded This investment guidance in ASU 2016-14 is not applicable to programmatic investments. Programmatic Investing → Making loans or other investments directed at carrying out an NFP’s purpose for existence Ex. Loans made to lower-income individuals to promote home ownership.

Implementation - Investment Expenses Report external and direct internal investment expenses as a component of net investment return. Excludes those expenses from the presentation of expenses by nature and function. Establish procedures to accumulate any external and direct internal investment expenses to be netted against investment return.

Statement of Cash Flows

Statement of Cash Flows NFPs may use either the direct or indirect method. If the direct method is used, NFPs are no longer required to show the reconciliation of the change in the net assets to cash flows from operating activities. Other proposed changes were deferred to Phase 2.

Operating Cash Flows - Which is Better? Direct Method User surveys indicate a strong preference for the direct method. If using the indirect method, determine the potential usefulness of change to the direct method. Indirect Method

Example Financial Statements Presentation and Disclosures *Refer to Handout

Identify your major program activities What you need to do now Identify your major program activities Major is defined by the Organization Level at which costs will be aggregated and disclosed General ledger tracking Expenses by function Asset restrictions Time reporting Indirect and direct time Cost allocation plan Documentation of methodology for indirect costs Identify joint costs, fundraising activities, administrative activities Prepare for new footnote disclosures

New Standards on the Way

ASU 2014-09 Revenue from Contracts with Customers (Topic 958) Implementation date: Annual reporting periods beginning after: December 15, 2018

ASU 2014-09 Revenue from Contracts with Customers (Topic 958) Exchange transactions Membership fees (non-reciprocal transfer vs. “benefits” received) Sales of products and services Sponsorships Special events Commissions Naming rights Separate contribution element - non exchange transactions 5 step approach (Identify the contract; Identify the performance obligation; determine transaction price; allocate price to performance obligations; recognize revenue as performance obligations met. Proposed ASC “Clarifying the Scope and Guidance for Contributions Received and Made”

ASU 2016-02 Leases (Topic 842) Effective for the fiscal years beginning after December 15, 2018 for any of the following: -Public business entities -NFP entity that has issued securities that are traded over-the-counter market exchange -An employee benefit plan that files financial statements with the SEC All other entities: Fiscal years beginning after: December 15, 2019

ASU 2016-02 Leases (Topic 842) Brings most leases on to the Balance Sheet Aligns certain underlying principles of new lessor model with those in ASC 606, FASB’s new revenue recognition standard Eliminates required use of bright-line tests to determine lease classification. Lessee will recognize ‘right of use’ assets and related lease liabilities on the balance sheet for all arrangements with terms longer than 12 months. Pattern of expense recognition in the income statement will depend on a lease’s classification.

What FASB ASC No.2016-14 Has Brought to Light Special Events Major or Central events vs. Peripheral or Incidental events Gross vs. net presentation Exchange vs. non-exchange transaction Direct donor benefit vs. fundraising Presentation options Joint Costs Combining a fundraising function with another function (i.e. program activities) Bonafide program activity Purpose - “call to action” other than to make a contribution Audience - who is benefiting from the program component Content - is it program oriented

Participants will be able to: Recap/Conclusion Participants will be able to: Understand how FASB ASC No. 2016-14 “Not-for-Profits Entities (Topic 958) Presentation of Financial Statements of Non-for-Profits Entities” impacts the presentation of their financial statements beginning with calendar year ends ending on or after December 31, 2018. Understand how the Organization should prepare for the implementation of ASC 2016-14. Access examples of the key components of ASC 2016-14. Understand some of the hot topics that ASC 2016-14 has brought to light.

Works Cited PowerPoint: “ASU 2016-14: FASB’s Not-for-Profit Financial Reporting Standard ; Aiming to Improve Not-for-Profit Financial Reporting” ASU 2016-14: https://fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176168381847&acceptedDisclaimer=true New Standard References: https://www.cpajournal.com/2017/05/01/not-profit-entities-new-revenue-recognition-standard/ https://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1218220137102 https://www.pwc.com/us/en/cfodirect/assets/pdf/accounting-reporting/fasb-effective-dates-nonpublic-cos.pdf Other References: http://nonprofitaccountingbasics.org/fundraising/accounting-fundraising-expenses http://nonprofitaccountingbasics.org/fundrasing/joint-cost-allocation http://cookandcompanycpa.com/functional-expenses-accounting-non-profits/ http://raffa.com/newsandresources/publications/pages/accounting-for-fundraising-e… Link to the actual standard

Thank you!