Key Accounting Updates for Convention and Visitor Bureaus

1. Key Accounting Updates for Convention and Visitor Bureaus Presented by: • MARIE BRILMYER, CPA, PARTNER • Tina Dzik, CPA, PARTNER April 12, 2018

2. Welcome&Introductions

3. Contact Information • MARIE BRILMYER, CPA • PARTNER • mbrilmyer@cohencpa.com • 330.255.4348 • TINA DZIK, CPA, MBA • PARTNER • tdzik@cohencpa.com • 216.774.1125

4. Accounting Standards Update (ASU) 2016-14Not-for-Profit Entities (Topic 958)Presentation of Financial Statements of Not-for-Profit Entities

5. Background • Refresh after 20 years • Update, not a complete overhaul • FASB debated, solicited comments, and revised the provisions of the ASU over the past 3 years • Why did the FASB seek to take on this project? • Does GAAP continue to meet users’ needs? • To better enable not-for-profit organizations to tell their story

6. Phases • Phase 1 • ASU 2016-14 • Phase 2 • Operating measures • Alignment of measures between statements • No set timeframe

7. Key Objectives – Overview • To improve the current net asset classification requirements (unrestricted, temporarily restricted and permanently restricted) • To improve information in the financial statements and footnotes useful in assessing an organization’s: • Liquidity • Financial performance • Cash flows

8. Key Objectives – Overview • Specifically to address the following issues: • Net asset classifications are too complex • It is impossible to figure out an organization’s liquidity and its availability of resources • All are organizations are doing something different when it comes to reporting • Expenses • Investment returns • The cash flow statement is cumbersome

9. Issue 1: Net Asset Classifications Are Too Complex • Instead of having three classes, there are now only two (minimum requirement) • Net assets with donor restrictions • Net assets without donor restrictions • Required disclosures • Composition of net assets with donor restrictions at end of period • Show an analysis of time, purpose and perpetual restrictions • Disclose how the restrictions affect the use of resources

10. Example Statement of Activities

11. Example Statement of Financial Position

12. Example Disclosure

13. Board Designated Net Assets • New required disclosures of nature and amounts of board designated net assets • New FASB ASC Master Glossary definition:

14. Board Designated Net Assets Enhanced Disclosure Example

15. Implementation of Net Asset Changes • Develop policies and/or practices regarding board designations on net assets; even if no designations • Determine whether you need to adjust your general ledger, excel spreadsheet or other tracking mechanism to accommodate new terminology and presentation for net assets (but remember 990 still requires the three classifications of unrestricted, temporarily restricted and permanently restricted net assets) • Determine the appropriate level of disaggregation of net assets you wish to present among: • Net assets without donor restrictions; • Those with donor restrictions that will be satisfied over time and/or by expenditure for a particular purpose; • And those that will be maintained in perpetuity • Decide the degree of disaggregation you wish to present on the face of the statement of financial position vs. in the notes

16. Issue 2: Liquidity and Availability of Resources • Report qualitative information • How the organization manages its liquid available resources to meet cash needs over the next year • Also report quantitative information that communicates the availability of a NFP’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year • Simple way to meet many of the requirements • Present a classified statement of financial position • If your organization is more complex • The amount of financial assets at the end of each period • Restrictions on financial assets, such that they are not available for near-term cash needs • The amount of financial liabilities that require cash in the near term

17. Liquidity Example #1

18. Liquidity Example #2

19. Liquidity Example #3

20. Implementation of Liquidity Requirements • 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 • Remember availability is affected by nature of assets, external limitations, imposed by donors, contractual agreements, and board designations • Develop a formal policy for managing the organization’s liquidity needs • Begin drafting the new disclosure describing how the entity manages its liquid assets and liquidity needs, including conditions under which certain board-designated net assets may be undesignated, access to the lines of credit or other financing sources, and any information useful in understanding the entity’s liquidity

21. Issue 3: Reporting Expenses and Investment Returns • All not-for-profits will report expenses by nature and function and an analysis by nature and function (currently only Voluntary Health and Welfare entities must report in this way) • Program • Management and General • Fundraising • Some choices: • On the face of the statement of activities • As a separate statement (but not a supplemental one) • In the notes to the financial statements • Disclose methodologies to allocate costs

22. Expense Reporting – Face of Statement of Activities

23. Expense Reporting – Separate Schedule

24. Disclosure Example for Expense Allocations:

25. Issue 3: Reporting Expenses and Investment Returns • Investment return will be net of related external and direct internal expenses • Do not disclose the netted expenses

26. Issue 4: Cash Flow Statement is Cumbersome • It was on the table to require all not-for-profit organizations to use the direct method of reporting cash flows • If the direct method was used, then indirect method reconciliation required • ASU allows a choice between direct and indirect method • If direct method, then no more reconciliation required

27. Effective Dates and Transition • If you are a December 31 year end, then your December 31, 2018 financial statements • If you are a June 30 year end, then your June 30, 2019 financial statements • Early adoption permitted • In the year of adoption  apply retrospectively • All not-for-profit organizations are affected

28. FASB ASU 2014-09Revenue From Contracts with Customers (ASC 606)

29. ASU 2014-09 Revenue From Contracts with Customers • Core principle • Recognize revenue to depict transfer of good/service (G/S) in amount that reflects consideration expected to be entitledto receive in exchange for those G/S • Transfer based on control • Ability to direct use of and receive benefit from asset transferred • Concept of earnings process and realization are eliminated • New concepts • Transfer = Delivery • Entitlement = Fixed or Determinable / Collectability / Evidence of Arrangement

30. ASU 2014-09 Revenue From Contracts with Customers • Customer = counterparty to a contract • Contracted with an entity to obtain G/S • G/S are an output of entity’s ordinary activities • Consideration must be exchanged • If a counterparty shares in risks and benefits that result from the activity or process = not a customer • Example – developing an asset in a collaborative arrangement

31. ASU 2014-09 – Five Step Process

32. Convention Center Revenues Impacted by the new standard • Membership or partnership dues • Sales of products or services (e.g. advertising, publication spots, etc.) to third parties • Hotel registration fees Not impacted by the new standard • Contributions

33. Partnership Dues Revenue Example • The CVB enters into a partnership contract with Company A for $2,500 for the calendar year 2017. The CVB provides the following under this contract to Company A: • An enhanced description on the CVB website • Listings in CVB’s owned publications • A 5% advertising discount • Admission to the CVB networking events for partners • Connections with more than 1,000 partner organizations • Access research on travel and tourism

34. Partnership Dues Revenue Example • 5 Step Process • Step 1: Does the CVB have a contract for the partnership it has with Company A? Enforceable right to payment? • Step 2: What are the performance obligations under the contract? • Step 3: What is the price? • Step 4: If there is more than one performance obligation, how is the price allocated to the separate performance obligations under the partnership contract? Is there a standalone selling price for each performance obligation and if not, can it be estimated? • Step 5: Should revenue be recognized at a point in time or over time?

35. Partnership Dues Revenue Example • Recognize over time if one of the following criteria is met: • The Company simultaneously receives and consumes the benefits provided by the CVB’s performance as the CVB performs. • The CVB’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced. • The CVB’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date.

36. Nonrefundable Fees • Nonrefundable fees charged upfront • Current GAAP • Guidance is not clear. Can take the position to recognize when received. • New GAAP • Do nonrefundable fees relate to promised good or service? If so, you would recognize nonrefundable fee over the service period. The period could extend beyond the initial service period if the nonprofit can renew service at no additional cost.

37. Implementation of the New Revenue Recognition Standard • Revise your revenue recognition policies in accordance with the new standard (new terminology and core principles). Also update policies to incorporate changes in the proposed ASU re: contributions (to be covered next). • Assess your revenue contracts and determine whether any changes will need to be made to your revenue recognition under the new standard and have conversations with your Board of Directors

38. Effect Dates and Transition • If you are a December 31 year end, then your December 31, 2019 financial statements • If you are a June 30 year end, then your June 30, 2020 financial statements • All not-for-profit organizations are effected

39. Proposed ASU Not-for-Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made

40. Purpose • The amendments were made in an attempt to • Eliminate the diversity in practice in recognizing grants received, particularly those from governmental sources, as either exchange transactions or contributions • Distinguish between conditional and unconditional contributions. • The FASB also sought to clarify whether grants or contracts fall under the scope of ASU 2014-09, Revenue from Contracts with Customers. • Applies to both contributions received by a recipient and contributions made by a resource provider (which could be CVBs)

41. Reciprocal (Exchange) vs. Nonreciprocal (Nonexchange/Contribution) Transactions

42. Key Clarifications • The resource provider is not synonymous with the general public, even a governmental entity. If a resource provider receives value indirectly by providing a societal benefit, this would be considered a nonreciprocal transaction • If the primary beneficiary of a grant or contract is a third party, a NFP must use judgment to determine if the transaction is reciprocal or nonreciprocal • Furthering a resource provider’s mission or “feel good” sentiment does not constitute commensurate value received • The type of resource provider should not override the substance of the transaction

43. NFP Revenue Recognition Decision Making Process

44. Indicators to Determine Barrier • To determine what is a barrier, a NFP would consider indicators, which would include, but are not limited to, the following: • The inclusion of a measurable performance-related barrier or other measurable barrier • Whether a stipulation is related to the purpose of the agreement • The extent to which a stipulation limits discretion by the recipient • The extent to which a stipulation requires an additional action or actions

45. Impacts on CVBs • Bed tax revenue – no changes • Funding CVBs provide to other organizations • Likely to be classified as contributions, conditional or unconditional • Would be classified as an exchange transactions in cases where the CVB provides funding to a third party to perform research where the CVB will benefit. Exchange transactions fall under the new revenue recognition standard.

46. Effect Dates and Transition • Same as the new revenue recognition standard • If you are a December 31 year end, then your December 31, 2019 financial statements • If you are a June 30 year end, then your June 30, 2020 financial statements

47. The New Lease Standard(ASC 842)

48. High-Level Insights • Will add lease-related assets and liabilities to the balance sheet that weren’t there before (for operating leases) • Will most likely impact compliance with contractual agreements and loan covenants • Two types of leases still remain, although now called finance leases (vs capital) and operating leases

49. Lessee Accounting – Overview

50. Lessee Accounting – Operating Leases • Recognize right-of-use asset and lease liability • Measured at PV of lease payments (including renewal option periods if it is reasonably certain that they will be exercised) • Recognize a single lease cost • Calculated so that the cost of the lease is allocated over the lease term on generally a straight-line basis • Classify all cash payments in operating activities in statement of cash flows