new audit guide: the aicpa’s overhauled audit and...

MACPA’s 2014 Government & Not-for-Profit Conference

New Audit Guide: The AICPA’s Overhauled Audit and Accounting Guide,

Not-for-Profit Entities

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Ellen K. Hobby, CPA, CAEChief Operating Officer, Chief Financial Officer

National Academy forState Health Policy

[email protected](202) 903-2784

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MACPA’s 2014 Government & Not-for-Profit Conference

NEW Audit Guide: Agenda

To help you better understand the AICPA’s Not-For-Profit Guide Overhaul project: Learn how the Guide has changedUnderstand auditor objectives and

expectationsHear issues, scenarios and interpretive

conclusions

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AICPA Audit and Accounting Guide –Not-For Profit Entities

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The Guide can be purchased at:

http://www.cpa2biz.com/AST/Main/CPA2BIZ_Primary/AuditAttest/IndustryspecificGuidance/NotforProfit/PRDOVR~PC-012645/PC-012645.jsp

Focus of the NFP Guide

Not-for-profit entitiesGAAP-basis financial statements Audited financial statements Provides assistance in the unique preparation,

auditing, accounting and reporting of NFP financial statements

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Issuance of Overhauled 2013 Guide

The AICPA issued a comprehensive revision of the Audit and Accounting Guide Not-for-Profit Entities in the spring of 2013 Financial Reporting Executive Committee (FinREC) Not-for-Profit Entities Expert Panel Not-for-Profit Guide Task Force

First revision, other than annual conforming changes, since the Guide was released in 1996

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New edition released on March 1, 2014 Includes additional guidance on: Reporting donated services between affiliated NFP’s Split interest agreements Contributions and grants Functional expenses and joint costs

Includes FASB ASU No. 2013-06 Not-for-Profit Entities (Topic 958): Services Received

from Personnel of an Affiliate; a consensus of the FASB Emerging Issues Task Force

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Includes FASB ASU No. 2012-02 Intangibles – Goodwill and Other (Topic 350): Testing

Indefinite-Lived Intangible Assets for Impairment

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Source of New Guide Content

Considered over 100 unique questions asked by members who called the AICPA Help Line

Authoritative guidance from FASB Codification Non-authoritative guidance from FinREC conclusions Incorporated relevant non-authoritative AICPA literature NFP-related Technical Questions and Answers (TIS)

section 6140 AICPA White Paper on Fair Value Measurement Alternative investments TIS section 2220.18–.27

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Authoritative Status of AICPA Guides

Accounting & Financial Reporting Basis of accounting content is from GAAP, but Guide

provides additional explanation and practical guidance Auditing

Auditing guidance considered interpretive publication under AU-C section 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Generally Accepted Auditing Standards

“The auditor should consider applicable interpretive publications in planning and performing the audit.” AU-C 200.27

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Guide: Table of Contents

Chapter 1 – Introduction Chapter 2 – General auditing considerations Chapter 3 – Financial statements, the reporting entity, and general financial reporting matters Chapter 4 – Cash, cash equivalents, and investments Chapter 5 – Contributions received and agency transactions Chapter 6 – Split-interest agreements and beneficial interests in trusts Chapter 7 – Other assets Chapter 8 – Programmatic investments Chapter 9 – Property and equipment Chapter 10 – Debt and other liabilities Chapter 11 – Net assets and reclassifications of net assets Chapter 12 – Revenues and receivables from exchange transactions Chapter 13 – Expenses, gains, and losses Chapter 14 – Reports of independent auditors Chapter 15 – Tax and regulatory considerations Chapter 16 – Fund accounting Appendices

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Chapter 1: Introduction

Lists types of entities covered by the audit guide Basis of accounting – GAAP!Definition of fund accounting vs. net asset

classesOther resources for financial reporting by NFP’s

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Chapter 2: General Auditing Guidance

Conformed to the Clarity project; includes NFP-specific guidance (e.g. fraud risks specific to NFPs)

Other guide chapters have NFP-specific suggested audit procedures relating to the chapter’s topic

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pReporting Entity, and General Financial Reporting Matters

Expanded guidance and FinREC Comments Financial Statements Reporting Related Entities Mergers & Acquisitions; Collaborative

Arrangements; Use of Fair Value; and Disclosures

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Chapter 3: continued

Financial Statements & Presentation Issues Sequencing assets according to nearness of

conversion to cash How is this impacted by restrictions?

Classified Balance Sheet – helpful observationsAssets restricted to payment of LT debt is noncurrent to

extent they exceed current portion of debt If governing board identifies specific assets to be

invested/held to a designation for noncurrent purposes, these assets would also be noncurrent

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Significantly expanded guidance on interests in related entities Summary chart of examples that reference to sections

of both the Guide and the FASB ASCNFP entitiesFor-profit entitiesSpecial-purpose leasing entities

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Statement of functional expenses Required as a basic financial statement for voluntary

health and welfare entities FinREC encourages presentation by all NFPs that are

supported by the general publicCost benefit, preparation and auditingNFP with contributions of 20-30% of total revenue presumed

to be supporteed by general public (excluding government support)

Consider the facts and circumstances and use judgment

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ASU 2012-05 – Statement of Cash Flows – Sale Proceeds of Donated Financial Assets

If donated financial asset was converted nearly immediately to cash upon receipt

Requires NFPs to classify cash receipts from the sale of those financial assets as cash inflows from operatingactivities

Unless the donor restricted the use of the contributed resources to long-term purposes, which are financing

Otherwise, classify as investing activities

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Chapter 4: Cash, Cash Equivalents and Investments

Not all “cash” is cash!Discussion of centralized cash management

arrangements Significantly expanded guidance on common

investments held by NFPsRecommended guidance on investment

expenses

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Accounting for investments where NFP is the general partner in a for-profit

partnership NFP is a limited partner in a for-profit partnership NFP holds derivative instruments NFP has an interest in an investment poolOther specific situations

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Excerpt from Exhibit 4-1

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Chapter 5: Contributions Received and Agency Transactions

Receipt of resources by a NFP – is it a contribution or an exchange transaction? Flowchart (Table 5-1) Table of indicators (FASB ASC 958-605-55-8) When elements of both are present, divide the

transaction in two, measuring exchange first Examples Membership Dues Grants University athletics Naming opportunities

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Contributions vs. Exchange Transactions

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Grants Use Table 5-1 to determine if grant is contribution or

exchange based on the facts and circumstances If contribution – consider if any conditions exist,

consider donor restrictions If exchange – determine revenue recognition NFP should establish accounting policy for grants so

they are accounted for consistently Government grants

Apply the above guidanceFASB Not-for-Profit Advisory Committee topic

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Membership Dues Is the value received by the member commensurate with the

dues paid? Often elements of both contribution and exchange

Measure the exchange portion first and recognize as revenue as the earning process is completed

Remainder is a contribution, recognize as revenue upon receipt

Performing Arts The Kennedy Center$ free parking$$ access to private receptions

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University Athletics Some universities offer “perks” for higher levels of

donation. For example:$ support student athletic experience$$ university logo jacket$$$ passes to stadium skybox$$$$ travel with the team to an away game

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Naming Opportunities May be accompanied by additional rights & privileges Is it acknowledgement of a gift or advertising?

Donor sponsors a faculty positionDonor sponsors a major eventBuilding named after a significant donor

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Recognition and Measurement of Contributions Contributed fundraising material, informational

material, or advertising, including media time or space Administrative costs of restricted contributions Below-market interest rate loans

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Contributed Fundraising Material, Info Material, or Advertising, Including Media Time or Space Examples –radio advertising time, newspaper print

space Donated asset, not a donated service –

Record contribution even if the asset would not typically needed to be purchased if not provided by donation

FinREC recommends: Recognize a contribution if NFP has active involvement in determining and managing the message and use of the materials; otherwise not a contribution

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Administrative costs of restricted contributions Policy of designating a certain % of restricted gifts to

offset the costs of raising and administering those giftsExample – Policy that 5% of contributions to scholarship fund

go to pay administrative costs; so $95 of a $100 gift is restricted for the scholarship fund

Policy needs to be effectively communicated to or from the donor prior to receipt of the contribution If not, then 100% of gift should be donor restricted

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Below-Market Interest Rate Loans No or low-interest of funds is a contribution to the

NFP Record contribution revenue and interest expense for

fair value of the contributionFair value typically estimated at difference between market

rate interest and actual interest. Related party status doesn’t impact recording Recognition of contribution /interest different for long-

term loan versus due on demand loan

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Example 1 – Long-term Loan from a Foundation On 1/1/2013 NFP receives 0% interest loan of

$200,000 payable on 12/31/2015 Market interest rate is 6%

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Record receipt of loan -1/1/2013 DR Cash $200,000

CR Loan payable (200,000)

Record annual interest and contribution (same entry also booked at 12/31/2014 and 12/31/2015)12/31/2013 DR Interest expense $12,000

CR Contribution Revenue (12,000)

Record repayment of loan12/31/2015 DR Loan payable $200,000

CR Cash (200,000)

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• Loans - Other issues Government loans at below-market interest

rates Forgivable Loans

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Chapter 6: Split Interest Agreements and Beneficial Interests in Trust

Beneficial interest in a trust held by another entity – Questions: What if NFP isn’t notified about trust until years after it

is created? What if NFP is unable to obtain information to verify it

is named as an irrevocable beneficiary? What if NFP is unable to obtain information to

measure the beneficial interest?

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Answers: NFP generally needs the following information in

order to record beneficial interest in the trust:Copy of executed trust document, statement from the trustee,

or other information to verify existenceSufficient information about the trust in order to value it (e.g.

trust assets, payout rate/amount, age of life beneficiaries)

Make reasonable efforts to obtain necessary information

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Answers, continued: Recognize beneficial interest in the trust and

contribution revenue in the first year the necessary information becomes available.

Should not record a prior period adjustment if the NFP made, and continues to make, reasonable efforts to obtain necessary information

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Chapter 7: Other Assets

Inventory Acting as an Agent in a Sale of Commodities Prepaid Expenses and Deferred CostsCollections and Works of Art and Historical

TreasuresGoodwill Intangible Assets Other than Goodwill

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Chapter 8: Programmatic Investments (New!)

Programmatic investments are any investment by an NFP that meets the following two criteria: Its primary purpose is to further the tax exempt

objectives of the NFP. The production of income or the appreciation of the

asset is not a significant purpose (that is, an investor seeking a market return would not enter into the investment).

Similar to program-related investment, IRS Sec. 4944(c).

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Specific examples discussed in the chapter: Loans

Low or no interest loansForgivable loans

GuaranteesGuarantee provided without commensurate return

Equity investmentsOften no contribution element

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Core Considerations Determine when the initial transaction occurs whether

the investment is programmatic If there is a contribution element, report it as

contribution expense Use GAAP for similar financial instruments, except for

the contribution element, if any Significance of the investments and the quantitative

and qualitative risks determine the type of financial statement presentation and the extent of disclosures

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Chapter 9: Property and Equipment

Contributed Property and EquipmentUse of P&E Owned by OthersCapitalized Interest Expiration of Restrictions on Property and

Equipment Impairment or Disposal of Long-lived

Assets Asset Retirement Obligations

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Chapter 10: Debt and Other Liabilities

New section on tax-exempt (municipal bond) debt based on the AICPA Audit and Accounting Guide Health Care Entities

Expanded discussion of credit enhancements, debt extinguishments, debt modifications, and classification

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Public Entity - Any entity that meets any of the following conditions: Its debt or equity securities trade in a public market either on a

stock exchange (domestic or foreign) or in an over-the-counter market, including securities quoted only locally or regionally.

It is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets).

It files with a regulatory agency in preparation for the sale of any class of debt or equity securities in a public market.

It is required to file or furnish financial statements with the Securities and Exchange Commission.

It is controlled by an entity covered by criteria above.

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Fair Value Measurement Municipal Bond Financing and Other Long-term Debt Conduit Bonds that Trade in the Public Markets Credit Enhancement Extinguishment and Modification Transactions Calls and Made Conversions Defeasance Bond Modifications and Exchanges Debt Issuance Costs Puts/Tender Options IRS Considerations

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Tax Liabilities Deferred Revenue Refunds Due to and Advances from Third Parties Promises to Give Split-Interest Agreements Amounts Held for Others Under Agency Transactions Revenue Sharing and Other Agreements Guarantees Contingencies Pension and Other Defined Benefit Postretirement Plan

Obligations Multi-employer Plans

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Chapter 11: Net Assets and Reclassifications of Net Assets

Significantly expanded guidance on expiration of restrictions Using restricted contributions first Restrictions met in the same year as the contribution

was received Promises to give, including implied time restriction on

multi-year pledges Gifts of long-lived assets or gifts for their purchase Donor restricted endowments (e.g. term endowments)

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Expiration of restrictions on promises to give By specifying future payment dates donors indicate that

their gift is to support activities in each period in which a payment is scheduled (i.e. an implied time restriction)

Time restrictions lapse when the receivable is due; gift becomes available for the donor-specified purpose

If the gift is for the construction or purchase of a specific long-lived asset, the donor supports activities of the period in which that asset is constructed or placed in service, even though the payment dates may extend beyond that period.

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Chapter 12: Revenues and Receivables from Exchange Transactions

Modest expanded guidance FASB Revenue Recognition Project Guidance on Conceptual Principles When is revenue recognized? Revenue vs. gains

Gains commonly result from transactions or other events that involve no earnings process

Exchange Transactions Loan Receivable Examples

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Chapter 13: Expenses, Gains and Losses

Fund-raising costs Financial Aid and Other Reductions in Amounts

Charged for Goods and Services Advertising Costs Start-up CostsContributed Use of Facilities Functional Reporting of Expenses

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Chapter 14: Reports of Independent Auditors

Reports on Financial StatementsUnmodified ReportsModified ReportsGong Concern Supplementary InformationReports Required under Government Auditing

Standards and OMB Circular A-133

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The Board of DirectorsThe Global Not-for-profit

Report on the Financial StatementsWe have audited the accompanying financial statements of The Global Not-for-profit (GNFP), which comprise the statements of financial position as of June 30, 2013 and 2012, and the related statements of activities and cash flows for the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial StatementsManagement is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s ResponsibilityOur responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to GNFP’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of GNFP’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

OpinionIn our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Global Not-for-profit as of June 30, 2013 and 2012, and the changes in its net assets and cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

[Auditor’s signature][Auditor’s city and state][Date of the auditor’s report]

Chapter 15: Tax and Regulatory Considerations

Greatly expanded discussion about legal and regulatory environment Maintaining the NFP’s tax-exempt status Unrelated business income and income tax positions State and local regulations issues (state charitable

solicitation laws, state and local gaming regulations, UPMIFA)

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Chapter 16: Fund Accounting

Few Changes Fund Accounting: Is it still needed? Converting Fund Balances to Net Asset Classes Current funds Plant funds Loan funds Endowment funds Annuity funds

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Resource Decision Tree

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Own the resource?

Unrestricted?

Current Operations?

Plant Funds?

Board designated-endowment or other?

Restricted?

Expendable?

Purpose restriction?

Current Operations?

Plant Fund?

Time restriction?

Expendable Term

Endowment?Income

restricted?

Expendable in future year?

Non-expendable?

Endowment?Income

restricted?

Split interest agreement?

Purpose restricted?

Affiliate?

Agency?

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Unrestricted Net Assets

Temporarily Restricted Net

Assets

Permanently Restricted Net

AssetsCurrent Unrestricted The general

operating budget. It contains no restricted resources.

Current Restricted Only if entity adopts policy to record “restricted” receipts as UNA if expended in the same period

Donor restricted funds available for current operations E.g., restricted gifts and restricted endowment spending accounts.

Loan Funds Loans available to students under the Federal Perkins Loan program.

Established by donors that become fully expendable w/ the passage of time or lifting of restriction

Established by donors [if funds to be used for loans perpetually] that are available to students

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Assets


AssetsEndowment Funds Underwater portion

of Donor-endowment, or UMIFA: Accumulated and reinvested endowment return whose income use is unrestricted

Accumulated and reinvested endowment return whose income use is restricted by donor; also term endowments

The endowment corpus or original historic gift value of endowment gifts. Includes perpetual trusts controlled by 3rd parties.

Quasi-endowment Funds or Board-designated endowments

Board has designated unrestricted and expendable funds to function as an endowment.

Board has designated funds to function as an endowment that were from expendable restricted gifts

Life Income Funds (deferred giving trusts and annuities)

Charitable gift annuities where purpose restrictions do not exist.

Time or purpose restriction exists but is expendable upon maturity

The fund remainder is designated as a permanent endowment

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Assets


AssetsPlant Fund-Unrestricted

Funds designated for department capital replacement/renewal, campus repair, and debt service

Plant Fund-Restricted

Donor restricted funds available for the acquisition of long-lived / capital assets

Investment in Plant Includes land, building, and equipment and related liabilities. Depreciation expense is recorded in this fund

Long-lived assets acquired by restricted gifts and policy adopted to imply a time restriction on the long-lived asset & release restriction over life of asset

Questions….

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Resources

AICPA Financial Reporting Whitepaper: Measurement of Fair Value for Certain Transactions of Not-for-Profit Entities(Link is for AICPA Members Only)

Update No. 2013-06—Not-for-Profit Entities (Topic 958): Services Received from Personnel of an Affiliate (A Consensus of the FASB Emerging Issues Task Force)

Update No. 2012-05—Statement of Cash Flows (Topic 230)

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Resources

Update No. 2012-02—Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment

Financial Accounting Standards Board (FASB) Website Alternative Investments – TIS Section 2220.18-.27 AICPA AU-C Section 200 AICPA – Improving the Clarity of Auditing Standards

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Ellen K. Hobby, CPA, CAEChief Operating Officer, Chief Financial Officer

National Academy forState Health Policy

[email protected](202) 903-2784

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new audit guide: the aicpa’s overhauled audit and...

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