Not-for-Profit Industry Update

1. Not-for-Profit Industry Update July 10, 2019 Presented by: Christine petrilla

2. About Us A member of Kreston International A global network of independent accounting firms MHM (Mayer Hoffman McCann P.C.) is an independent CPA firm that provides audit, review and attest services, and works closely with CBIZ, a business consulting, tax and financial services provider. CBIZ and MHM are members of Kreston International Limited, a global network of independent accounting firms. • Together, CBIZ & MHM are a Top Ten accounting provider • Offices in most major markets • Tax, audit and attest and advisory services • Over 2,900 professionals nationwide

3. Disclaimer The information in this presentationis a brief summary and may not include all of the details relevant to your situation. Please contact your service provider to further discuss the impact on your business.

4. Presenter Christine is a Senior Manager in the Accounting and Audit Group of CBIZ MHM, LLC.Christine brings over 10 years of public accounting experience with a heavy concentration of servicing the not-for-profit industry. Her area of professional experience includes planning and managing audit and attestation engagements including audits in accordance with Uniform Grant Guidance, for a variety of not-for-profit clientele, including social service organizations, senior housing, long-term care, and other not-for-profit entities. Christine also provides management of the not-for-profit tax requirements related to Forms 990, 990-T, and 990-EZ, as well as related state tax filings. 610-862-2426 • Cpetrilla@cbiz.com Christine Petrilla, CPA

5. Agenda

6. Implementation of ASU 2016-14

7. NFP Financial Statements

8. Lessons Learned – Net Asset Classifications Unrestricted Temp. Restricted Perm. Restricted • Previous • GAAP • ______________________________________________________________________________________________________________ Without Donor Restrictions • Current • GAAP With Donor Restrictions • + Disclosures Amount, purpose, and type of board designations Nature and Amount of Donor Restrictions Underwater Endowments – reflected in net assets with donor restrictions rather than net assets without donor restrictions.

9. Lessons Learned – Net Asset Classifications

10. Lessons Learned – Liquidity and Availability of Resources • Will now require disclosures relative to liquidity and availability of resources as follows: • Qualitative information on how an NFP manages its liquid available resources and its liquidity risk (in the footnotes) • Quantitative information that communicates the availability of an NFP’s financial assets at the balance sheet dates to meet cash needs for general expenditures within one year (on the face and/or in the footnotes)

11. Lessons Learned – Liquidity and Availability of Resources Availability of financial assets may be affected by: Their nature External limits imposed by donors, laws and contracts with others Internal limits imposed by governing board decisions

12. Lessons Learned – Liquidity Disclosure

13. Lessons Learned – Expense Reporting • Report expenses, either on the face of financial statements or in the footnotes, by: • Function (program, management, fundraising) - as currently required • Natural classification (salaries, fringe, occupancy, etc.) - akin to tax return approach • Separate statement or in the footnotes • Supplementary information doesn’t meet the requirement • Will require further disclosure about methods used to allocate costs among program and support functions • Incorporates more guidance on allocating costs from management and general • Direct conduct or direct supervision will now be the standard to allow for allocation

14. NFP Financial Statements – Expense Reporting – Example

15. Lessons Learned – Expense Reporting

16. Lessons Learned – Underwater Endowments • Statement of Financial Position • Separate disclosure in “with donor restrictions” class of net assets (or in footnotes) • Footnotes • Accounting policies • Endowments • Additional disclosure of original gift and fair value amounts as well as deficiency amount – all on the aggregate • Policy on spending on underwater funds • Net Assets – with donor restrictions column Defined in Master Glossary: Donor restricted endowment funds for which the fair value of the fund at the reporting date is less than either the original gift amount or the amount required to be maintained by the donor or by law

17. Lessons Learned – Underwater Endowments Revised Net Asset Classification Will no longer be charged to unrestricted as under prior rules; will be reflected as part of “With Donor Restrictions” detail Enhanced Disclosures In addition to aggregate amounts by which funds are underwater (as currently required) there will be additional disclosures of the Board policy concerning appropriation from such funds as well as of the aggregate original corpus of such funds

18. Lessons Learned – Underwater Endowments

19. Lessons Learned – Reporting of Investment Return Changes in Presentation • Net presentation of investment expenses against investment return on the face of the statement of activities will be required (most had already netted these costs against interest and dividends) • Netting includes external and direct internal expenses Changes in Disclosures • Disclosure of investment expenses no longer required • No longer require disclosure of investment return by interest, dividends, realized gains (losses), and unrealized gains (losses)

20. Lessons Learned – Reporting of Investment Return

21. Revenue Recognition Topics 606 and 958

22. Revenue Recognition vs Contributions Topic 606 Applies to exchange transactions that occur through contracts with customers Topic 958 Applies to non-exchange transactions (contributions)

23. Why Are These Standards So Important? The amount and timing of revenues recognized will be different Disclosure requirements are more extensive Clarifies exchange transactions versus contributions Systems and processes will need to be updated to ensure they properly capture information that affects revenues Time and effort to implement the standard is fairly substantial

24. General Application Criteria vs Steps Topic 606 Represents a drastic change in approach Topic 605 • Staff Accounting Bulletin (SAB) 104 establishes the “four criteria” to recognize revenue • Persuasive evidence of an arrangement • Delivery and performance • Fixed or determinable sales price • Collectability is reasonably assured

25. Topic 606 - Scoping • Leases • Financial Instruments • Topic 310, Receivables • Topic 320, Investments- Debt and Equity Securities • Topic 323, Investments- Equity Method and Joint Ventures • Topic 325, Investments- Other • Topic 405, Liabilities • Topic 470, Debt • Topic 815, Derivatives and Hedging • Topic 825, Financial Instruments • Topic 860, Transfers and Servicing • Guarantees • Insurance contracts • Certain nonmonetary exchanges • Contracts not with customers Investment Income & Contributions are out of scope • The following are scoped out and retain their existing industry guidance:

26. Topic 606 - Scoping • Memberships • Subscriptions • Products and services • Sponsorships • Tuition and impact of scholarship and rights to withdraw with full refunds • Student housing • Royalty agreements • Licensing • Federal and state grants and contracts • Advertising • Conferences and seminars The following items may be accounted for under Topic 606:

27. Topic 606 and Topic 958 Useful Information

28. Example #1 – Membership Dues • NFP Organization has annual dues of $500. • Members receive the following benefits from their membership: • Right to participate in monthly activities (membership services): • Advocacy efforts • Educational opportunities • Information about industry trends • Quarterly professional journal • Assume the standalone selling price: • $400 for membership services • $100 for the quarterly journal

29. Example #1 – Membership Dues • Step #1 – Identify the Contract • Contract between NFP and the Member for Dues and Subscription • Step #2 – Identify the Performance Obligations in the Contract • Obligation #1 – Membership Services • Obligation #2 – Quarterly Journal • Step #3 – Determine the Transaction Price • The Transaction Price for the bundle is $500

30. Example #1 – Membership Dues • Step #4 – Allocate the Transaction Price to the Performance Obligations in the Contract based on relative selling price • Obligation #1 – Membership Services - $400 • Obligation #2 – Quarterly Journal - $100 • Step #5 – Recognize Revenue when (or as) each Performance Obligation is Satisfied • Obligation #1 – Membership Services – over 12 months • Obligation #2 – Quarterly Journal – each quarter (mailing)

31. Example #2 – Museum Dues • A museum provides an annual individual membership for $75. • Designated benefits include access to the museum research center and exhibits, for which the museum believes the fair value is $75. • This year, to generate new memberships, the museum launched a membership drive with two promotional benefits. An individual membership will also include: •One free admission to the museum (normally priced at $20). •A $20 discount on any purchase of $100 or more in the museum gift shop. The museum believes it 50% likely that the member will make a purchase of at least $100.

32. Example #2 – Museum Dues • Step #1 – Identify the Contract • Contract between NFP and the Member related to membership benefits and the promotional items • Step #2 – Identify the Performance Obligations in the Contract • Obligation #1 – Membership Services • Obligation #2 – One Free Museum Admission • Obligation #3 – Gift Shop Discount • Step #3 – Determine the Transaction Price • The Transaction Price for the bundle is $75

33. Example #2 – Museum Dues • Step #4 – Allocate the Transaction Price to the Performance Obligations in the Contract • The museum previously determined that member benefits have standalone selling price of $75. • One free admission has a standalone selling price of $20. • The gift shop discount’s estimated stand-alone selling price is $10 ($20 discount X 50% probability that it will be used). • Member benefits ($75/105) x $75 = $54 • Free admission ($20/105) x $75 = $14 • Gift shop discount ($10/105) x $75 = $7

34. Example #2 – Museum Dues • Step #5 – Recognize Revenue when (or as) each Performance Obligation is Satisfied • Obligation #1 – Membership Services – over 12 months • Obligation #2 – One Free Museum Admission – when utilized • Obligation #3 – Gift Shop Discount – when utilized

35. Topic 958: ASU 2018-08 - Clarifying What is a Contribution • Clarifying the scope and accounting guidance for contributions received and contributions made • Explains how to evaluate whether a transaction is an exchange transaction or a contribution • Applies to all organizations that receive or make contributions – including business entities • Clarifies when a contribution is conditional

36. FASB Decision for Revenue Recognition for Contributions & Grants Is the transaction one in which each party directly receives commensurate value? Is it an exchange transaction? Apply Topic 606 on revenue from contracts with customers. Yes No Is the payment from a third-party payer on behalf of an existing reciprocal transaction? It is a balance-sheet only transaction? No effect on an entity’s revenue recognition. Yes No It is a nonreciprocal transaction. Apply contribution (nonexchange) guidance.

37. FASB Decision for Revenue Recognition for Contributions & Grants Are there conditions present (a barrier and a right of return/right of release must exist)? No Yes It is conditional Recognize revenue when the condition is met. Meeting of Condition It is unconditional Recognize revenue in appropriate net asset class. Are restrictions present (that is, limited purpose or timing)? Yes No It is unconditional and with donor restrictions. It is unconditional and without donor restrictions.

38. Example #3: Grant from Local Government • NFP Areceives funding from the local government to perform a research study on the benefits of changing the current school curriculum. • The agreement requires NFP A to: • Plan the study • Perform the research • Summarize and submit the research to the local government • The local government retains all rights to the study.

39. Example #3: Conclusion • NFP A concludes this is an exchange (reciprocal) transaction so it is accounted for under 606. • Explanation: • Commensurate value is exchanged between the two parties • The local government retains the rights to the study

40. Example #4: Grant from Federal Government • NFP A is awarded a grant from the federal government. • The agreement requires NFP A to: • Follow the rules and regulations established by the Office of Management and Budget (OMB) • Incur certain expenses (costs) in compliance with rules and regulations established by the OMB and the federal awarding agency • Obtain an annual audit in accordance with OMB guidelines • Submit a summary of program outcomes to the federal government • Any unused assets are forfeited, and any disallowed cost that have been drawn down by NFP A are required to be refunded • NFP A retains the rights to all program outcomes.

41. Example #4: Conclusion • NFP A concludes this is a nonexchange transaction (nonreciprocal) • Explanation: • Commensurate value is not being exchanged between the two parties • NFP A retains all the rights to the program outcomes and received the primary benefit of the programs • The federal government’s benefit is considered indirect because the program outcomes serve the general public

42. Example #4 (expanded): Conclusion • NFP A determines that it should account for this grant as conditional. • Explanation: • Barrier - The grant agreement limits NFP A’s discretion as a result of the specific requirements on how the assets may be spent (qualifying expenses) • There is a right of return and release • The audit requirement alone is not a barrier to entitlement because it is not related to the purpose of the agreement.

43. Bifurcation – Transactions Partially Covered by 606 • Some transactions have multiple components that consist of both contributions and exchange transaction • Examples may include the following: • membership dues • sponsorship agreements • donor transactions • Organizations will identify and bifurcate the transaction.

44. Bifurcation – Transactions Partially Covered by 606 • If consideration is = or < normal selling price of the exchange transaction 100% is allocated to the exchange transaction • If consideration is > normal selling price of the exchange transaction but less than the total, allocate 100% of the fair value to the exchange transaction first and the residual to the contribution transaction • If consideration is = or > than the total selling price of the exchange portion and contribution portion then use relative selling price approach to allocate consideration paid

45. Example #5 – Monthly Newsletter • NFP Organization has annual dues of $150. • Members receive the following benefits from their membership: • Monthly newsletter with a fair value of $60

46. Example #5 – Monthly Newsletter • Bifurcate the transaction • Topic 606: Newsletter for $60 • Topic 958: Contribution of $90 • Step #1 – Identify the Contract • Contract between NFP and the Member • Step #2 – Identify the Performance Obligations in the Contract • Obligations –Monthly Newsletter • Step #3 – Determine the Transaction Price • The Transaction Price is $60

47. Example #5 – Monthly Newsletter • Step #4 – Allocate the Transaction Price to the Performance Obligations in the Contract • $5 per Monthly Newsletter ($60 total) • Step #5 – Recognize Revenue when (or as) each Performance Obligation is Satisfied • Monthly Newsletter– each month (mailing) • Topic 958 Contribution • Remaining $90 would be recognized as a contribution when received

48. Keys to Implementation

49. Leasing Update & Considerations

50. Two Sets of Dates