WEALTH ADVISORY | OUTSOURCING | AUDIT, TAX, AND CONSULTING Investment advisory services are offered through CliftonLarsonAllen Wealth Advisors, LLC, an SEC-registered investment advisor

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FASB Update

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Agenda

2

Presentation of Financial Statements of NFP Entities

Grants and Contracts to NFP Entities

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ASU 2016-14 Presentation of Financial Statements of Not-for-Profit Entities

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Not-for-Profit Section

Key Areas Affected

Key Changes in ASU

2016-14

Net Assets Classes

Liquidity & Availability

Expense Reporting

Investment Return

Statement of Cash Flows

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Net Assets

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Balance Sheet Presentation

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Adjustments Upon Adoption • Reclassify “unrestricted net assets” to “net assets without donor restrictions” • Reclassify “temporarily restricted” and “permanently restricted net assets” to “net assets with donor

restrictions” • Reclassify any “unrestricted net assets” related to underwater endowments to “net assets with donor

restrictions” • Reclassify any “temporarily restricted net assets” related to implied restrictions on contributions restricted for

acquisition or construction of PP&E to “net assets without donor restrictions” (to adopt placed-in service approach)

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Sample Reclassifications

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Statement of Activities Presentation EXAMPLE 1

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Statement of Activities Presentation EXAMPLE 2

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LLP Statement of Activities Presentation

EXAMPLE 3*

* GAAP still allows flexibility in presentation of NFP financials, examples in slide deck are not all inclusive

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Board-designated Net Assets Presentation May disclose on the face of the statement of financial position or in the notes

Could present in narrative or tabular form in the note.

Net Assets Without donor restrictions

Undesignated 3,057,607 Designated by the Board for operating reserve 300,000 Designated by the Board for endowment 15,511,186 Invested in property and equipment, net of related debt 21,150,885

40,019,678

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Operating Measure Considerations

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Liquidity and Availability

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Liquidity/ Availability Disclosure, Example 1 Liquidity and Availability Financial assets available for general expenditure, that is, without donor or other restrictions limiting their use, within one year of the balance sheet date, comprise the following:

Our endowment funds consist of donor-restricted endowments and funds designated by the board as endowments. Income from donor-restricted endowments is restricted for specific purposes, with the exception of the amounts available for general use. Donor-restricted endowment funds are not available for general expenditure. Our board-designated endowment of $15,511,186 is subject to an annual spending rate of 4.5 percent as described in Note 9. Although we do not intend to spend from this board-designated endowment (other than amounts appropriated for general expenditure as part of our Board’s annual budget approval and appropriation), these amounts could be made available if necessary. As part of our liquidity management plan, we invest cash in excess of daily requirements in short-term investments, CDs, and money market funds. Occasionally, the Board designates a portion of any operating surplus to its operating reserve, which was $300,000 as of December 31, 201X.

Cash and cash equivalents 4,851,231$ Operating investments 723,006 Accounts receivable 312,216 Promises to give 985,846 Distributions from assets held under split-interest agreements 145,000 Distributions from beneficial interests in assets held by others 180,110 Endowment spending-rate distributions and appropriations 1,115,664

8,313,073$

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Liquidity/ Availability Disclosure, Example 2

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LLP Example – NFP with Deficiency in the Composition of

Assets to Comply with Donor-Imposed Restrictions * Donations restricted for purposes more limited than general expenditures total $3,750.

Codification references: 958-210-50-2 An NFP shall disclose the following, if applicable, in the notes to the financial statements and may include that information in qualitative disclosures on the availability of an NFP’s financial assets in accordance with paragraph 958-210-50-1A(b): b. The fact that the NFP has not maintained appropriate amounts of cash and cash equivalents to comply with donor-imposed restrictions (see paragraph 958-450-50-3)

958-450-50-3 If the noncompliance results from a not-for-profit entity’s (NFP’s) failure to maintain an appropriate composition of assets in amounts needed to comply with all donor restrictions, the amounts and circumstances shall be disclosed.

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Expense Reporting

Where to Report?

Statement of Functional Expenses

Statement of Activities

Notes to Financial Statements

Do not report as supplementary information

Describe allocation methods used

Report expenses by function and nature in one place

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Expense Reporting (cont’d.)

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Example 1 Analysis of Expenses Presentation in the notes or a separate statement

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LLP Example 2

Analysis of Expenses Presentation on the face of the statement of activities

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Reporting of Investment Return

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Reporting of Investment Return - Examples • Direct internal investment expenses involve the direct conduct or direct

supervision of the strategic and tactical activities involved in generating investment return. The following are some examples:

– CIO’s Compensation: Potentially all of expense

– CFO’s Compensation: Potentially a partial allocation of expense

– Investment Accountant’s Compensation: Potentially a partial allocation of expense

– CIO’s Travel Expenses to Visit Fund Managers: Potentially all of expense

– Accountant Performing Endowment Allocations: None

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Incentive to Use Direct Method for Cash Flow Statement

Direct

Indirect

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Grants and Contracts to NFP Entities (Improving the Scope and Accounting Guidance for Contributions Received and Contributions Made)

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Timeline of the Project

Issued Proposed Update

November 1, 2017

Final ASU Comment Period

Deadline

Q2 2018 August 3, 2017

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Scope • Applies to all entities (NFPs and business entities) that receive or make

contributions unless otherwise indicated. • Excludes transfers of assets from the government to business entities. • Applies to both contributions received by a recipient and contributions made by a

resource provider. The intent is simply that both apply the same guidance, the entities do not need to track each other’s accounting to achieve the same reporting results.

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Why This Upcoming ASU Is Necessary

To address difficulty and diversity in practice among NFPs in:

Characterizing grants and similar contracts with government agencies and others as (i) reciprocal transactions (exchanges) or (ii) nonreciprocal transactions (contributions)

Distinguishing between conditional and unconditional contributions

Issue 1

Issue 2

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Issue 1: Grants and Contracts – Reciprocal vs Nonreciprocal (Exchange vs Nonexchange) • Many NFPs treat governmental grants/contracts as exchange transactions without regard to

the substance of the agreement

• Some equate the government with the general public, i.e., the government is merely “purchasing” benefits for taxpayers that it would otherwise have to provide itself

– The underlying issue is whether the government receives direct commensurate value in return because the public benefits

• Many believe the government doesn’t make “contributions,” i.e., it is not within the government’s purview to make philanthropic decisions or make contributions using taxpayer monies

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Issue 2: Contributions – Conditional vs Unconditional

• Stakeholders find it difficult to distinguish between conditional and unconditional contributions – Especially when funds are provided with certain outcome stipulations, but no specified

return policy.

• Diversity exists in the application of the “remote” notion – Whether the likelihood of failing to meet a condition is remote

◊ Some NFPs believe that any condition within their control has a remote likelihood of not being met; other NFPs believe that administrative or other trivial “conditions” prevent recognition until satisfied

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Issue 1: Who Receives the Benefit?

Current Practice

Exchange

Direct commensurate

value to resource provider

Specified third parties

General public

Proposed Clarification

Exchange Follow Topic 606 (or other, such as

Leases)

Direct commensurate

value to resource provider

Specified third parties

Government/ resource provider is a 3rd party payer

on behalf of an identified customer

Nonexchange Follow Topic

958-605

Specified third parties

Continue to monitor GASB

and IPSASB projects in this

area

General public

*The revenue recognized would be the underlying contract’s patient service revenue, tuition revenue, etc.

**A focus on whether or not there is a “performance obligation” possibly could include some contracts where the general public is the primary beneficiary

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Reciprocal vs Nonreciprocal – Key Clarifications

• “Resource provider” is NOT synonymous with “General public”

– A resource provider includes governmental entities, private foundations and others

– Indirect benefit received by the public is not equivalent to commensurate value received by the resource provider

– Indirect benefit received by a resource provider in providing a societal benefit is not equivalent to commensurate value received by the resource provider

– Furthering a resource provider's mission or positive sentiment from acting as a donor does not constitute commensurate value received by the resource provider

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Reciprocal vs Nonreciprocal – Key Clarifications

• The type of resource provider should not override the substance of the transaction

• If the primary beneficiary of a grant or contract is a 3rd party, an NFP must use judgment to determine if the transaction is reciprocal or nonreciprocal

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Issue 2: Conditional vs. Unconditional Contributions For a Donor-Imposed Condition to Exist:

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Indicators to Determine a Barrier

*During redeliberations, the Board decided to make additional clarifications to each indicator

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When to Recognize Revenue/Expense? Recipients • When the contribution is no longer conditional

– No longer a right of return or release – No longer a barrier

• Funds received in advance would be recorded as a liability in the recipient’s books

Donors • Contributions made generally should be recognized by the donor at the same time the done

recognizes the contribution received – Donor does not recognize until the contribution has become unconditional – Donor follows the same determination criteria as donee

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Example #1: 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 (or 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 research findings to the federal government

Any unused assets are forfeited, and any unallowed costs that have been drawn down by NFP A are required to be refunded.

• NFP A retains the rights to the findings. • Is this transaction exchange or nonexchange? If nonexchange, is it conditional or

unconditional?

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Example #1: 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 research and findings and received

the primary benefit of the findings • The federal government’s benefit is considered indirect because the

research and findings serve the general public.

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Example #1: Conclusion, continued

• NFP A determines that it should account for this grant as conditional.

• Explanation: • 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

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Example #2: Grant from a Private Foundation • NFP B receives a grant from a private foundation for funding in the

amount of $400,000 to provide specific career training to disabled veterans.

• The grant requires NFP B to provide training to at least 8,000 disabled veterans during the next fiscal year, with specific minimum targets that must be met each quarter.

• There is a right of release from the obligation in the agreement. • Is this transaction exchange or nonexchange? If nonexchange, is it

conditional or unconditional?

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Example #2: Conclusion

• NFP B determines that it should account for this grant as non-exchange and conditional.

• Explanation: • The foundation does not receive commensurate value in return • The agreement contains a right of release from obligation • The foundation requires NFP B to achieve a specific level of service

that would be considered a measurable performance-related barrier

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Example #3: Pledge from an Individual • University C receives a multi-year pledge from a wealthy individual to

build a new “green” building on a college campus. The pledge is for $20 million payable over 3 years. – $7 million is payable up front on July 1, 2018 with no associated

conditions. – A second payment of $6 million is entitled and payable on July 1, 2019

upon evidence that the land was cleared, an architectural design was received, and proper building permits were obtained.

– A third payment of $7 million is entitled and payable upon receipt of a certificate of occupancy.

• Is this transaction exchange or nonexchange? If nonexchange, is it conditional or unconditional?

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Example #3: Conclusion • University C determines that it should account for this transaction as

nonexchange and bifurcates the total pledge. $7 million is unconditional, and $13 million is conditional.

• Explanation: – The wealthy individual is not receiving commensurate value for the $20

million transferred – University C will receive the initial $7 million payment without having to

satisfy any conditions – University C will not be entitled to or receive either of the remaining $13

million in payments unless it overcomes their respective performance barriers, demonstrating the wealthy individual’s right of release from obligation if the barriers are not met

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NFP Revenue Recognition Decision Process

Resource providers would apply a similar

decision making process for

recognizing expenses.

*Includes third-party payments on behalf of identified customers. These do not create new revenue.

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Likely Impact on Funding from…

Government Agencies

Individuals & Corporations Foundations

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Transition Approach • Modified Prospective

– Apply to all agreements:

o Existing at the effective date (only apply to the portion of existing agreements not previously recognized)

o Entered into after the effective date

• No restatement of prior amounts recognized

• Retrospective Application Permitted

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Effective Date

*The effective date is the same as the new Revenue Recognition standard (Topic 606) for recipients, and allows for early implementation.

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CLAconnect.com

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Thank you! Jeanette Ramos, CPA Signing Director, CLA Jeanette. Ramos@CLAConnect.com (602) 602-3642