webinar slides: not-for-profit reporting model and best practices in financial reporting
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CBIZ & MHM Executive Education Series™ Not-for-Profit Reporting Model and
Best Practices in Financial Reporting Presented by: Tracey McDonald
and Brent Wilson October 7, 2014
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Before We Get Started…
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This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar.
External participants will receive their CPE certificate via email immediately following the webinar.
CPE Credit
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The information in this Executive Education Series course is a brief summary and may not include all
the details relevant to your situation.
Please contact your service provider to further discuss the impact on your business.
Disclaimer
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Today’s Presenters
Tracey L. McDonald, CPA Shareholder, MHM 813.316.4051 | tracey.mcdonald@cbiz.com Tracey has extensive audit experience with clients in a number of industries including not-for-profit organizations, manufacturing, distribution, employee leasing, food service, professional employee organizations and healthcare. In addition, Tracey provides consulting for federal indirect cost rate issues, federally qualified community health centers and captive insurance. She also has substantial knowledge of the reporting requirements for employee benefit plans, OMB A-133 and HUD audits.
Brent Wilson, CPA Shareholder, MHM 913.234.1079 | bawilson@cbiz.com Brent is the Co-Attest Practice leader in our Kansas City office. Brent has performed and supervised numerous not-for-profit and single audits subject to OMB Circular A-133 during his 19 years with the organization. His expertise includes financial risk assessments, planning, interviewing key client staff, developing and implementing analytical procedures and methods to enhance client value and focused reviews of systems.
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Today’s Agenda
1
2
Overview and Background of NAC
Changes to the NFP Reporting Model
Best Practices in Financial Reporting 3
4 Questions
OVERVIEW AND BACKGROUND
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Not-for-Profit Advisory Committee (NAC)
Sep 2011
NAC Recommendations
Nov 2011
Project Added to
FASB Agenda
2012
Project Planning/
Board Education/
Initial Outreach
2013/2014
Deliberations continue
Q4 2014
Exposure
Draft Expected
Q4 2014 to Q1 2015
Comment
Period
2H 2015
Final ASU
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Financial Statement Users &
Others
Committee Composition
Financial Statement Preparers Nonprofit Organizations, CFOs, Controllers
Financial Statement Auditors Partners of National and Regional
Firms
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Net Asset Classifications
Financial Performance
Reporting of Expenses
Cash Flow Statement Liquidity NFP
Disclosures
Financial Statements of NFPs - Topics
CHANGES TO THE NFP REPORTING MODEL
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UPMIFA and the distinction between TRNA & PRNA Ability of NFPs to spend endowments even if underwater Board action required to appropriate investment returns for
spending TRNA considered by many to be “hodgepodge” Need to enhance disclosures of the nature and availability
(timing) of donor restricted resources URNA open to misinterpretation Enhanced disclosure surrounding availability and liquidity of
net assets would be helpful, including limits imposed by a NFP governing board
Net Assets - Issues
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Approach 1 – Restrictions as Primary Cut
Approach 2 – Purpose as Primary Cut
Operating Endowment Plant
Two Approaches to Presenting Net Assets
Without Restrictions
With Restrictions
Operating Endowment Plant
Operating
Without restrictions
With restrictions
Endowment
Without restrictions
With restrictions
Plant
Without restrictions
With restrictions
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Current GAAP
Proposed GAAP + Disclosures
Net Assets - Comparison
Temporarily restricted Unrestricted Permanently
restricted
Without Donor Restrictions
(disclose amount and purpose of
donor restrictions)
With Donor Restrictions
(disclose nature and amount of donor restrictions)
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Defined a required intermediate operating measure based on two dimensions:
Financial Performance: Operating Measure
Mission
Availability
Accepted Approach
Rejected Approaches Recurring / Non-recurring
Large or Unusual
“Beyond management’s control”
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Requires display of all available revenues separate and before board designations (show gross instead of net)
Removes requirement to display an operating
measure (if reported) on same statement that reports change in unrestricted net assets
Operating Measure
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One statement approach Two statement approach
Ability to present total revenue and contributions
Effect on transfers easier to identify
Too much information in one statement
Labeling of totals difficult
A greater emphasis on the operating measure
Facilitates multi-year comparison
Some may ignore second statement
Some may incorrectly interpret the operating measure to be net income
Financial Performance – Statement Approach
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Example of One Statement Approach Without Donor With Donor
Restrictions RestrictionsSupport and revenue:
Bequests 600$ -$ 600$ Other contributions 425 1,500 1,925 Fees for services 495 - 495 Restricted support released for current period 1,375 (1,375) -
Total support and revenue 2,895 125 3,020
Expenses:Total expenses 1,950 - 1,950 Excess before appropriations/transfers 945 125 1,070
Board appropriations/transfers to/(from) operations:Investment returns appropriated from donor endowment 60 a - 60 Investment returns appropriated from quasi-endowment 90 b - 90 Bequests transferred to quasi-endowment (500) c - (500)
Total appropriations/transfers to/(from) operations (350) - (350)
Excess (deficit) from operations 595 125 720 Investment return, net 170 445 615 Board appropriations/transfers from/(to) operations:
Investment returns appropriated from donor endowment - (60) a (60) Investment returns appropriated from quasi-endowment (90) b - (90) Bequests transferred to quasi-endowment 500 c - 500
Total appropriations/transfers from/(to) operations 410 (60) 350
Total change in net assets 1,175 510 1,685 Net assets at beginning of period 1,500 2,100 3,600 Net assets at end of period 2,675$ 2,610$ 5,285$
Total
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Example of Two Statement Approach (1 of 2)
Operating support and revenue:Bequests 600$ Other contributions 425 Fees for services 495 Restricted support released for current period 1,375
Total support and revenue 2,895
Expenses:Total expenses 1,950 Excess before appropriations/transfers 945
Board appropriations/transfers to/(from) operations:Investment returns appropriated from donor endowment 60 aInvestment returns appropriated from quasi-endowment 90 bBequests transferred to quasi-endowment (500) c
Total appropriations/transfers to/(from) operations (350)
Excess (deficit) from operations 595$ d
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Example of Two Statement Approach (2 of 2)
Without Donor With DonorRestrictions Restrictions
Excess (deficit) from operations 595$ -$ 595$
Nonoperating activities:Contributions - 1,500 1,500 Restricted support released for current period - (1,375) (1,375) Investment return, net 170 445 615
Board appropriations/transfers from/(to) operations:Investment returns appropriated from donor endowment - (60) a (60) Investment returns appropriated from quasi-endowment (90) b - (90) Bequests transferred to quasi-endowment 500 c - 500
Total change in net assets 1,175 510 1,685 Net assets at beginning of period 1,500 2,100 3,600 Net assets at end of period 2,675$ 2,610$ 5,285$
Total
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Charitable and Business(Operating)
xxx
Investing/Financing(Non-operating)
xxx
Donor-restricted
xxx
Statement Flexibility
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AICPA Issue Who should be required to present a statement of functional
expenses?
FASB Deliberations Should natural expenses be required? Should functional expenses be required? Should both be required together? Which breakout on the statement of activities? Should investment and other non-operating expenses be
presented on a functional basis?
Reporting of Expenses - Issues
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Reporting of Expenses
Nonfunctional
Function*Total
Program Services Supporting Services Operating Nonoperating TotalExpenses Program A Program B M&G Fundraising Expenses Expenses Expenses
Salaries and benefitsGrants to othersProfessional feesOccupancy costsEquipment rentalSuppliesTravelPrintingInterestOtherDepreciation
* Either (or both) on face of Statement of Activities
Nature*
Expense by nature and function – one place in the F/S
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Two primary issues Understandability / Utility
Relation to Statement of Activities
Cash Flow Statement
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Require the direct method for operating cash flows
No longer require indirect method Will ask in exposure draft if it should still be required for
certain nonprofits
Re-categorize certain items to better align operating section with activities statement
Cash Flow Statement
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Revise the following classifications – 1. Cash gifts with donor-imposed restrictions to be used to
acquire long-lived assets for operating purposes from financing to operating
2. Cash payments to acquire long-lived assets for operating purposes from investing to operating
3. Cash proceeds from the sale of long-lived assets from investing to operating
4. Cash dividends and interest income from operating to investing
5. Cash payments of interest expense from operating to financing
Cash Flow Statement
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Focus is on presentation and disclosure of information useful in assessing liquidity
An entity should define the time horizon it uses to manage its liquidity – For example: 30, 60, or 90 days
Disclose quantitative and qualitative information
Liquidity
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Quantitative Information Total amount of financial assets
The amounts that are not available to meet cash needs within
the time horizon because of restrictions (limits) imposed by contract (or law), donors, or actions of its governing board
Total amount of financial liabilities that are due within that time horizon
Liquidity
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Qualitative information about how the entity manages its liquidity. For example – Strategy for addressing entity-wide risks that may affect
liquidity, including its use of lines of credit
Policy for establishing liquidity reserves
Basis for determining the time horizon used for managing liquidity
Liquidity
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FASB developing more streamlined examples of note disclosures that meet U.S. GAAP requirements, particularly related to – Investments
Endowment net assets
Fair value levels
Note Disclosures
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Underwater Endowments - The amount by which fair value of an individual donor-
restricted endowment fund is less than original gift or level required by donor stipulations or law
Report within the “with donor restrictions” (rather than as
currently reported in unrestricted net assets)
Note Disclosures
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Underwater Endowments Disclosures – Board’s policy for decision on whether to reduce or not spend
from underwater endowment funds
Original gift amount of underwater endowment funds in the aggregate
Fair value of underwater endowment funds in the aggregate
Note Disclosures
BEST PRACTICES IN FINANCIAL REPORTING
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Compare external audit reports to internal reports – Measure of operations
Revenue / expense categories Explain differences
Best Practices in Financial Reporting
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Financial Statements Do immaterial items have their own line?
Consider a 1% rule for combining small items.
Small dollar items may still be relevant and important.
Related party amounts
Is there information in a footnote that can be on the statements or vice versa?
Best Practices in Financial Reporting
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Footnotes to the Financial Statements – Are your footnotes stale?
Are new matters discussed before old matters?
Is the wording relevant?
Has the description of the Organization been updated?
Has there been a change in operations?
Best Practices in Financial Reporting
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Footnotes to the Financial Statements – Do policies and notes follow a logical sequence?
Are sources of revenue and recognition fully described?
Are all restrictions fully explained?
Are related party transactions clear and evident?
Are there duplications?
You only have to say it once!
Best Practices in Financial Reporting
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Common Disclosure Challenges Endowments Fair value Conditional promises not recorded Using discount rates that are not risk adjusted Existence of union contracts covering major groups of
employees Long term employment contracts with executives Concentrations of major donors or suppliers Disclosure of self-insurance
Best Practices in Financial Reporting
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Common Reporting Errors – Fundraising costs reported as asset or deferred – expense! Board designated / restricted combined Negative balance in temporarily restricted net assets Recognizing in-kind contributions or donated services Reclassification of net assets is a prior period adjustment Non-cash items not disclosed Wording
Affect / effect Principal / principle Its / It’s Improper usage gives a poor impression!
Best Practices in Financial Reporting
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Questions?
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Join us for this course: Dec. 4 and 10: Key Tax Issues Facing Not-for-Profit
Organizations
Read these related publications: MHM Messenger: Best Practices of Effective Audit Committees MHM Messenger: OMB Grant Reform Standardizes Cost Principles MHM Messenger: OMB Makes Sweeping Changes to A-133 Audit
Requirements
Sign up for our newsletter: Not-for-Profit Viewpoint
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