New NFP Accounting Guidance:
The AICPA’s
New NFP A&A Guide
United Way Worldwide
Financial Management and
Human Resources Forum
October 8, 2013
Andrew M. Prather, CPA
Shareholder
aprather@clarknuber.com
425-635-4571
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Agenda
• AICPA’s New Overhauled NFP A&A Guide
• Briefly - New Auditing Standards
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Learning Objectives
• AICPA’s New Overhauled NFP A&A Guide
– Aware of the new Guide, understand specific
new accounting guidance, equipped with tools
to do further research
• Clarified Auditing Standards
– Aware of new standards and impact to your
auditors report
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Overhaul of the
AICPA Audit
and Accounting
Guide
Not-for-Profit
Entities
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Focus of the NFP Guide
• Not-for-profit entities
• GAAP-basis financial statements
• Audited financial statements
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Issuance of Overhauled 2013 Guide
• The AICPA has 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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Source of New Guide Content
• Considered over 100 questions that had been asked by
members who called the AICPA Help Line
• Authoritative guidance from FASB Codification
• Non-authoritative guidance from FinREC conclusions
• Incorporated relevant nonauthoritative 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 Guides
provide additional explanation and practical guidance
• Auditing
– Auditing guidance considered interpretive publication
under AU-C section 200 “The auditor should consider
applicable interpretive publications in planning and
performing the audit.” AU-C 200.27
• Effective Date of 2013 NFP A&A Guide
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Table of Contents
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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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Table of Contents
• 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 8 – Programmatic investments
• Chapter 11 - Net assets and reclassifications of net assets
• Chapter 13 – Expenses, gains, and losses
• Chapter 14 – Reports of independent auditors
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Details on What’s New
• Supplementary conference material:
– Listing of Sections with New or Enhanced Guidance
– AICPA flyer on where to purchase copy of the Guide
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Chapter 3, Financial Statements, the Reporting Entity,
and General Financial Reporting Matters
• 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 public
• NFP with contributions of 20-30% of total revenue presumed
to be supported by general public (excluding gov’t support)
• Consider facts & circumstances and use judgment
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Related Party Transactions
• GAAP disclosure requirements
– Material related party transactions (but not
compensation, expense allowances)
– Relationship results in operating results or financial
position significantly different than if entities not
related
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Who Are Related Parties?
• DEFINITELY:
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–
–
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Affiliates (“control” – upstream, downstream, sideways)
Equity method investee
Employee benefit plans the NFP sponsors
Management of the entity; members of their immediate families
• PROBABLY:
–
–
–
–
–
Officers, board members, founders, substantial contributors
Immediate family members of Board/management
Parties providing concentrations in revenues and receivables
Certain national and local affiliates
Other entities with common Board/executives
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Examples of Related Party Transactions
• NFP leases office space from a Board member
• NFP uses legal services provided by a firm in which a
Board member’s spouse is a person of influence, such
as a partner.
• NFP purchases printing services from a printing shop
owned by a Board member
• A national NFP provides financial consulting to a local
affiliate, either for a fee or for no fee (or one brothersister organization provides consulting to another, either
for a fee or for no fee)
• NFP makes grants to a separate organization whose
executive director is a Board member of the NFP
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Practical Considerations
• GAAP definition of “related parties” different from
IRS/990
• Recommend use of IRS/990 information gathering as
primary tool; GAAP disclosure can leverage IRS/990
information
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Chapter 3, Continued
• Significantly expanded guidance on interests in related
entities
– Summary chart of examples that reference to sections of both the
Guide and the FASB ASC
• NFP entities
• For-profit entities
• Special-purpose leasing entities
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Excerpt from Exhibit 3-2
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Chapter 4, Cash, Cash Equivalents, and Investments
• Significantly expanded guidance on common
investments by NFPs
– Summary chart of examples that reference to sections of both
the Guide and the FASB ASC
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Excerpt from Exhibit 4-1
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Chapter 5, Contributions Received and Agency
Transactions
• Core accounting considerations
– Distinguishing contributions from other transactions
• Contributions
• Agency transactions
• Exchange transactions
– Recognition and measurement of contributions
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Chapter 5, Continued
• Receipt of resources by a NFP --a contribution, exchange, or agency transaction?
– Flowchart 5-1 – Determining Whether a Transfer to a NFP
Includes a Contribution
– Table 5-1 – Indicators Useful in Distinguishing Contributions from
Exchange Transactions
– When elements of both are present, divide the transaction in two,
measuring exchange first
• Examples
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Chapter 5, continued
• Agency Transactions
– Definition: a type of transaction in which the NFP acts as an agent,
trustee, or intermediary for another party that may be a donor or
donee
– Resource inflow to NFP is not a contribution, no revenue
recognized
– Key consideration is “variance power”
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Chapter 5, continued
• Exchange Transaction Example: 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 guidance
• FASB Not-for-Profit Advisory Committee topic
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Chapter 5, continued
• Recognition and Measurement of Contributions
– Contributed fundraising material, informational material, or
advertising, including media time or space
– Below-market interest rate loans
– Administrative costs of restricted contributions
– Contributed use of facilities
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Chapter 5, continued
• Contributed Fundraising Material, Info Material, or
Advertising, Including Media Time or Space
– Examples –public service announcements, 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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Chapter 5, continued
• Below-Market Interest Rate Loans
– No or low-interest loan of funds is a contribution to the NFP
– Record contribution revenue and interest expense for fair value
of the contribution
• Fair 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
vs. 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 12/31/2015
– Market interest rate is 6%
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Record receipt of loan 1/1/2013
DR Cash
CR Loan payable *
$200,000
(167,924)
CR Contribution revenue **
(32,076)
* calculated at PV of $200K at 6% over 3 years
** donor restricted, release over term of loan
Record annual interest (similar entries also booked at 12/31/2014 and 12/31/2015)
12/31/2013
DR Interest expense
CR Loan payable
$10,075
(10,075)
Record repayment of loan
12/31/2015
DR Loan payable
CR Cash
$200,000
(200,000)
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Example 2 –
Due on demand loan from a foundation
– On 1/1/2013 NFP receives 0% interest loan of
$200,000, due on demand, repaid 12/31/2015
– Market interest rate is 6%
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Record receipt of loan 1/1/2013 DR Cash
CR Loan payable
$200,000
(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)
* unrestricted
Record repayment of loan
12/31/2015
DR Loan payable
CR Cash
$200,000
(200,000)
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Chapter 5, continued
• Administrative Costs of Restricted Contributions
– Policy of designated a certain % of restricted gifts to offset the
costs of raising and administering those gifts
• Example – 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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Chapter 5, continued
• Contributed Use of Facilities
– Recognize contribution revenue in period contribution is received
• Record pledge receivable unconditional right to use the
facilities for multiple years (temporarily restricted contribution
revenue)
– Recognized expense in the period the asset is used
– Use estimated fair value of comparable rental costs
– Recognition of contribution/rent expense different for long-term
committed leases vs. monthly usage
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Example 1 –
Long-term lease from a company
– On 1/1/2013 NFP signs a lease contract
– Free use of space for a committed three year term
– Market rental rate for comparable space is $20,000
per year
– Discount rate is 6%
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Entry when lease contract is signed 1/1/2013 DR Facilities contribution receivable *
$59,405
CR Contribution revenue **
(59,405)
* calculated at PV of $60K at 6% over 3 years
** donor restricted, release over term of lease
Record annual rent (similar entries also booked at 12/31/2014 and 12/31/2015)
12/31/2013 DR Rent expense
CR Facilities contribution receivable
CR Contribution revenue ***
$20,000
(19,703)
(297)
***in addition to this new contribution revenue, there would also be a release
of restriction of $19,703
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Example 2 –
Monthly use of space from a company
– On 1/1/2013 NFP signs a lease contract
– Free use of space monthly but no committed term,
may be canceled by landlord at any time with 30 days
notice
– Market rental rate for comparable space is $20,000
per year
– NFP uses the space for three years
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Entry when lease contract is signed 1/1/2013 no entry to be recorded
Record annual rent (same entries also booked at 12/31/2014 and 12/31/2015)
12/31/2013 DR Rent expense
CR Contribution revenue *
$20,000
(20,000)
*unrestricted
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Chapter 6, Split Interest Agreements and Beneficial
Interests in Trust
• Examples:
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Charitable Lead Trusts
Charitable Remainder Trusts
Perpetual Trusts
Charitable Gift Annuities
Pooled (Life) Income Fund
Life Interest in Real Estate
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Chapter 6, Continued
• 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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Chapter 6, Continued
• 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 existence
• Sufficient 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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Chapter 6, Continued
• 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 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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Chapter 8, continued
• Specific examples discussed in the chapter:
– Loans
• Low or no interest loans
• Forgivable loans
– Guarantees
• Guarantee provided without commensurate return
– Equity investments
• Often no contribution element
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Chapter 8, continued
• 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 11, Net Assets and Reclassifications of Net
Assets
• Significantly expanded guidance on expiration of
restrictions
–
–
–
–
–
Using restricted contributions first
Gifts of long-lived assets or gifts for their purchase
Donor restricted endowment funds
Restrictions met in the same year as the contribution was received
Promises to give, including implied time restriction on multi-year
pledges
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Chapter 11, continued
• 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 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 extend beyond that period
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Chapter 13, Expenses, Gains, and Losses
• Grants payable
– Recognize as expense in the period grant is made
– Unconditional promise to give cash; recognize expense and
accrue payable when promise (grant) is made
– Disclose conditional promises to give if material and reasonably
possible the conditions will be met
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Chapter 14, Reports of Independent Auditors
• New formatting of auditors’ Caused by new “clarified”
auditing standards
• Applies to all audits
– Yes – FS, A-133, EBP, program audit, final cost certification, etc.
– No – Review, compilation, agreed-upon procedures, etc.
• Effective Date
– Audits of periods ending on or after 12/15/2012
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Details on What’s New
• Supplementary conference material:
– Listing of Sections with New or Enhanced Guidance
– AICPA flyer on where to purchase copy of the Guide
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Questions?
Andrew Prather CPA
Shareholder
Clark Nuber P.S.
aprather@clarknuber.com
425.635.4571
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