Not-For-Profit Organizations: Lessons Learned from Implementation of the New Financial Reporting Standard
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The document discusses the implementation of new not-for-profit financial reporting standards, particularly FASB ASU 2016-14, which introduces significant changes such as net asset classification, investment return presentation, and liquidity information. It outlines lessons learned and best practices from the implementation process, emphasizing the importance of adequate disclosures and management policies. The agenda includes an overview of the changes, lessons learned, and a Q&A session for further clarification on the standards.
Not-For-Profit Organizations: Lessons Learned from Implementation of the New Financial Reporting Standard
- 1. Lessons Learned From the Implementation of the New Not- for-Profit Financial Reporting Standards!
- 2. Introductions Janice Snyder, CPA ▻ Partner ▻ Audit Segment Leader ▻ Industry specializations: Healthcare, Nonprofits, Food Manufacturers/Distributors ▻ Experience the Magic 2
- 3. Introductions Gary Dubas, CPA ▻ Partner ▻ Not for Profit Industry Leader ▻ Industry specializations: Nonprofits, Affordable Housing, IRS form 990 ▻ Par for the Course! 3
- 4. Introductions Jim Shellenberger, CPA ▻ Principal ▻ Not-For-Profit Leadership Team ▻ Industry specializations: Nonprofits, Affordable Housing, Uniform Guidance ▻ To Dare is To Do! 4
- 5. Disclaimer The information contained in this presentation, both that contained in the slides and that expressed by the presenter, is not intended to be complete and comprehensive. To obtain a more detailed understanding of technical literature mentioned, please consult the full standards and interpretations. There are also many other topics not being covered due to their narrow applicability or time constraints. 5
- 6. Agenda 1. Not-For-Profit Financial Reporting Changes – A Brief Overview 2. Lessons Learned and Best Practices from Implementation (so far) 3. Q&A – This standard and any others! Objective: To further understand these standards and their implementation challenges. 6
- 8. Not-For-Profit Financial Reporting FASB ASU 2016-14 Released August 18, 2016 Effective NOW! (Year ends 12/31/2018, 3/31/2019, 6/30/2019 & 9/30/2019) 8
- 9. Not-For-Profit Financial Reporting 9 5 Major Changes Net Asset Classification With and Without Donor Restrictions Investment Return Investment return net of all related external and direct internal expenses Statement of Cash Flows Free choice between direct or indirect method. Expenses Present expenses by both the natural and functional classifications. Liquidity & Availability of Resources Qualitative & quantitative information about the availability of resources to meet cash needs within one year of the balance sheet date.
- 10. Statement of Cash Flows Overview of Changes and Lessons Learned 10
- 11. Statement of Cash Flows ▰ Free choice between using the direct or indirect method of reporting operating cash flows. ▰ If using the direct method, nonprofit organizations are not required to also present the indirect method reconciliation, as currently required. 11
- 12. Statement of Cash Flows ▰ Lessons Learned: ▻ Don’t do it unless you have to! ▻ User will typically prefer the direct method, but consider accounting/finance department constraints and the cost/benefit of using the direct method. 12
- 13. Investment Return Overview of Changes and Lessons Learned 13
- 14. Investment Return ▰ Presented on a net basis, with all external and direct internal investment management and custodial expenses netted against the return. ▰ Show one line “Investment return” or “Income from Investments” ▰ Eliminates the current requirement to disclose the investment income components and expenses separately. ▰ More comparable measure of investment return across all not-for-profit organizations. 14
- 15. Investment Return ▰ Direct 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 associated with staff responsible for development and execution of investment strategy, including supervision, selecting and monitoring external managers. ▻ Excludes costs not associated with generating investment return, such as administrative management, contracts, pooled-fund administration. 15
- 16. Investment Return ▰ Lessons Learned: ▻ Identification of direct internal expenses, if any. ▻ If there are direct internal expense, are they material enough to warrant the administrative burden to accumulate? ▻ Changes/updates to investments disclosures not considered early in the process. Use new standard as a reason to streamline lengthy, and not required, disclosures. 16
- 17. Net Asset Classification Overview of Changes and Lessons Learned 17
- 18. Net Asset Classification Replaces the existing three classes of net assets with two new classes of net assets: ▻ Net Assets With Donor Restrictions ▻ Net Assets Without Donor Restrictions 18 Unrestricted Temporarily Restricted Permanently Restricted Without Donor Restrictions With Donor Restrictions
- 21. Net Asset Classification ▰ Enhanced disclosure requirements ▻ Disclosures for board-imposed limits on the use of net assets without donor restrictions (Quantitative and Qualitative) ▻ Composition of net assets with donor/grantor restrictions and emphasis on how/when net assets can be used (purpose, time, perpetual) ▰ Highlight how restrictions and board-imposed limits impact liquidity and the use of available resources. ▰ Underwater endowment funds – losses included net assets with donor restriction and additional disclosures. 21
- 22. Net Asset Classification ▰ Lessons Learned: ▻ Determine early the level of disaggregation. Use as an opportunity to streamline reporting, to the extent possible. ▻ Board does not have appropriate policies in place for designated net assets, underwater endowment funds, etc. 22
- 23. Net Asset Classification ▰ Lessons Learned: ▻ Two year comparison for disclosures can require additional effort. Some organizations are choosing single year presentation (if permitted). ▻ Are organizations maintaining adequate schedule of support for restrictions if not maintained in the accounting software / general ledger. 23
- 24. Liquidity and Availability of Resources Overview of Changes and Lessons Learned 24
- 25. Liquidity & Availability of Resources ▰ Quantitative information about the availability of financial assets as of the date of the statement of financial position. ▻ Availability may be affected by: Nature of the assets, external limits, and internal limits. ▰ Qualitative information about how a not-for-profit organization manages its available resources to meet cash needs within one year of the date of the statement of financial position. ▻ Consider lines of credit, operating reserves, board designated net assets, etc. ▻ Forecasting, guiding principles, and target on-hand cash. 25
- 26. 26 NEW PRESENTATION – Example Note 2 – Liquidity and Availability Financial assets available for general expenditures, that is, without donor or other restrictions limiting their use, within one year of the balance sheet dates, comprise the following: Cash $ 1,351,000 Accounts Receivable, net 420,000 Total Financial Assets $ 1,771,000 As part of ABC Company’s liquidity management, it has a policy to structure its financial assets to be available as its general expenditures, liabilities, and other obligations come due. To help manage unanticipated liquidity needs, ABC Company has committed lines of credit in the amount of $200,000, which it could draw upon as further disclosed in Note 7. Note: Cash = $1,400,000 from balance sheet less $49,000 of funds restricted in perpetuity.
- 27. Liquidity & Availability of Resources ▰ Lessons Learned: ▻ Lack of policies in place by management to manage resources. Start the discussion early! ▻ Organizational leadership approval of information to include in the disclosure (especially if there are limited financial assets) ▻ Failure to identify resources designated for future projects, such as capital projects. ▻ Table format has been the preferred method. This makes it easy to agree to the statement of financial position. 27
- 28. Functional Expenses Overview of Changes and Lessons Learned 28
- 29. Functional Expenses ▰ Requirement for all not-for-profit organizations to present expenses by both the natural and functional classifications ▻ Natural: Salary, Rent, Office Supplies, etc. ▻ Functional: Program, Mgt & General, and Fundraising ▰ Required to be presented in one location: ▻ Statement of Activities ▻ Separate Statement (Statement of Functional Expenses) ▻ Notes to the Financial Statements 29
- 30. Functional Expenses – Example 30 Requirements of the ASU are more significant than the Form 990! Source: AICPA Financial Statement Presentation on June 10, 2018
- 31. Functional Expenses ▰ Include a description of the method(s) used to allocate costs among program and support functions. ▰ When to Allocate Management & General: ▻ Activities that represent direct conduct or direct supervision of program or other supporting activities to those program. Examples: ▻ IT – benefits various functions and generally would be allocated ▻ CEO – Program, Mgt & General, and Fundraising ▻ CFO – Mgt & General and Investment Expense ▻ HR – Generally would assign all to Mgt & General ▻ Grant Accounting/Reporting – program reports would be Program, but financial reports would be Mgt & General ▰ Depreciation and interest expense is expected to be allocated! 31
- 32. Functional Expenses ▰ Lessons Learned: ▻ Decide on a method of presentation that is most useful to the reader ▻ Separate statement most common ▻ Determine the significant and material programs ▻ Use IRS Form 990 as a starting point for programs ▻ Update footnote #1 to disclosure ▻ Keep it simple and use materiality. Not every natural expense needs its own line. ▻ Document methodology for allocation of expenses. 32
- 33. Functional Expenses ▰ Lessons Learned: ▻ Changes/reclassification of prior year amounts if presenting comparative. ▻ Excluding costs from the schedule of functional expenses, such as cost of good sold, special event costs, etc. The only expense to exclude is external and direct internal investment expense. ▻ No allocation of depreciation and interest expense ▻ Disclosure of allocation method (i.e. time and effort, sq footage, etc.) in table format 33
- 34. Q&A 34
- 35. Submitted During Webinar Registration ▰ Do these apply to very, very small NFP organizations? Does size matter as far as the standards go? 35
- 36. ▰ What are the biggest hurdles your clients have faced with the functional expense disclosures? ▰ How broad/detailed do the expenses lines need to be for the natural / program (functional) classifications? 36 Submitted During Webinar Registration
- 37. Live Q&A 37
- 38. Questions? 38 Janice Snyder, CPA Partner jsnyder@macpas.com Gary Dubas, CPA Partner gdubas@macpas.com Jim Shellenberger, CPA Principal jshellenberger@macpas.com
Editor's Notes
- #9: The most significant changes to Not-For-Profit Financial Reporting in over 2 decades! Affects essentially all not-for-profits, including charities, foundations, private colleges and universities, nongovernmental health care providers, religious organizations, trade associations, etc. Goal is to meet the evolving needs of the industry, and to provide better and more consistent information to donors, grantors, creditors, and other users of financial statements.
- #19: Within Net Assets With Donor Restrictions – “Funds of Perpetual Duration” replaces the superseded ‘Permanently Restricted”
- #21: Income from Investments: Report external and direct internal investment expenses as a component of net investment return. Exclude these expenses from the functional and nature disclosures and presentation.
- #22: Additional required disclosures Board’s policy for spending from endowment funds that are underwater Board’s interpretation of relevant law Fair value of funds Original gift amount Level required to be maintained by either the donor or the law
- #23: Two year comparison requirement for disclosures is unlike the one year (first year) requirement for liquidity and functional expenses
- #24: Two year comparison requirement for disclosures is unlike the one year (first year) requirement for liquidity and functional expenses
- #28: AICPA resources available to not-for-profit industry section members
- #33: In year of adoption, not required to go back to the prior year and present new functional expense if previously not required to do so
- #37: Organization’s with multi-entity consolidation, determining which programs to report and working through all elimination entries Standard has caused organizations to look at the cost allocation methodology and practice, sometimes causing reclassification of prior year amounts