This document provides a summary of recent accounting and tax updates relevant to not-for-profit organizations, including updates from the FASB, GASB, and OMB. It covers new standards and guidance on consolidation, debt issuance costs, retirement benefits, cloud computing arrangements, fair value measurements, and the 2015 OMB Compliance Supplement. The briefing is intended to keep audit committee members informed of changes impacting not-for-profits.
2. Today's not-for-profit organizations are shifting from being purely mission focused to
operating more “like a business.” While philosophies, purposes and structures differ
significantly between not-for-profit and for-profit entities, certain core principles and
fundamentals apply to both. A not-for-profit organization that seeks strategic revenue
enhancement or cost reduction opportunities, works to attract highly competent board
members, deploys leading-edge technology, considers strategic partnerships, and
institutes sound financial planning procedures will be better positioned to deliver on its
mission, as well as to answer to stakeholders.
To achieve sustained success, non-profits must not only deliver on mission, but increase
constituent value, improve productivity, contain costs and streamline processing. In this
challenging environment, it is vitally important for audit committee members to stay
ahead of relevant changes to legal and regulatory requirements.
Foreword
3. Mark Oster
National Managing Partner
Not-for-Profit Practice
Contents
Accounting Standards
Updates.................................6
Tax Updates........................28
This briefing provides an overview of recent accounting pronouncements and tax
regulations with the potential to affect the not-for-profit sectors we serve – foundations,
higher education institutions, Jewish and Israeli organizations, museums and cultural
institutions, religious organizations, social services organizations and trade and
professional associations. We hope this guide serves as a solid reference for the audit
committee members and executive leaders within your organization.
Dennis Morrone
National Partner-in-Charge
Audit Services
Not-for-Profit and Higher
Education Practices
Dan Romano
National Partner-in-Charge
Tax Services
Not-for-Profit and Higher
Education Practices
6. 6 Not-for-Profit Audit Committee Briefing 2016
Recently Released Pronouncements
ASU 2015-01 - Update No. 2015-01—Income Statement—Extraordinary and
Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation
by Eliminating the Concept of Extraordinary Items
Main Provisions
Under its simplification initiative, the Board released this Update, Simplifying Income Statement Presentation
by Eliminating the Concept of Extraordinary Items, which eliminates the concept of extraordinary items
altogether from U.S. GAAP.
Currently, an event or transaction that is unusual and occurs infrequently must be separately
classified and presented as an extraordinary item net of tax after income from continuing operations.
Entities are also required to disclose income taxes and earnings-per-share data for each extraordinary
item if the amounts are not already presented on the face of the income statement. By removing the
concept of extraordinary items from U.S. GAAP, this ASU removes the uncertainty and disparity
in practice involved in identifying, presenting, and disclosing extraordinary items, as well as more
closely aligns U.S. GAAP with IFRS. As with all of the FASB’s simplification initiatives, the new
guidance is also expected to reduce the costs and complexity of financial statement preparation.
Effective Date
The amendments resulting from this Update are effective for all entities for fiscal years, and for
interim periods within those fiscal years, beginning after December 15, 2015, with earlier adoption
permitted provided that the guidance is applied from the beginning of the fiscal year of adoption.
Entities may elect to apply the guidance prospectively (including subsequent adjustments to
extraordinary items recognized before the date of adoption) or retrospectively. An entity that
applies the guidance prospectively must disclose the nature and amount, if applicable, of any item
included in continuing operations that adjusts a previously reported extraordinary item. An entity
that applies the guidance retrospectively must provide the change in accounting principle disclosures
required under ASC 250, Accounting Changes and Error Corrections.
Who is affected
by this Update?
The amendments in
this Update apply to
all entities.
7. Not-for-Profit Audit Committee Briefing 2016 7
ASU No. 2015-02—Consolidation (Topic 810): Amendments to the
Consolidation Analysis
Main Provisions
The Board released this Update, Amendments to the Consolidation Analysis, which changes the guidance for
evaluating whether to consolidate certain legal entities.
The amendments affect all reporting entities that are required to evaluate whether they should
consolidate certain legal entities and all legal entities that will be subject to reevaluation under the
revised consolidation model. The new guidance in this Update:
• Modifies the evaluation of whether limited partnerships and similar legal entities are variable
interest entities (VIEs) or voting interest entities
• Eliminates the presumption that a general partner should consolidate a limited partnership
• Modifies the consolidation analysis for all reporting entities associated with VIEs, particularly
those that have fee arrangements and related party relationships
• Provides a scope exception from the consolidation guidance for reporting entities with interests
in legal entities that are similar to investment companies as defined in the Investment Company
Act of 1940.
Limited Partnerships and Similar Legal Entities
This Update eliminates the consolidation model created specifically for limited partnerships.
Accordingly, the new guidance presents a single model for evaluating consolidation by all entities,
which is expected to simplify the process. The amended guidance requires limited partnerships
or similar legal entities to provide partners with either substantive kick-out rights or substantive
participating rights over the general partner in order to qualify as voting interest entities. The
Update also eliminates the presumption that the general partner should consolidate the partnership.
Fee Arrangements and Related Party Transactions
The new guidance clarifies when fees paid to a decision maker should be considered in determining
whether to consolidate a variable interest entity (VIE). The amendments in this Update remove three
of the six criteria under current U.S. GAAP for making this assessment. If the fees are determined to
be a variable interest, the reporting entity consolidates the VIE only if it has a controlling
financial interest.
Who is affected
by this Update?
The amendments in
this Update apply to
all entities.
8. 8 Not-for-Profit Audit Committee Briefing 2016
Related Party Transactions
This Update reduces the circumstances in which entities must apply the existing related party assessment
guidance for consolidating VIEs, as outlined in the following three changes:
• Single decision makers will now assess related party relationships indirectly on a proportionate basis rather
than in their entirety. If neither of the conditions in bullets 2 and 3 exists, the consolidation analysis ends
with this step.
• For entities under common control, related party relationships should be considered in their entirety only
if the common control group has the characteristics of a primary beneficiary (the common control group
collectively has a controlling financial interest).
• If the entities are not under common control but substantially all of the VIE’s activities are conducted on
behalf of a single variable interest holder (excluding the decision maker) in a related party group that has the
characteristics of a primary beneficiary, then the single variable interest holder should consolidate the VIE.
Current U.S. GAAP guidance remains in effect for situations where power is shared between two or more
entities that hold variable interests in a VIE.
Effective Date
The guidance is effective for public business entities for annual and interim periods beginning after December
15, 2015. For all other entities, the effective date is for annual periods beginning after December 15, 2016 and
for interim periods within annual periods beginning after December 15, 2017. Early adoption is permitted,
including adoption in an interim period.
ASU No. 2015-03—Interest—Imputation of Interest (Subtopic 835-30): Simplifying
the Presentation of Debt Issuance Costs
Main Provisions
The FASB issued this Update, Simplifying the Presentation of Debt Issuance Costs, requiring entities to
present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount
of the debt liability. This new guidance is similar to existing presentation requirements for debt discounts
and aligns with the presentation of debt issuance costs under IFRS. The new guidance does not affect entities’
recognition and measurement of debt issuance costs. Previously, entities were required to present debt issuance
costs as deferred charges in the asset section of the statement of financial position.
Effective Date
The Update is effective for all entities in fiscal years beginning after December 15, 2015. Public business entities
must apply the guidance in interim periods within the fiscal year of adoption, while all other entities must apply
the guidance in interim periods within fiscal years beginning after December 15, 2016. All entities must apply
the guidance retrospectively and provide the required disclosures for a change in accounting principle in the
period of adoption. Early adoption is permitted.
Who is affected
by this Update?
The amendments in
this Update apply to
all entities.
9. Not-for-Profit Audit Committee Briefing 2016 9
ASU 2015-04—Compensation—Retirement Benefits (Topic 715): Practical
Expedient for the Measurement Date of an Employer’s Defined Benefit
Obligation and Plan Assets
Main Provisions
As part of its initiative to reduce complexity in accounting standards, the FASB issued this Update,
Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets. The new
guidance provides a practical expedient that allows an employer with a fiscal year-end that does
not fall on a month-end to elect to measure its defined benefit plan assets and obligations as of the
month-end that is closest to its fiscal year-end. The new guidance also offers a similar practical
expedient to all employers when a significant event in an interim period calls for remeasurement.
That practical expedient would permit remeasurement of defined benefit plan assets and obligations
using the month-end that is closest to the date of the significant event.
An entity that elects the practical expedient is required to adjust the measurement of plan assets and
obligations recognized in the balance sheet to reflect contributions made or significant events caused
by the entity (for example, plan amendments, settlements, or curtailments) that occur in the period
between the measurement date and the fiscal year-end. An entity should not adjust its measurement
of plan assets and obligations to reflect changes in market prices or interest rates occurring between
the measurement date and the reporting date.
Under the new guidance, an entity is not required to adjust the disclosure of the fair value of plan
assets by class of asset and level within the fair value hierarchy for contributions made between
the measurement date and the reporting date. Instead, the entity must separately disclose the
contribution in the notes to the financial statements, enabling financial statement users to reconcile
the total fair value by class of plan assets at the measurement date to the ending balance of the
fair value of plan assets. In addition, the entity is required to disclose this policy election and the
alternative measurement date. Entities that elect this practical expedient must apply it consistently to
all of their plans from year to year.
Effective Date
For public business entities, the guidance in this Update is effective for financial statements issued
for fiscal years beginning after December 15, 2015 and for interim periods within those fiscal years.
For all other entities, it is effective for financial statements issued for fiscal years beginning after
December 15, 2016 and for interim periods within fiscal years beginning after December 15, 2017.
Early adoption is permitted. All entities must apply the guidance prospectively.
Who is affected
by this Update?
The amendments in
this Update apply to
all entities.
10. 10 Not-for-Profit Audit Committee Briefing 2016
ASU 2015-05—Intangibles—Goodwill and Other—Internal-Use Software
(Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud
Computing Arrangement
Main Provisions
Continuing with its simplification initiative, the Board recently issued this Update, Customer’s
Accounting for Fees Paid in a Cloud Computing Arrangement, to simplify and improve the financial reporting
by entities (customers) that pay fees under cloud computing arrangements. Existing U.S. GAAP
contains guidance on accounting for such arrangements by cloud service providers, but the lack
of guidance for customers has caused stakeholders to raise concerns about the existing diversity in
practice, as well as the cost and complexity of evaluating how to account for the fees.
The guidance in this Update assists customers in determining whether a cloud computing
arrangement contains a software license by adding the guidance for vendors in ASC 985-605-55-
121 through 55-123, Software: Revenue Recognition, to ASC 350-40, Intangibles – Goodwill and Other:
Internal-Use Software. A customer that determines a cloud computing arrangement contains a software
license must account for the license consistent with the acquisition of other software licenses. If
an arrangement does not contain a software license, the customer is required to account for it as a
service contract.
As a result of this ASU, all software licenses within the scope of ASC 350-40 will be accounted for
consistently with other licenses of intangible assets.
Effective Date
For public business entities, the guidance in this Update is effective for fiscal years, including interim
periods within those fiscal years, beginning after December 15, 2015. For all other entities, it is
effective for fiscal years beginning after December 15, 2015 and for interim periods within fiscal
years beginning after December 15, 2016. Early adoption is permitted.
Entities can elect to apply the guidance either retrospectively or prospectively to all cloud computing
arrangements entered into or materially modified after the effective date. For either method, entities
must disclose upon transition the nature of and reason for the change in accounting principle, the
transition method adopted, and a qualitative description of the financial statement line items affected
by the change. Entities electing to apply the guidance retrospectively must also disclose quantitative
information about the effects of the accounting change.
Who is affected
by this Update?
The amendments in
this Update apply to
all entities.
11. Not-for-Profit Audit Committee Briefing 2016 11
ASU 2015-07—Fair Value Measurement (Topic 820): Disclosures for
Investments in Certain Entities That Calculate Net Asset Value per Share
(or its Equivalent) (a consensus of the FASB Emerging Issues Task Force)
Main Provisions
This Update, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)
– a consensus of the FASB Emerging Issues Task Force, exempts investments measured using the net asset value
(NAV) practical expedient in ASC 820, Fair Value Measurement, from categorization within the fair
value hierarchy and related disclosures.
The existing guidance in ASC 820 permits entities to estimate the fair value of certain investments
using NAV as a practical expedient. If these investments are redeemable at the measurement date,
entities must categorize them in Level 2 of the fair value hierarchy, but if they are never redeemable,
entities must categorize them in Level 3.
For investments that are not redeemable at the measurement date but will become redeemable after
the measurement date, entities must categorize them in Level 3 if the future redemption dates are
not known or will not occur in the “near term.” However, the guidance in ASC 820 does not define
“near term,” resulting in disparity in practice. Depending on its policy, an entity might reclassify
certain investments between Levels 2 and 3 each period based on the relationship between the
measurement date and the next redemption date.
This Update resolves this issue by exempting investments measured using the NAV practical
expedient from categorization within the fair value hierarchy and related disclosures. Instead, entities
are required to separately disclose the information required under ASC 820-10-50-6A for assets
measured using the NAV practical expedient. Entities are also required to show the carrying amount
of investments measured using the NAV practical expedient as a reconciling item between the total
amount of investments categorized within the fair value hierarchy and total investments measured at
fair value on the face of the financial statements.
Effective Date
The guidance requires retrospective application and is effective for public business entities for fiscal
years, and interim periods within those years, beginning after December 15, 2015. For all other
entities, the guidance is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2016. Early adoption is permitted.
Who is affected
by this Update?
The amendments in
this Update apply to
all entities.
12. 12 Not-for-Profit Audit Committee Briefing 2016
GASB Implementation Guide 2015-1
The Governmental Accounting Standards Board (GASB) recently issued Implementation Guide
2015-1, which incorporates changes resulting from feedback received during the year-long public
exposure of previously issued implementation guidance. The objective of the guide is to provide
guidance that clarifies, explains, or elaborates on existing GASB Statements and Interpretations.
The new guide supersedes all previously issued implementation guidance and is effective for
reporting periods beginning after June 15, 2015.
Due to the new two-tiered GAAP hierarchy introduced by Statement 76, The Hierarchy of Generally
Accepted Accounting Principles for Statement and Local Governments, the GASB will expose for public comment
all new implementation guidance, as is done for other GASB pronouncements, because of the
implementation guidance’s elevated status to the second of two categories of authoritative U.S.
GAAP, right below the GASB Statements.
OMB A-133 2015 Compliance Supplement (Uniform Guidance)
The U.S. Office of Management and Budget (OMB) released the 2015 Compliance Supplement
for single-audit engagements. In addition to the normal changes, such as the addition, deletion,
and modification of federal programs, the supplement includes several major Uniform Guidance
changes. The changes contained in the 2015 supplement include:
The title of the supplement has been changed to remove the reference to OMB Circular A-133.
Part 3, “Compliance Requirements,” has been revised to address the new structure of Part 3 and
how it should be used for testing awards made before December 26, 2014 and new awards or
incremental funding made on or after that date. It has been divided into two parts:
• Part 3.1 includes compliance requirements that apply to federal awards with terms and
conditions based on the OMB Circular A-102 Common rule, the OMB Circular A-110 Pre-
Uniform Guidance requirements, and the OMB Cost Principles Circulars. Part 3.1 applies to
federal awards made prior to December 26, 2014.
• Part 3.2 includes compliance requirements that apply in lieu of those in Part 3.1 to federal awards
with terms and conditions based on the Uniform Guidance (that is, new awards made on or
after December 26, 2014 or funding increments made on or after that date). Part 3.2 also includes
enhanced coverage of Federal Acquisition Regulation-based cost-reimbursement contracts.
Who is affected
by this Update?
The amendments in
this Update apply to
all entities.
13. Not-for-Profit Audit Committee Briefing 2016 13
Two compliance requirements are removed:
• D, “Davis-Bacon Act.” However, many of the compliance requirements associated with this act
were moved to the “Special Tests and Provisions” section of the individual programs.
• K, “Real Property Acquisition and Relocation Assistance”
Compliance requirement L, “R religious building eporting,” no longer includes sub-award reporting
audit requirements under the Federal Funding Accountability and Transparency Act (FFATA).
Part 4, “Agency Program Requirements,” and Part 5, “Clusters of Programs,” include dual
references to both pre-existing requirements and to all or part of the Uniform Guidance and, as
applicable, the federal awarding agency’s implementing regulations.
The content of Part 6, “Internal Control,” was replaced with a note stating that the section needs to
be updated for recent internal control developments and that nonfederal entities and their auditors
should look to COSO and the Green Book for guidance on internal controls.
Appendix VII includes a new section relating to awards issued by the National Institute of Health
(NIH). Grants and cooperative agreements issued by the NIH with budget periods beginning on or
after December 26, 2014, and awards that received supplemental funding on or after December 26,
2014, now meet the definition of research and development. Appendix VII also includes guidance
relating to federal agency exceptions to the Uniform Guidance.
• Eight clusters were deleted and one new program was added to an existing cluster.
• Eleven programs were deleted.
• Five new programs were added.
• Updates were added for program changes and technical corrections.
The OMB previously made a draft of the updated Compliance Supplement available for planning
purposes. Practitioners should now use the issued final 2015 Compliance Supplement.
The supplement is effective for audits of fiscal years beginning after June 30, 2014 and supersedes the
2014 supplement.
14. 14 Not-for-Profit Audit Committee Briefing 2016
Pending Pronouncements
Financial Statements of Not-for Profit Entities—FASB Exposure Draft Issued
April 22, 2015; Comment Period Ended August 20, 2015
Will the FASB’s changes to the nonprofit financial reporting model better help you tell your financial
story? After nearly 20 years of living with the current not-for-profit reporting model, users of financial
statements of nonprofit organizations in many cases still do not have a true understanding of the
organization’s financial position and performance, and the achievement of its mission.
The FASB reacted to these concerns by undertaking a project that reimagines the design of the financial
statements and related disclosures.
In April 2015, the FASB issued an exposure draft of an Accounting Standards Update (Standard) that
would change the presentation of financial statements for not-for-profit entities, including health care
entities.
While the FASB has referred to its contemplated design as a refresh, we believe this proposed standard is
far more substantive in design and construction than a mere refresh. It is a prodigious rewrite. Impetus
for this massive change is due in part to input from the Governmental Accounting Standards Board,
the AICPA, the National Association of College and University Business Officers, the Not-for-Profit
Advisory Committee, and the broader nonprofit community. More input and possibly more changes are
to come, as the comment period for the draft extended through late summer.
Main Provisions
The amendments in this proposed Update would change several of the requirements for financial
statements and notes in Topic 958, Not-for-Profit Entities, as well as certain requirements in Topic
954, Health Care Entities. Certain amendments would add new requirements or replace existing
requirements, and others would remove existing requirements or provide greater flexibility in complying
with the requirements.
The main provisions would require an NFP to do the following:
1. Present on the face of the statement of financial position amounts for two classes of net assets at the
end of the period, rather than for the currently required three classes. That is, an NFP would report
amounts for net assets with donor restrictions and net assets without donor restrictions, as well as the
currently required amount for total net assets.
15. Not-for-Profit Audit Committee Briefing 2016 15
2. Present on the face of the statement of activities the amount of the change in each of the two classes
of net assets (noted in item 1) rather than that of the currently required three classes. An NFP
would continue to report the currently required amount of the change in total net assets for the
period.
3. Present on the face of the statement of activities two additional amounts (subtotals) of the operating
activities that are associated with changes in net assets without donor restrictions. Those subtotals
are described in items 3(a) and 3(b) and would reflect operating activities for the period, which
would be distinguished from other activities on the basis of whether the resource inflows and
outflows are from or directed at carrying out an NFP’s purpose for existence and available for
current-period operating activities. The subtotals are the following:
a. The first subtotal includes operating revenues, support, expenses, gains, and losses that are
without donor-imposed restrictions and is before internal transfers.
b. The second subtotal includes the 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.
4. Present on the face of the statement of cash flows the net amount for operating cash flows using the
direct method of reporting.
5. Classify certain cash flows differently than how they are classified under current guidance, as
follows:
a. Classify as operating cash flows (rather than as investing cash flows)—those cash flows resulting
from (1) purchases of long-lived assets, (2) contributions restricted to acquire long-lived assets, and
(3) sales of long-lived assets.
b. Classify as financing cash flows (rather than as operating cash flows)—those cash flows resulting
from payments of interest on borrowings, including cash management activities.
c. Classify as investing cash flows (rather than as operating cash flows)—those cash flows resulting
from receipts of interest and dividends on loans and investments other than those made for
programmatic purposes.
16. 16 Not-for-Profit Audit Committee Briefing 2016
6. Provide enhanced disclosures about the following:
a. Governing board designations, appropriations, and similar transfers that result in the addition
or removal of self-imposed limits on the use of resources without donor-imposed restrictions.
Those disclosures would include a description of the purpose, amounts, and types of transfers
(for example, those done because of standing board policies, as one-time decisions, or for other
reasons) and qualitative and quantitative information about any period-end balances of board
designations of net assets without donor restrictions.
b. Composition of net assets with donor restrictions at the end of the period and how the
restrictions affect the use of resources.
c. Management of liquidity and quantitative information as of the reporting date about financial
assets available to meet near-term demands for cash, including demands resulting from near-term
financial liabilities.
d. Expenses, including amounts for operating expenses by both their nature and function. That
information could be provided on the face of the statement of activities, as a separate statement,
or in notes to financial statements.
e. Method(s) used to allocate costs among program and support functions.
f. Underwater endowment funds, which are 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 or law. In addition to disclosing the currently required aggregate
amount by which funds are underwater, an NFP would be required to disclose the aggregate of
the original gift amounts (or level required by donor or law) for such funds and any governing
board policies or decisions to spend or not spend from such funds. In addition, an NFP would
classify the amount by which the endowment is underwater in net assets with donor restrictions
rather than in the current unrestricted net asset category.
7. Use the placed-in-service approach for reporting expirations of restrictions on gifts of cash or
other assets to be used to acquire or construct a long-lived asset, thus eliminating the option to
release the donor-imposed restriction over the estimated useful life of the acquired asset.
17. Not-for-Profit Audit Committee Briefing 2016 17
8. Report investment income net of external and direct internal investment expenses. The main
provisions would eliminate current requirements for an NFP to
(1) present separately amounts for temporarily restricted net assets and permanently restricted
net assets,
(2) present separately the transactions and other changes in each of those classes of net assets, and
(3) present cash flows provided by operating activities using the indirect method of reporting.
Also, unlike current requirements for NFPs that elect to provide an intermediate measure of
operations, the required operating measures could, but need not be, presented on the same page
as the change in net assets without donor restrictions. In addition, the performance indicator
currently required of business-oriented health care NFPs would no longer be required. Similarly,
voluntary health and welfare organizations would no longer be required to provide a statement
of functional expenses; rather, like other NFPs, they could provide such information about
expenses on the face of the statement of activities, as a separate statement, or in notes to financial
statements. Finally, an NFP would no longer be required to separately disclose the amount of
investment expenses (other than the amount of internal direct costs of salaries and benefits).
Next Steps
The FASB has conducted various outreach activities with stakeholders during the comment period
of the Exposure Draft of the proposed Accounting Standards Update. Workshops were held in
Chicago, Dallas, Atlanta, Charlotte and Denver.
The FASB also hosted public roundtable meetings on the Exposure Draft on September 21, 2015
and another on October 6, 2015. The roundtable meetings were an important part of the Board’s
due process and provided an opportunity for those that submitted a comment letter to discuss the
proposals with Board members in further detail.
18. 18 Not-for-Profit Audit Committee Briefing 2016
Leases—Joint Project of the FASB and IASB, Updated as of October 8, 2015
The FASB revisited several issues that arose as its staff was drafting the final lease standard. The final
standard will require lessees to recognize most leases on their balance sheets as lease liabilities with
corresponding right-of-use assets.
The final standard is expected to be issued late 2015 or early 2016. Some recent key
decisions include:
• Lease modifications that extend the term of the lease—a modification that solely extends the lease
term would not result in a separate, new lease. A lessee would reassess the classification of a lease
in connection with a modification that does not result in a separate, new lease. Generally, lease
modifications would include changes to terms and conditions that were not a part of the original lease.
• Reassessment of lease classification—when a lessee exercises an existing renewal option or is reasonably
certain to exercise a purchase option, the lessee would be required to reassess the lease classification.
• Recognition of initial direct costs in a sales-type lease—the FASB decided that initial directs costs for
sales-type leases with no selling profit or loss would be deferred and recognized over the lease term.
Initial direct costs for sales-type leases with selling profit or loss would be expenses at the start of
the lease.
• Presentation of net investment in the lease by the lessor—A lessor would present its net investment
in a sales-type lease or direct financing lease separately from other assets on the statement of financial
position and the components of the net investment in the lease would be disclosed in the notes to the
financial statements.
Although there appears to be alignment on reporting virtually all leases on the balance sheet, the boards
remain split on their views regarding the lessee income recognition model. The IASB is supportive of an
approach that would present all leases in a manner similar to today’s financing leases (which the latest
exposure draft refers to as Type A leases). Under that approach, the lessee's expense would be front loaded.
The FASB prefers a dual model that, in addition to Type A leases, would permit a straight-line expense
recognition pattern similar to today's operating leases (which the latest exposure draft refers to as “Type B”).
The boards are more closely aligned on the lessor model, which is expected to result in financial reporting
similar to current U.S. GAAP and IFRS. Although the boards agree on the basic model, they differ on how
they would identify when the lessor has sold an asset via the lease arrangement. The IASB’s focus is on the
transfer of risks and rewards, which is consistent with the principle in its current literature as well as U.S.
GAAP. The FASB, on the other hand, has proposed an approach based on the transfer of control of the
asset, which is similar to the model in the new revenue standard.
19. Not-for-Profit Audit Committee Briefing 2016 19
Government Accounting Standards Board (GASB) Statement No. 72, Fair Value
Measurement and Application (“GASB 72”)
In February of 2015, GASB issued Statement No. 72, Fair Value Measurement and Application (“GASB 72”).
This Statement addresses accounting and financial reporting issues related to fair value measurements. This
Statement provides guidance for determining a fair value measurement for financial reporting purposes and
for applying fair value to certain investments and disclosures related to all fair value measurements. The
provisions of the this Statement are effective for financial statements for periods beginning after June 15,
2015.
In June of 2015, GASB issued Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than
Pensions (“GASB 75”). The primary objective of GASB 75 is to improve accounting and financial reporting
for postemployment benefits other than pensions and replaces the requirement of GASB Statement No.
45. GASB 75 establishes standards for recognizing and measuring liabilities, deferred outflows of resources,
deferred inflows of resources, and expenses. GASB 75 also identifies the methods and assumptions that
are required to be used to project benefit payments, discount projected benefits payments to their actuarial
present value, and attribute that present value to periods of employee service. The provisions of the this
Statement are effective for financial statements for periods beginning after June 15, 2017.
In June of 2015, GASB issued Statement No. 76, The Hierarchy of Generally Accepted Accounting Principles for State
and Local Governments (“GASB 76”). The objective of GASB 76 is to identify, in the context of the current
governmental financial reporting environment, the hierarchy of generally accepted accounting principles.
The hierarchy consists of the sources of accounting principles used to prepare financial statements of
state and local governmental entities in conformity with generally accepted accounting principles and
the framework for selecting those principles. The provisions of this Statement are effective for financial
statements for periods beginning after June 15, 2015.
20. 20 Not-for-Profit Audit Committee Briefing 2016
Who is affected
by this Update?
The guidance in this Update
affects any entity that either
enters into contracts with customers to
transfer goods or services or enters into
contracts for the transfer of nonfinancial
assets unless those contracts are
within the scope of other standards (for
example, insurance contracts or lease
contracts).
The guidance in this Update supersedes
the revenue recognition requirements
in Topic 605, Revenue Recognition,
and most industry-specific guidance
throughout the Industry Topics of the
Codification. Additionally, this Update
supersedes some cost guidance
included in Subtopic 605-35, Revenue
Recognition – Construction-Type and
Production-Type Contracts.
In addition, the existing requirements
for the recognition of a gain or loss on
the transfer of nonfinancial assets that
are not in a contract with a customer
(for example, assets within the scope
of Topic 360, Property, Plant, and
Equipment; and intangible assets within
the scope of Topic 350, Intangibles
– Goodwill and Other) are amended
to be consistent with the guidance on
recognition and measurement (including
the constraint on revenue) in
this Update.
Revenue Recognition Standards
ASU 2014-09 – Revenue from Contracts with Customers (Topic
606), Section A – Summary and Amendments that Create Revenue
from Contracts with Customers (Topic 606) and Other Assets and
Deferred Costs – Contracts with Customers (Subtopic 340-40),
Issued May 2014
Main Provisions
The core principle of the guidance is that an entity should recognize revenue to depict
the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods
or services.
Recognize revenue when (or as) the entity satisfies a performance obligation.
Identify the contract(s) with a customer.
Identify the performance obligations in the contract.
Determine the transaction price.
To achieve that core principle, an entity should apply the following steps:
Allocate the transaction price to the performance obligations in the contract.
Step
Step
Step
Step
Step
1
2
3
4
5
21. Not-for-Profit Audit Committee Briefing 2016 21
4
5
Step
Identify the Contract with a Customer
A contract is an agreement between two or more parties that
creates enforceable rights and obligations. An entity should
apply the requirements to each contract that meets the
following criteria:
1. Approval and commitment of the parties
2. Identification of the rights of the parties
3. Identification of the payment terms
4. The contract has commercial substance
5. It is probable that the entity will collect the consideration to
which it will be entitled in exchange for the goods or services
that will be transferred to the customer
In some cases, an entity should combine contracts and account
for them as one contract. In addition, there is guidance on the
accounting for contract modifications.
Step
Identify the Performance Obligations in the Contract
A performance obligation is a promise in a contract with a
customer to transfer a good or service to the customer. If an
entity promises in a contract to transfer more than one good
or service to the customer, the entity should account for each
promised good or service as a performance obligation only if it
is (1) distinct or (2) a series of distinct goods or services that are
substantially the same and have the same pattern of transfer.
A good or service is distinct if both of the following criteria
are met:
1. Capable of being distinct – the customer can benefit from
the good or service either on its own or together with other
resources that are readily available to the customer.
2. Distinct within the context of the contract – the promise to
transfer the good or service is separately identifiable from
other promises in the contract.
A good or service that is not distinct should be combined with
other promised goods or services until the entity identifies a
bundle of goods or services that is distinct.
1 2
22. 22 Not-for-Profit Audit Committee Briefing 2016
Step
Determine the Transaction Price
The transaction price is the amount of consideration (for example,
payment) to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer, excluding
amounts collected on behalf of third parties. To determine the
transaction price, an entity should consider the effects of:
1. Variable consideration. If the amount of consideration in a
contract is variable, an entity should determine the amount
to include in the transaction price by estimating either the
expected value (that is, probability-weighted amount) or the
most likely amount, depending on which method the entity
expects to better predict the amount of consideration to which
the entity will be entitled.
2. Constraining estimates of variable consideration. An
entity should include in the transaction price some or all
of an estimate of variable consideration only to the extent
it is probable that a significant reversal in the amount of
cumulative revenue recognized will not occur when the
uncertainty associated with the variable consideration is
subsequently resolved.
3. The existence of a significant financing component. An
entity should adjust the promised amount of consideration
for the effects of the time value of money if the timing of the
payments agreed upon by the parties to the contract (either
explicitly or implicitly) provides the customer or the entity
with a significant benefit of financing for the transfer of goods
or services to the customer. In assessing whether a financing
component exists and is significant to a contract, an entity
should consider various factors. As a practical expedient, an
entity need not assess whether a contract has a significant
financing component if the entity expects at contract inception
that the period between payment by the customer and the
transfer of the promised goods or services to the customer will
be one year or less.
4. Noncash consideration. If a customer promises consideration
in a form other than cash, an entity should measure the
noncash consideration (or promise of noncash consideration)
at fair value. If an entity cannot reasonably estimate the fair
value of the noncash consideration, it should measure the
consideration indirectly by reference to the standalone selling
price of the goods or services promised in exchange for the
consideration. If the noncash consideration is variable, an
entity should consider the guidance on constraining estimates
of variable consideration.
5. Consideration payable to the customer. If an entity pays,
or expects to pay, consideration to a customer (or to other
parties that purchase the entity’s goods or services from the
customer) in the form of cash or items (for example, credit,
a coupon, or a voucher) that the customer can apply against
amounts owed to the entity (or to other parties that purchase
the entity’s goods or services from the customer), the entity
should account for the payment (or expectation of payment)
as a reduction of the transaction price or as a payment for a
distinct good or service (or both). If the consideration
payable to a customer is a variable amount and accounted
for as a reduction in the transaction price, an entity should
consider the guidance on constraining estimates of
variable consideration.
3
23. Not-for-Profit Audit Committee Briefing 2016 23
Step
Allocate the Transaction Price to the Performance
Obligations in the Contract
For a contract that has more than one performance obligation, an
entity should allocate the transaction price to each performance
obligation in an amount that depicts the amount of consideration
to which the entity expects to be entitled in exchange for
satisfying each performance obligation.
To allocate an appropriate amount of consideration to each
performance obligation, an entity must determine the standalone
selling price at contract inception of the distinct goods or services
underlying each performance obligation and would typically
allocate the transaction price on a relative standalone selling price
basis. If a standalone selling price is not observable, an entity
must estimate it. Sometimes, the transaction price includes a
discount or variable consideration that relates entirely to one
of the performance obligations in a contract. The requirements
specify when an entity should allocate the discount or variable
consideration to one (or some) performance obligation(s) rather
than to all performance obligations in the contract.
An entity should allocate to the performance obligations in
the contract any subsequent changes in the transaction price
on the same basis as at contract inception. Amounts allocated
to a satisfied performance obligation should be recognized as
revenue, or as a reduction of revenue, in the period in which the
transaction price changes.
Step
Recognize Revenue When (or as) the Entity Satisfies a
Performance Obligation
An entity should recognize revenue when (or as) it satisfies a
performance obligation by transferring a promised good or
service to a customer. A good or service is transferred when (or
as) the customer obtains control of that good or service.
For each performance obligation, an entity should determine
whether the entity satisfies the performance obligation over
time by transferring control of a good or service over time. If an
entity does not satisfy a performance obligation over time, the
performance obligation is satisfied at a point in time.
An entity transfers control of a good or service over time and,
therefore, satisfies a performance obligation and recognizes
revenue over time if one of the following criteria is met:
1. The customer simultaneously receives and consumes the
benefits provided by the entity’s performance as the
entity performs.
2. The entity’s performance creates or enhances an asset (for
example, work in process) that the customer controls as the
asset is created or enhanced.
3. The entity’s performance does not create an asset with an
alternative use to the entity, and the entity has an enforceable
right to payment for performance completed to date.
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24. 24 Not-for-Profit Audit Committee Briefing 2016
If a performance obligation is not satisfied over time, an
entity satisfies the performance obligation at a point in time.
To determine the point in time at which a customer obtains
control of a promised asset and an entity satisfies a performance
obligation, the entity would consider indicators of the transfer of
control, which include, but are not limited to, the following:
1. The entity has a present right to payment for the asset.
2. The customer has legal title to the asset.
3. The entity has transferred physical possession of the asset.
4. The customer has the significant risks and rewards of
ownership of the asset.
5. The customer has accepted the asset.
For each performance obligation that an entity satisfies over
time, an entity shall recognize revenue over time by consistently
applying a method of measuring the progress toward complete
satisfaction of that performance obligation. Appropriate methods
of measuring progress include output methods and input
methods. As circumstances change over time, an entity should
update its measure of progress to depict the entity’s performance
completed to date.
Costs to Obtain or Fulfill a Contract with a Customer
The guidance also specifies the accounting for some costs to
obtain or fulfill a contract with a customer.
Incremental costs of obtaining a contract – An entity should
recognize as an asset the incremental costs of obtaining a contract
that the entity expects to recover. Incremental costs are those
costs that the entity would not have incurred if the contract
had not been obtained. As a practical expedient, an entity may
expense these costs when incurred if the amortization period is
one year or less.
Costs to fulfill a contract – To account for the costs of fulfilling a
contract with a customer, an entity should apply the requirements
of other standards (for example, Topic 330, Inventory; Subtopic
350-40; Internal-Use Software; Topic 360, Property, Plant, and
Equipment; and Subtopic 985-20, Costs of Software to Be Sold,
Leased, or Marketed), if applicable. Otherwise, an entity should
recognize an asset from the costs to fulfill a contract if those costs
meet all of the following criteria:
1. Relate directly to a contract (or a specific anticipated contract)
2. Generate or enhance resources of the entity that will be used
in satisfying performance obligations in the future
3. Are expected to be recovered
25. Not-for-Profit Audit Committee Briefing 2016 25
Disclosures
An entity should disclose sufficient information to enable users
of financial statements to understand the nature, amount, timing,
and uncertainty of revenue and cash flows arising from contracts
with customers. Qualitative and quantitative information is
required about:
1. Contracts with customers – including revenue and
impairments recognized, disaggregation of revenue, and
information about contract balances and performance
obligations (including the transaction price allocated to the
remaining performance obligations)
2. Significant judgments and changes in judgments – determining
the timing of satisfaction of performance obligations (over
time or at a point in time), and determining the transaction
price and amounts allocated to performance obligations
3. Assets recognized from the costs to obtain or fulfill a contract
Effective Date
For a public entity, the amendments in this Update are effective
for annual reporting periods beginning after December 15, 2016,
including interim periods within that reporting period. Early
application is not permitted.
A public entity is an entity that is any one of the following:
1. A public business entity
2. A not-for-profit entity that has issued, or is a conduit bond
obligor for, securities that are traded, listed, or quoted on an
exchange or an over-the-counter market
3. An employee benefit plan that files or furnishes financial
statements to the SEC
For all other entities (nonpublic entities), the amendments in this
Update are effective for annual reporting periods beginning after
December 15, 2017, and interim periods within annual periods
beginning after December 15, 2018. A nonpublic entity may elect
to apply this guidance earlier, however, only as of the following:
1. An annual reporting period beginning after December 15,
2016, including interim periods within that reporting period
(public entity effective date)
2. An annual reporting period beginning after December 15,
2016, and interim periods within annual periods beginning
after December 15, 2017
3. An annual reporting period beginning after December 15,
2017, including interim periods within that reporting period
26. 26 Not-for-Profit Audit Committee Briefing 2016
An entity should apply the amendments in this Update using one
of the following two methods:
1. Retrospectively to each prior reporting period presented and
the entity may elect any of the following practical expedients:
a. For completed contracts, an entity need not restate
contracts that begin and end within the same annual
reporting period.
b. For completed contracts that have variable
consideration, an entity may use the transaction price at
the date the contract was completed rather than estimating
variable consideration amounts in the comparative
reporting periods.
c. For all reporting periods presented before the date
of initial application, an entity need not disclose the
amount of the transaction price allocated to remaining
performance obligations and an explanation of when the
entity expects to recognize that amount as revenue.
2. Retrospectively with the cumulative effect of initially applying
this Update recognized at the date of initial application. If an
entity elects this transition method, it also should provide the
additional disclosures in reporting periods that include the
date of initial application of:
a. The amount by which each financial statement line item is
affected in the current reporting period by the application
of this Update as compared to the guidance that was in
effect before the change
b. An explanation of the reasons for significant changes
28. 28 Not-for-Profit Audit Committee Briefing 2016
Protecting Americans from Tax Hikes Act of 2015
In December 2015, Congress passed The Protecting Americans from Tax Hikes Act
(PATH Act) which permanently renewed and enhanced many benefits that help not-for-
profit entities, but it also brought new restrictions and reporting requirements. The $680
billion tax deal will affect those involved in higher education, community development,
conservation, social services and health care, and other tax-exempt organizations.
The PATH Act reinstates, makes permanent and even enhances several provisions that
encourage charitable giving:
• Tax-free distributions of up to $100,000 from IRAs to charity for taxpayers age 70 ½
and older have been made permanent
• Favorable basis adjustments for shareholders of S-corporations after a charitable
donation of property have been made permanent.
Benefits and regulatory reporting - The PATH Act makes significant changes that
affect tax-exempts:
• Forms W-2, W-3 and 1099-MISC are now due to the IRS and Social Security
Administration by Jan. 31. The forms were previously due at the end of February, or
at the end of March if electronically filing.
• The excludable amount for fringe transit benefits is now equal to the parking
allowance, indexed for inflation, and made permanent. The monthly limit is $250 for
2015 and $255 for 2016.
Colleges and universities should be aware of new reporting requirements as well as
changes affecting those seeking higher education:
• Form 1098-T instructions eliminate the option to report the amount billed for
qualified tuition and related expenses. Higher education institutions are now required
to report only the aggregate amount of qualified tuition and related expenses
received.
• The American Opportunity Tax Credit has been made permanent.
• Section 529 plans were expanded by making computer and related costs eligible,
segregating distributions from separate accounts for determining if they are included
in income and exempting tuition refunds from tax if recontributed to the plan within
60 days.
Donor Relations
The IRS is scrutinizing both the
reporting of sensitive donor
information and requiring more
information from your donors.
• A court ruling in California upheld
the state regulation requiring
charities to file an unredacted
Form 990 Schedule B with the
state.
• Schedule B is not open to public
inspection as it contains sensitive
donor information, and very
often information about board
members.
• In response, the IRS is
considering eliminating
Schedule B.
• Are your donors aware their
personal information is filed with
the IRS and state agencies?
• Recent changes to Form 990
Schedule L instructions may
necessitate changes to your
institution's Conflict of Interest
Policy and Questionnaire.
• An "interested person" now
includes substantial contributors
to the organization.
• Are you prepared to ask
donors for more details about
their relationship with your
organization?
29. Not-for-Profit Audit Committee Briefing 2016 29
College Endowments Under Increased Scrutiny
A recent congressional research report proposed modifications to the tax-exempt status of college
endowments.
• Imposition of a payout requirement, similar to what is imposed on private foundations.
• Imposition of a tax on endowments or endowment earnings, similar to the tax imposed on net
investment earnings of a private foundation.
• Imposition of a limit on the value of charitable contribution deductions for restricted gifts, in
efforts to encourage more non-restricted contributions.
• Changes to the tax treatment of certain debt-financed investment strategies.
The Senate Finance Committee and House Ways and Means Committee recently requested private
universities to report on the costs to manage endowment funds, fee arrangements, how investment
income was spent for the past three years, and how much of the investment return is spent on
financial aid.
Affordable Care Act Mandate
The Affordable Care Act (ACA) mandates that all businesses with 50 or more full-time equivalent
employees (FTE) provide health insurance to at least 95% of full-time employees, or pay a tax.
• The IRS graciously lowered the threshold to 70% of full-time employees (FTE) for 2015 only.
• If coverage is not offered to 95% of FTE (2016 going forward), the tax is $2,000 per employee
per year, indexed for inflation.
• Proper worker classification (employee vs. independent contractor) is emerging as a significant
issue. Has your organization captured all employees that the IRS considers full-time?
ACA Reporting Requirements
• Annual statements with month-by-month breakdown of coverage must be provided to
employees and the IRS.
• Forms 1095-B (Health Coverage) and 1095-C (Employer-Provided Health Insurance Offer and
Coverage) must be provided to employees by March 31, 2016.
30. 30 Not-for-Profit Audit Committee Briefing 2016
• Forms 1094-B (Transmittal of Health Coverage Information Returns), 1094-C (Transmittal of
Employer-Provided Health Insurance Offer and Coverage Information Returns) 1095-B, and
1095-C are due to the IRS by May 31, 2016 if paper filing, or June 30, 2016 if electronically filing.
• Has your organization prepared a communication to accompany Form 1095-C, explaining its
purpose and relation to the employee’s individual income tax return?
Executive Compensation – Current and Deferred
• The IRS, the media, and the public continue to focus attention on tax-exempt organizations’
executive compensation programs.
• IRS Form 990 continues to evolve and require greater disclosure and transparency of
compensation levels and compensation governance practices.
• Tax-exempt organizations should annually review their executive compensation programs and
follow a diligent governance process to establish a “rebuttable presumption of reasonableness.”
The IRS has indicated that if tax-exempt organizations comply with the following steps, the
“burden of proof” that the compensation is not reasonable will shift to the IRS. It is much more
difficult to prove that something is not reasonable than it is to prove that it is reasonable.
• Many organizations have deferred compensation or other executive benefit plans that were
established in years past. Has your organization reviewed these contracts to determine if they are
still compliant with current laws and regulations?
31. • Consequently, it is recommended that boards of directors:
–– Ensure that compensation decisions are made by an independent committee of the board
–– Review the organization’s executive compensation philosophy
–– Review and determine appropriate peer organizations and data sources (the IRS recommends
utilizing at least three sources)
–– Assess and approve current and potential total compensation levels
–– Document any changes and decisions in minutes
• Grant Thornton recommends development of a compensation and benefits handbook to help
educate board members and guide processes and decisions.
• Tax-exempt organizations providing board member compensation should also be reviewing
and approving compensation levels on an annual basis, taking into account complexity of the
organization, hours worked and peer organization compensation levels.