Accounting and Auditing Update

Accounting and Auditing Update • December 2013 Jennifer Culotta Associate Jim Hagestad Associate

Overview • New ASU’s • NFP Audit Guide Clarifications • Auditor’s Report – Emphasis of Matter • FASB and NFP Advisory Committee Projects

ASU 2012-05 Classification of the Sale of Proceeds of Donated Financial Assets in the Statement of Cash Flows • Effective for annual reporting periods beginning after June 15, 2013 • Cash receipts from the sale of donated financial assets (donated securities) that upon receipt had no donor imposed limitations for sale and were converted nearly immediately into cash (considered to be within days of receiving the donation) shall be classified as operating cash flows • If the donor restricted the use of the donated financial assets to a long-term purpose (acquiring property and equipment or for an endowment), then the cash receipts shall be classified as a financing activity • If neither of the above are applicable, the receipts from the sale of the donated financial assets should be classified as an investing activity

ASU 2013-06 Services Received From Personnel of an Affiliate • Effective for fiscal years beginning after June 15, 2014. Early adoption is permitted. • “Affiliate” is defined as a party that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with an entity • Who is affected? NFP’s that receive services from personnel of an affiliate that directly benefit the recipient NFP and for which the affiliate does not charge the recipient NFP

ASU 2013-06 Services Received From Personnel of an Affiliate • A NFP entity is required to recognize all services received from personnel of an affiliate that directly benefit the recipient NFP entity • Those services should be measured at the cost recognized by the affiliate for the personnel providing those services • If measuring a service received from personnel of an affiliate at cost will significantly overstate or understate the value of the service received, the recipient NFP entity may elect to recognize that service received at either: • The cost recognized by the affiliate for the personnel providing the service • The fair value of that service

NFP Audit Guide Clarifications • Beneficial interests in trusts • If sufficient information was unavailable in the year that the NFP initially became aware of the existence of the trust, the NFP should recognize the beneficial interest in the trust and contribution revenue in the first year in which the necessary information becomes available. • No prior period adjustment should be recorded if the NFP made, and continued to make, reasonable efforts to obtain the necessary information to measure the beneficial interest

NFP Audit Guide Clarifications • Investment Expenses • Investment expenses include, but are not limited to, the costs of the following activities if conducted by the NFP or directly on its behalf: • Investment advice • Investment acquisition due diligence • Custodian services • Other administrative activities in connection with investments • Other professional services in connection with investment activities, such as legal and accounting • Interim and year-end monitoring • Valuation procedures and processes • Investment expenses that are netted against investment revenues should be reported by their functional classification on the statement of functional expenses (if one is being presented)

NFP Audit Guide Clarifications • Expenses • Expenses that are reported by other than their natural classification (such as salaries included in cost of goods sold or facility rental costs of special events reported as direct benefits to donors) should be reported by their natural classification if a statement of functional expenses is presented • Gains and Investment Income • Gains and investment income that are limited to specific uses by donor-imposed restrictions may be reported as increases in unrestricted net assets if the restrictions are met in the same reporting period as the gains and income are recognized, provided the NFP has a similar policy for reporting contributions received, reports consistently from period to period, and discloses its accounting policy in the notes to the financial statements

NFP Audit Guide Clarifications • Contributions Receivable • Release of restrictions-time restrictions on contributions receivable lapse when the receivable is due • Change in PY Reporting of Net Asset Classification • Changing Net Asset Classifications Reported in a Prior Year-individual net asset classes, rather than net assets in the aggregate, are relevant in determining whether the correction is an error in previously issued financial statements

NFP Audit Guide Clarifications • Conduit Bonds • Conduit bonds issued on behalf of an NFP in a competitive or negotiated offering are deemed to trade in public markets; bonds issued in a private placement would not be deemed to trade in public markets for as long as the bonds are privately held • Classification of Debt • Debt that appears to be long-term based on its legal maturity might not be considered long-term for financial reporting purposes because of subjective acceleration clauses or due on demand (put) provisions

Auditor’s Report • Emphasis of Matter Paragraph for Alternative Investments • Alternative investments representing 25% of more of net assets will generally warrant inclusion of an emphasis paragraph • Example- • As explained in Note X, the financial statements include investments valued at $XXX,XXX (X% of net assets) at December 31, 2013 and at $XXX,XXX (X% of net assets) at December 31, 2012 whose fair values have been estimated by management in the absence of readily determinable market values. Management’s estimates are based on information provided by XXX (fund managers of the general partners)

FASB and NFP Advisory Committee (NAC) Projects • Existing Exposure Draft: Review of Nonpublic Entity Definition • Re-examining the definitions of the nonpublic entity and public entity as defined by FASB. The project focuses on defining what constitutes a public business entity and determining whether distinctions should be made between NFP’s • Anticipate issuing a final pronouncement in the 4th quarter of 2013

FASB and NAC Projects • New Exposure Draft on a Variety of Topics • Financial Reporting Initiative • Net Assets Classification • Cash Flow Statement • Statement of Functional Expenses • Estimated to be issued the first half of 2014 • Final pronouncement estimated to be issued the first half of 2015

FASB and NAC Projects • Financial Reporting Initiative • Revisit net asset classifications/terminology • Improve liquidity portrayal • More clearly communicate NFP performance • Enhance relevance and clarity of NFP specific disclosures • Provide framework for commentary and analysis on operations/financial health

FASB and NAC Projects • Net Asset Classifications • Replace the existing requirements to present totals for each of three classes of net assets on the face of a statement of financial position and for changes in each of those classes on the statement of activities with similar requirements for each of two classes of net assets that convey net assets with donor-imposed restrictions and without donor-imposed restrictions. • Retain the current requirement to provide information about the nature and amounts of different types of donor-imposed restrictions but modify the requirement to (a) remove the hard-line distinction between temporary and permanent restrictions and (b) focus on describing differences in the nature with a focus on both how and when the resources (net assets) can be used

FASB and NAC Projects • Cash Flow Statement • Require the direct method of reporting cash flows provided/used by operating activities and removing the requirement to reconcile the change in net assets to net cash flows from operating activities (indirect method) • Cash gifts with donor-imposed restrictions that they be used to purchase, construct or otherwise acquire long-lived assets for operating purposes would be classified as inflows from operating activities rather than as inflows from financing activities • Cash payments to purchase, construct, or otherwise acquire long-lived assets for operating purposes would be classified as outflows from operating activities rather than as outflows from investing activities • Cash dividends and interest income would be classified as inflows from investing activities rather than as inflows from operating activities • Cash payments of interest expense would be classified as outflows from financing activities rather than as outflows from operating activities

FASB and NAC Projects • Statement of Functional Expenses • AICPA Expert Panel recommended a statement of functional expenses be prepared for all NFP’s for which contributions are a significant percentage of revenue

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Accounting and Auditing Update