1. 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

2. Financial Accounting Standards Board (FASB)

3. 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

4. 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.

5. 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.

6. 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.

7. What is the effective date
What is the effective date? The FASB Accounting Standard Update, ASU 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.

8. Governmental Accounting Standards Board (GASB) Overview

9. 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.

10. 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.

11. 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

12. Review of Capital Asset Reporting in Accordance with OMB

13. 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.

14. 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.

15. 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.

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

17. 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

18. 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

19. 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)

20. 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!

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

22. 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

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

24. 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

25. 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

26. Benefits of a Good Fixed Asset System
Financial Reporting

27. Asset Control
Capitalized
Controlled
Expensed
Distinction is Important

28. 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

29. 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

30. 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

31. 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

32. 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%

33. 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

34. Other Important Considerations

35. 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.

36. Questions?

37. Contact Information
Kevin J. McHugh Managing Director Navigant Consulting, Inc. 685 Third Avenue, 14th Floor New York, NY Main Number Fax