dzhphillips.co m 1/22/20 2016 Nonprofit Accounting Updates 1

dzhphillips.co m 1/22/20 2016 Nonprofit Accounting Updates 1

dzhphillips.co m 1/22/20 2016 Nonprofit Accounting Updates 1 dzhphillips.co m 1/22/20 About DZH Phillips Specialize in assurance, tax, forensics, and outsourced accounting for nonprofit organizations 28th Largest Women-Owned Business in the San Francisco Bay Area Top 15 largest accounting firms in the San Francisco Bay Area Top 200 accounting firm in the nation

2 dzhphillips.co m 1/22/20 Hydeh Ghaffari, Partner Hydeh Ghaffari brings more than 30 years of experience as a financial manager and 25 years as a Certified Public Accountant to DZH Phillips. She offers services in financial management, including audits, reviews, and compilation of financial statements. With 22 years of experience with client accounting for nonprofit organizations, Hydeh specializes in grant management and understands the specific needs that come with an outsourced CFO or Controller. Hydeh also excels in accountancy education, frequently speaking at nonprofit conferences and facilitating auditing workshops locally and nationally for nonprofit organizations and nonprofit funding organizations, including governmental agencies and their board members and staff. She also offers consultations regarding assessment of accounting functions, including staffing, software, and internal controls; agency and funding source budgeting; cash flow projection; single audits; and indirect cost proposals. Hydeh holds an MBA from Golden Gate University and a bachelors degree in accounting from University of Tehran, Iran. She has taught at the University of San Francisco as an adjunct faculty member. Hydeh has been a regular speaker at AICPA National Nonprofit Conference for the past several years, and is a member of CalCPA and the AICPA. She is the former co-chair of the California Nonprofit Conference and is on the planning committee of the AICPA National Nonprofit Conference, and past President of the board of directors of Tenderloin Neighborhood Development Corporation.

Hydehs mission is to provide quality service, establish a true partnership with clients, and assist them in building a stronger infrastructure so they can make informed decisions and accomplish their mission and objectives. Her ideal client is a mid-sized nonprofit looking to grow with their accountant. Outside of the office, Hydeh likes to stay active, enjoying running, biking, swimming, skiing, traveling, playing tennis and golf, and shopping with her girls. 3 dzhphillips.co m 1/22/20 Kevin OConnell, Audit Manager Kevin specializes in audit and compliance services for commercial enterprises and nonprofit organizations, with additional expertise in forensic accounting. He has sharp organizational skills, a wide range of technical research experience and in-depth knowledge of GAAP accounting. Kevin attained his Bachelor of Science degree in business administration with a concentration in accounting at California Polytechnic State University, San Luis Obispo. He maintains affiliations with the American Institute of Certified Public Accountants (AICPA), the California Society of Public Accountants (CalCPA) and the Association of Certified Fraud Examiners (ACFE). Kevin believes that when an accounting team comes in to audit, they are not just putting the numbers together for clients, but are helping them with internal control systems and revenue recognition, as well as strengthening each member of the accounting team. He strives to manage a personable and friendly team and is dedicated to respecting and working collaboratively to help his clients succeed, since they know their businesses inside-out. Kevin works with a broad range of industries, and has a passion working specifically with consumer goods, technology, construction, and nonprofits involved with youth arts or athletics, independent schools and social

service organizations. While growing up, Kevin was highly involved in athletics and the arts. He recognizes the importance of these activities within todays education system and now serves as a board member of the San Francisco Arts Education Project. When not at work, Kevin enjoys volleyball, running, music and being an active member of the DZH Phillips soccer and basketball teams. 4 dzhphillips.co m 1/22/20 2016 Nonprofit Accounting Update 5 dzhphillips.co m 1/22/20 Topics Covered in This Nonprofit Accounting Update Revenue customers

from contracts with Accounting for leases Changes to considerations going concern Statements on standards for accounting and review services (SSARS 21) Single audit update. Proposed changes to accounting and reporting for nonprofit organizations 6 dzhphillips.co m

1/22/20 Revenue from Contracts with Customers What? FASB ASC 606 Revenue from Contracts with Customers Why? FASB wants to eliminate the need for industry specific guidance and take a principles-based approach for recognizing revenue. When? Annual reporting periods beginning after December 31, 2018. Early adoption is permitted. 7 dzhphillips.co m 1/22/20 Revenue from Contracts with Customers The following revenue streams are specifically exempt from ASC 606:

Debt and equity securities Derivatives Financial instruments Guarantees Insurance contracts Leases Nonmonetary exchanges Transfer and servicing rights 8 dzhphillips.co m 1/22/20 Revenue from Contracts with Customers What about contributions? Although not specifically scoped out of ASC 606, we

believe that the definition of contributions as being voluntary and nonreciprocal exempts contribution revenue from the new guidance. 9 dzhphillips.co m 1/22/20 Revenue from Contracts with Customers The following revenue streams are likely to be subject to ASC 606: Government contracts Licensing Memberships Products and services

Royalty agreements Sponsorships Subscriptions Tuition 10 dzhphillips.co m 1/22/20 Revenue from Contracts with Customers An entity recognizes revenue in accordance with the core principle by applying the following steps: Step 1: Identify the contract(s) with a customer: A contract is an agreement between two or more parties that creates enforceable rights and obligations Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation

11 dzhphillips.co m 1/22/20 Revenue from Contracts with Customers Example Quarterly Newsletters NPO has dues of $500 per year. Member benefits include the right to use facilities and quarterly newsletters with a fair value of $25 per issue. Step 1: Identify the contract A contract exists between the NPO and member related to dues for the right to use facilities and the quarterly newsletters Step 2: Identify the performance obligations Obligation 1: Use of facilities Obligation 2: Subscription to quarterly newsletter Step 3: Determine the transaction price The total transaction price is $500 per year for membership which includes the right to use facilities and quarterly newsletters 12 dzhphillips.co m 1/22/20

Revenue from Contracts with Customers Example Quarterly Newsletters NPO has dues of $500 per year. Member benefits include the right to use facilities and quarterly newsletters with a fair value of $25 per issue. Step 4: Allocate the transaction price to the performance obligations in the contract Since the NPO sells its quarterly newsletters for $25 per issue for nonmembers, that would create a standalone selling price for the newsletter subscription. $100 would be allocated to the newsletters $400 would be allocated to the membership Step 5: Recognize revenue when each performance obligation is satisfied Membership dues (paid annually) would be recognized over a 12-month period Newsletter subscription revenue would be recognized quarterly, as each issue is delivered to the subscribers. 13 dzhphillips.co m 1/22/20 Accounting for Leases What? Accounting Standards Update (ASU) 2016-02 Leases

(Topic 842) Why? 1) Convergence with International Accounting Standards Board 2) Put true liabilities on the balance sheet When? Annual reporting periods beginning after December 31, 2019. Early adoption is permitted. 14 dzhphillips.co m 1/22/20 Accounting for Leases Future GAAP Current GAAP Two classifications: Two Classifications: Finance lease

Operating leases No liability for future commitments Future commitments disclosed Similar to capital leases in current GAAP Operating lease Capital leases Record asset and amortize over life of lease Record liability to be reduced as lease payments are made 15 Recognize a right-to-use asset and a lease liability

measured at the PV of future lease payments Total cost of lease over the lease term recognized generally on a straight-line basis dzhphillips.co m 1/22/20 Accounting for Leases Other key provisions Short term leases excluded (12 months or less) Include lease options only if reasonably certain that option will be exercised Lease modification/subleases = separate contracts

Initial direct costs are amortized over the lease term 16 dzhphillips.co m 1/22/20 Changes to Going Concern Considerations Issued August 2014 Applies to all entities Incorporates and expands upon certain principles that are currently in U.S. auditing standards Requires management to evaluate going concern

status Effective for periods beginning after December, 15, 2016 Should be based on events known or knowable at the date that the financial statements are issued Evaluation considers events within one year after the date that the financial statements are available to be issued 17 dzhphillips.co m 1/22/20 Changes to Going Concern Considerations Management must consider whether it is probable that plans will be effectively implemented and that the plans

will mitigate the conditions that raised substantial doubt about the entities ability to continue as a going concern Disclosure requirements If plans alleviate doubt based on consideration of managements plans: Principal conditions or events that raised substantial doubt about the Organizations ability to continue as a going concern (before consideration of managements plans) Managements evaluation of the conditions in relation to the entities ability to meet its obligations Managements plans that alleviated substantial doubt about the entities ability to continue as a going concern 18 dzhphillips.co m 1/22/20

Changes to Going Concern Considerations Disclosure requirements (continued) If plans do not alleviate doubt based on consideration of managements plans, would additionally disclose a statement indicating there is substantial doubt about the Organizations ability to continue as a going concern within one year after the financial statements are issued No change to auditors reporting requirements or requirements to perform procedures on managements plans 19 dzhphillips.co m 1/22/20 Statements on Standards for Accounting and Review Services

SSARS 21: Effective for periods ending on or after 12/15/15 New report language for compilations and reviews New Preparation service Eliminates managements use only financial statements prepared by CPAs Compilations: Retains requirement to indicate in report if independence is impaired 20 dzhphillips.co m 1/22/20 Statements on Standards for Accounting and Review Services Preparation Services When Required When financial statements are provided by a CPA firm to clients (excluding financial statements prepared only for tax preparation purposes) Requirements

Engagement letter signed by the accounting firm and management (annually) No accountants report Basis of accounting disclosed in financial statement headings Legend indicating no assurance is provided Departures from GAAP or other reporting framework need to be disclosed Independence does not need to be considered; applies to financial statements with disclosures and no disclosure financial statements 21 dzhphillips.co m 1/22/20 Amendments to Single Audit Act Current New Single Audit Threshold $500,000 $750,000 Type A Program

Determination $300,000 $750,000 $10,000 $25,000 Low risk auditee 25% 20% Not low risk auditee 50% 40% Threshold for reporting a questioned cost Minimum Coverage Effective for fiscal years beginning on or after December 26, 2014

22 dzhphillips.co m 1/22/20 Amendments to Single Audit Act OMB Uniform Grant Guidance Combines the following OMB Circulars into one: A-133 (audit) A-102 and A-110 (administrative) A-87, A-122 and A-21 (cost principles) A-89 (Federal domestic assistance program information) A-50 (audit follow-up for single audits) Effective for some new grants, including new funding from existing grants 23 dzhphillips.co m 1/22/20

Proposed Changes to Accounting and Reporting for Nonprofit Organizations Why should we care about proposed changes? 24 dzhphillips.co m 1/22/20 Proposed Changes to Accounting and Reporting for Nonprofit Organizations Proposed Changes Still in exposure draft: Comment period ended in August 2015 Effective date TBD 25 dzhphillips.co m 1/22/20

Proposed Changes to Accounting and Reporting for Nonprofit Organizations Net Asset Classifications Current GAAP Proposed Changes Three Net Asset Classifications: Two Net Asset Classifications: Unrestricted Without Donor Restrictions With Donor Restrictions Temporary Restricted *Plus disclosure of nature and

amounts of different types of donorimposed restrictions, governing board designations and information about how these restrictions affect use of resources and liquidity. Permanently Restricted 26 dzhphillips.co m 1/22/20 Proposed Changes to Accounting and Reporting for Nonprofit Organizations Underwater Endowments Current GAAP Proposed Changes Underwater endowment amounts reported in unrestricted net assets Underwater endowment amounts reported in net

assets with donor restrictions, with enhanced disclosures 27 dzhphillips.co m 1/22/20 Proposed Changes to Accounting and Reporting for Nonprofit Organizations Changes in Net Assets Current GAAP Proposed Changes Present the amounts of the net change in three classes of net assets and of total net assets Present the amounts of the net changes in two classes of net assets and of total net assets Present two measures of

operating activities; both of which are within changes in net assets without donor restrictions 28 dzhphillips.co m 1/22/20 Proposed Changes to Accounting and Reporting for Nonprofit Organizations Changes in Net Assets Two Measures of Operating within changes in net assets without donor restrictions. Reflecting: First Subtotal Before internal transfers (1) whether resources are directed at carrying out an NFPs purpose for existence and

(2) whether resources are available for current period activities Second Subtotal Includes effects of internal transfers resulting from governing board designations, appropriations and similar actions that place (or remove) self-imposed limits on the use of resources that make them unavailable (or available) for current-period operating activities. 29 dzhphillips.co m 1/22/20 Proposed Changes to Accounting and Reporting for Nonprofit Organizations Functional Expenses Current GAAP Proposed Changes Statement of functional expenses required for

voluntary health and welfare organizations Present information about expense by function, nature or both with enhanced disclosures in notes if both are not on the face of the statement Not required for other organizations Present investment return net of related investment expenses Currently acceptable, but disclosure needed 30 dzhphillips.co m 1/22/20 Proposed Changes to Accounting and

Reporting for Nonprofit Organizations Statement of Cash Flows Current GAAP Proposed Changes Present the net amount for operating cash flows using the indirect method (with additional presentation of the direct method permitted) Present the net amount for operating cash flows using the direct method (with additional presentation of the indirect method permitted, but not required) 31 dzhphillips.co m 1/22/20 Proposed Changes to Accounting and

Reporting for Nonprofit Organizations Other Changes Cash Flow Activity Current GAAP Purchase of long-lived assets Investing Proposed Changes Operating Contributions restricted to acquire long-lived assets Sales of long-lived assets Payment of interest on borrowings Receipts of interest and dividends on loans and investments other than those made for programmatic purposes Investing Operating Investing Operating

Operating Operating Financing Investing 32 dzhphillips.co m 1/22/20 Proposed Changes to Accounting and Reporting for Nonprofit Organizations Enhanced Disclosures Governing board designations, appropriations and similar transfers that result in the addition or removal of selfimposed limits on the use of resources without donorimposed restrictions. The composition of net assets with donor restrictions at the end of the period and how such restrictions affect the use of resources.

Management of liquidity, including quantitative information as of the reporting date about financial assets available to meet near-term demands for cash. 33 dzhphillips.co m 1/22/20 Proposed Changes to Accounting and Reporting for Nonprofit Organizations Enhanced Disclosures Expenses, including amounts for operating expense by both their nature and function. The method used to allocate costs among program and support functions. Underwater endowment funds (i.e., donor-restricted

endowment funds for which the fair value of the fund is less than either the original gift amount or the amount required to be maintained by the donor law). 34 dzhphillips.co m 1/22/20 Questions? Hydeh Ghaffari, CPA, Partner Phone: (510) 834-6542 ext 303 Email: [email protected] Kevin OConnell, CPA, Audit Manager Phone: (415) 655-6207 Email: [email protected] 35

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