CBIZ & MHM Executive Education Series™ Not-for-Profit Reporting Model and

Best Practices in Financial Reporting Presented by: Tracey McDonald

and Brent Wilson October 7, 2014

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Before We Get Started…

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The information in this Executive Education Series course is a brief summary and may not include all

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Disclaimer

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Today’s Presenters

Tracey L. McDonald, CPA Shareholder, MHM 813.316.4051 | tracey.mcdonald@cbiz.com Tracey has extensive audit experience with clients in a number of industries including not-for-profit organizations, manufacturing, distribution, employee leasing, food service, professional employee organizations and healthcare. In addition, Tracey provides consulting for federal indirect cost rate issues, federally qualified community health centers and captive insurance. She also has substantial knowledge of the reporting requirements for employee benefit plans, OMB A-133 and HUD audits.

Brent Wilson, CPA Shareholder, MHM 913.234.1079 | bawilson@cbiz.com Brent is the Co-Attest Practice leader in our Kansas City office. Brent has performed and supervised numerous not-for-profit and single audits subject to OMB Circular A-133 during his 19 years with the organization. His expertise includes financial risk assessments, planning, interviewing key client staff, developing and implementing analytical procedures and methods to enhance client value and focused reviews of systems.

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Today’s Agenda

1

2

Overview and Background of NAC

Changes to the NFP Reporting Model

Best Practices in Financial Reporting 3

4 Questions

OVERVIEW AND BACKGROUND

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Not-for-Profit Advisory Committee (NAC)

Sep 2011

NAC Recommendations

Nov 2011

Project Added to

FASB Agenda

2012

Project Planning/

Board Education/

Initial Outreach

2013/2014

Deliberations continue

Q4 2014

Exposure

Draft Expected

Q4 2014 to Q1 2015

Comment

Period

2H 2015

Final ASU

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Financial Statement Users &

Others

Committee Composition

Financial Statement Preparers Nonprofit Organizations, CFOs, Controllers

Financial Statement Auditors Partners of National and Regional

Firms

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Net Asset Classifications

Financial Performance

Reporting of Expenses

Cash Flow Statement Liquidity NFP

Disclosures

Financial Statements of NFPs - Topics

CHANGES TO THE NFP REPORTING MODEL

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UPMIFA and the distinction between TRNA & PRNA Ability of NFPs to spend endowments even if underwater Board action required to appropriate investment returns for

spending TRNA considered by many to be “hodgepodge” Need to enhance disclosures of the nature and availability

(timing) of donor restricted resources URNA open to misinterpretation Enhanced disclosure surrounding availability and liquidity of

net assets would be helpful, including limits imposed by a NFP governing board

Net Assets - Issues

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Approach 1 – Restrictions as Primary Cut

Approach 2 – Purpose as Primary Cut

Operating Endowment Plant

Two Approaches to Presenting Net Assets

Without Restrictions

With Restrictions

Operating Endowment Plant

Operating

Without restrictions

With restrictions

Endowment

Without restrictions

With restrictions

Plant

Without restrictions

With restrictions

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Current GAAP

Proposed GAAP + Disclosures

Net Assets - Comparison

Temporarily restricted Unrestricted Permanently

restricted

Without Donor Restrictions

(disclose amount and purpose of

donor restrictions)

With Donor Restrictions

(disclose nature and amount of donor restrictions)

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Defined a required intermediate operating measure based on two dimensions:

Financial Performance: Operating Measure

Mission

Availability

Accepted Approach

Rejected Approaches Recurring / Non-recurring

Large or Unusual

“Beyond management’s control”

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Requires display of all available revenues separate and before board designations (show gross instead of net)

Removes requirement to display an operating

measure (if reported) on same statement that reports change in unrestricted net assets

Operating Measure

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One statement approach Two statement approach

Ability to present total revenue and contributions

Effect on transfers easier to identify

Too much information in one statement

Labeling of totals difficult

A greater emphasis on the operating measure

Facilitates multi-year comparison

Some may ignore second statement

Some may incorrectly interpret the operating measure to be net income

Financial Performance – Statement Approach

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Example of One Statement Approach Without Donor With Donor

Restrictions RestrictionsSupport and revenue:

Bequests 600$ -$ 600$ Other contributions 425 1,500 1,925 Fees for services 495 - 495 Restricted support released for current period 1,375 (1,375) -

Total support and revenue 2,895 125 3,020

Expenses:Total expenses 1,950 - 1,950 Excess before appropriations/transfers 945 125 1,070

Board appropriations/transfers to/(from) operations:Investment returns appropriated from donor endowment 60 a - 60 Investment returns appropriated from quasi-endowment 90 b - 90 Bequests transferred to quasi-endowment (500) c - (500)

Total appropriations/transfers to/(from) operations (350) - (350)

Excess (deficit) from operations 595 125 720 Investment return, net 170 445 615 Board appropriations/transfers from/(to) operations:

Investment returns appropriated from donor endowment - (60) a (60) Investment returns appropriated from quasi-endowment (90) b - (90) Bequests transferred to quasi-endowment 500 c - 500

Total appropriations/transfers from/(to) operations 410 (60) 350

Total change in net assets 1,175 510 1,685 Net assets at beginning of period 1,500 2,100 3,600 Net assets at end of period 2,675$ 2,610$ 5,285$

Total

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Example of Two Statement Approach (1 of 2)

Operating support and revenue:Bequests 600$ Other contributions 425 Fees for services 495 Restricted support released for current period 1,375

Total support and revenue 2,895

Expenses:Total expenses 1,950 Excess before appropriations/transfers 945

Board appropriations/transfers to/(from) operations:Investment returns appropriated from donor endowment 60 aInvestment returns appropriated from quasi-endowment 90 bBequests transferred to quasi-endowment (500) c

Total appropriations/transfers to/(from) operations (350)

Excess (deficit) from operations 595$ d

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Example of Two Statement Approach (2 of 2)

Without Donor With DonorRestrictions Restrictions

Excess (deficit) from operations 595$ -$ 595$

Nonoperating activities:Contributions - 1,500 1,500 Restricted support released for current period - (1,375) (1,375) Investment return, net 170 445 615

Board appropriations/transfers from/(to) operations:Investment returns appropriated from donor endowment - (60) a (60) Investment returns appropriated from quasi-endowment (90) b - (90) Bequests transferred to quasi-endowment 500 c - 500

Total change in net assets 1,175 510 1,685 Net assets at beginning of period 1,500 2,100 3,600 Net assets at end of period 2,675$ 2,610$ 5,285$

Total

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Charitable and Business(Operating)

xxx

Investing/Financing(Non-operating)

xxx

Donor-restricted

xxx

Statement Flexibility

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AICPA Issue Who should be required to present a statement of functional

expenses?

FASB Deliberations Should natural expenses be required? Should functional expenses be required? Should both be required together? Which breakout on the statement of activities? Should investment and other non-operating expenses be

presented on a functional basis?

Reporting of Expenses - Issues

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Reporting of Expenses

Nonfunctional

Function*Total

Program Services Supporting Services Operating Nonoperating TotalExpenses Program A Program B M&G Fundraising Expenses Expenses Expenses

Salaries and benefitsGrants to othersProfessional feesOccupancy costsEquipment rentalSuppliesTravelPrintingInterestOtherDepreciation

* Either (or both) on face of Statement of Activities

Nature*

Expense by nature and function – one place in the F/S

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Two primary issues Understandability / Utility

Relation to Statement of Activities

Cash Flow Statement

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Require the direct method for operating cash flows

No longer require indirect method Will ask in exposure draft if it should still be required for

certain nonprofits

Re-categorize certain items to better align operating section with activities statement

Cash Flow Statement

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Revise the following classifications – 1. Cash gifts with donor-imposed restrictions to be used to

acquire long-lived assets for operating purposes from financing to operating

2. Cash payments to acquire long-lived assets for operating purposes from investing to operating

3. Cash proceeds from the sale of long-lived assets from investing to operating

4. Cash dividends and interest income from operating to investing

5. Cash payments of interest expense from operating to financing

Cash Flow Statement

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Focus is on presentation and disclosure of information useful in assessing liquidity

An entity should define the time horizon it uses to manage its liquidity – For example: 30, 60, or 90 days

Disclose quantitative and qualitative information

Liquidity

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Quantitative Information Total amount of financial assets

The amounts that are not available to meet cash needs within

the time horizon because of restrictions (limits) imposed by contract (or law), donors, or actions of its governing board

Total amount of financial liabilities that are due within that time horizon

Liquidity

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Qualitative information about how the entity manages its liquidity. For example – Strategy for addressing entity-wide risks that may affect

liquidity, including its use of lines of credit

Policy for establishing liquidity reserves

Basis for determining the time horizon used for managing liquidity

Liquidity

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FASB developing more streamlined examples of note disclosures that meet U.S. GAAP requirements, particularly related to – Investments

Endowment net assets

Fair value levels

Note Disclosures

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Underwater Endowments - The amount by which fair value of an individual donor-

restricted endowment fund is less than original gift or level required by donor stipulations or law

Report within the “with donor restrictions” (rather than as

currently reported in unrestricted net assets)

Note Disclosures

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Underwater Endowments Disclosures – Board’s policy for decision on whether to reduce or not spend

from underwater endowment funds

Original gift amount of underwater endowment funds in the aggregate

Fair value of underwater endowment funds in the aggregate

Note Disclosures

BEST PRACTICES IN FINANCIAL REPORTING

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Compare external audit reports to internal reports – Measure of operations

Revenue / expense categories Explain differences

Best Practices in Financial Reporting

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Financial Statements Do immaterial items have their own line?

Consider a 1% rule for combining small items.

Small dollar items may still be relevant and important.

Related party amounts

Is there information in a footnote that can be on the statements or vice versa?

Best Practices in Financial Reporting

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Footnotes to the Financial Statements – Are your footnotes stale?

Are new matters discussed before old matters?

Is the wording relevant?

Has the description of the Organization been updated?

Has there been a change in operations?

Best Practices in Financial Reporting

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Footnotes to the Financial Statements – Do policies and notes follow a logical sequence?

Are sources of revenue and recognition fully described?

Are all restrictions fully explained?

Are related party transactions clear and evident?

Are there duplications?

You only have to say it once!

Best Practices in Financial Reporting

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Common Disclosure Challenges Endowments Fair value Conditional promises not recorded Using discount rates that are not risk adjusted Existence of union contracts covering major groups of

employees Long term employment contracts with executives Concentrations of major donors or suppliers Disclosure of self-insurance

Best Practices in Financial Reporting

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Common Reporting Errors – Fundraising costs reported as asset or deferred – expense! Board designated / restricted combined Negative balance in temporarily restricted net assets Recognizing in-kind contributions or donated services Reclassification of net assets is a prior period adjustment Non-cash items not disclosed Wording

Affect / effect Principal / principle Its / It’s Improper usage gives a poor impression!

Best Practices in Financial Reporting

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Questions?

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Join us for this course: Dec. 4 and 10: Key Tax Issues Facing Not-for-Profit

Organizations

Read these related publications: MHM Messenger: Best Practices of Effective Audit Committees MHM Messenger: OMB Grant Reform Standardizes Cost Principles MHM Messenger: OMB Makes Sweeping Changes to A-133 Audit

Requirements

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