Leases & Proposed Guidance On Contributions Received/Made. September 18, 2017

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1 Leases & Proposed Guidance On Contributions Received/Made September 18, 2017 Jeff Holt, Partner, EisnerAmper LLP William Epstein, Director, EisnerAmper LLP

2 Webinar Introduction We are pleased to welcome you to today s webcast. In order to qualify for your CPE Certificate, you will need to: Remain logged on for at least 50 minutes Respond to ALL 3 polling questions We would appreciate if you would complete the evaluation survey following the event. A link to the survey will be ed to you automatically within the hour following the webinar. You may submit questions and we will try to address them during the program. However, if time does not permit us to answer a question posed during the webcast, it will be answered offline after the event. 2

3 CPE Certificate Information For those who meet the criteria, you will receive a CPE Certificate from EisnerAmperU@eisneramper.com within 14 business days of confirmed course attendance. Disclaimer: There is a possibility we will be unable to offer CPE certificates to people who log in to the webinar using: Google Chrome GoToWebinar Instant Join ipads or mobile devices These login methods may prevent you from being registered on the final attendee report. To ensure that you show up on the final attendee report, please log in using a different method than the ones listed above. 3

4 Speakers Jeff Holt Partner EisnerAmper LLP William Epstein Director EisnerAmper LLP

5 Agenda Introduction Leases Clarifying the scope and accounting guidance for contributions received and made Q&A 5

6 New Leasing Standard

7 Leases: Overview After working for almost a decade, the FASB has finally issued its new standard on accounting for leases, ASU ( ASU or the Standard ) The primary objective of the leases project was to address the off-balance-sheet financing concerns related to lessees operating leases The Standard Introduces a lessee right-of-use model where most leases will be on the balance sheet (similar to today s capital leases) Eliminates the bright-line tests for determining lease classification 7

8 Leases: Overview The Standard May impact the presentation and expense recognition pattern Retains the fundamentals of today s lessor accounting model (and as such, this presentation will focus on the impact on lessees) Applies to all leases greater than 12 months (with certain exclusions, intangible asset, inventory and others) Significantly increases lease footnote disclosures Is a wholesale change to lease accounting Is effective for calendar periods beginning on: Public Companies January 1, 2019 Private Companies January 1,

9 Polling Question #1 Which best describes your role? A. Finance staff at a for-profit organization B. Finance staff at not-for-profit organization C. Public accountant serving both sectors D. Board member at a not-for-profit organization E. Other 9

10 Lease Definition & Identification

11 Lease Definition Per FASB s master glossary, a lease is defined as: A contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. 11

12 Lease Identification Identified Asset Control over Use Lease 12

13 Lessee Lease Classification, Recognition and Subsequent Measurement

14 Lessee Lease Classification Look familiar? 14

15 Lessees: Recognition Right to use underlying asset Lessor Lease payments Lessee All leases (other than short-term leases) will be recognized on the balance sheet. ROU asset Right to use underlying asset during lease term Lease liability Obligation to make future lease payments 15

16 Lessees: Recognition At the commencement date of the lease, the lessee would record a right-of-use asset and a lease payment liability measured at the present value of the lease payments (plus initial direct costs, prepaid lease payments, less any incentives received): Right-of-use asset $20,000 Lease liability $20,000 This treatment applies to both operating and financing leases. The subsequent measurement differs depending upon the lease classification. 16

17 Finance Leases: Subsequent Measurement Lease liability Previous carrying amount + interest expense lease payments Balance = Present value of remaining lease payments Right of use asset Previous carrying amount current amortization expense Generally on a straight-line basis, over the shorter of the lease term or useful life of the right of use asset Balance = Original amount Accumulated amortization 17

18 Finance Leases: Subsequent Measurement Interest expense Amortization expense Total expense Interest expense Lease liability $XX $XX $ Lease liability Cash Amortization Accum. Amort. $XXX $XX $XXX $XX Total expense = Interest + Amortization (not rent expense) Time 18

19 Operating Leases: Subsequent Measurement Lease liability Previous carrying amount + interest expense lease payments Balance = Present value of remaining lease payments Right of use asset Recognize in income statement a SINGLE lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term (usually on a straight-line basis) 19

20 Operating Leases: Subsequent Measurement Interest Amortization Total expense Rent expense Lease liability (int.) $XX $XX $ Lease liability Cash Rent expense Accum. Amort. $XXX $XXX $XX $XX Total expense = straight-line rent expense Time 20

21 Leases: Debt Covenants ASU brings most leases on the balance sheet as a right-of-use asset and a lease liability The increased leverage will potentially have a negative impact on key metrics or potentially cause debt covenant violations This may depend in part on how various debt agreements define and limit indebtedness Financing leases: expense recognition will be recorded as interest and amortization rather than as rent expense May result in lower income in early lease years (as interest expense is front loaded) more EBITDA (as it is all added back) Same as current capital leases 21

22 Leases: Debt Covenants ASU requires entities to present operating lease liabilities outside of traditional debt, which may provide relief to some entities It is important for entities to determine the ASU s potential effects on debt covenants and begin discussions with lenders early if they believe that violations are likely to occur as a result of adopting the ASU. 22

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25 Polling Question #2 The new lease standard applies to both operating leases and capital leases? A. True B. False 25

26 Proposed Accounting Standards Update: Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made

27 Revenue Recognition of Grants and Contracts by Notfor-Profit Entities Background: Project added to the FASB Technical Agenda to improve and clarify existing guidance ASU , Revenue from Contracts with Customers, including related disclosures, heightened the issue Raised the question as to whether grants and contracts are in the scope of that guidance (reciprocal vs. non-reciprocal) Long-standing diversity in practice in classifying grants and contracts, particularly from government entities 27

28 Revenue Recognition of Grants and Contracts by Notfor-Profit Entities Areas of Confusion Issue 1: Reciprocal vs. Non-reciprocal Issue 2: Conditional vs. Unconditional Many NFPs treat federal grants / contracts with governmental entities as exchanges (regardless of substance) Some equate the government general public issue is whether government receives direct commensurate value in return (because the public benefits) Many believe the government doesn t give contributions Stakeholders find it difficult to distinguish between a conditional and unconditional contribution > causing diversity in application If funds are provided with certain stipulations, there is difficulty in distinguishin g whether a contribution is conditional, restricted, or both Diversity in application of remote notion whether the likelihood of failing to meet a condition is remote. (Some NFPs believe any condition within their control has remote likelihood of not being met) 28

29 Revenue Recognition of Grants and Contracts by Notfor-Profit Entities Proposed guidance would assist entities in: 1. Evaluating whether transactions should be accounted for: Contributions within Topic 958 non-reciprocal Exchange transactions subject to other guidance reciprocal 2. Distinguishing between conditional and unconditional contributions 29

30 Revenue Recognition of Grants and Contracts by Notfor-Profit Entities Revenue Recognition Decision Process Is the transaction one in which each party directly receives commensurate value? No Is the payment from a third-party payer on behalf of an existing reciprocal transaction? No It is a non-reciprocal transaction. Apply contribution (non-exchange) guidance. Yes Yes It is a balance-sheet only transaction. No effect on an entity s revenue recognition It is an exchange transaction. Apply Topic 606 on revenue from contracts with customers or other applicable topics It is unconditional. Recognize revenue in appropriate net asset class Are there conditions present (a barrier and right of return/right of release must exist)? Yes Are restrictions present (that is, limited purpose or timing)? It is conditional. Recognize revenue when the condition is met It is unconditional and with donor restrictions It is unconditional and without donor restrictions 30

31 Revenue Recognition of Grants and Contracts by Notfor-Profit Entities Distinguishing contributions (non-reciprocal transfers of assets) from exchange transactions (reciprocal): Clarify how an entity determines whether a resource provider is participating in an exchange Evaluate whether the resource provider is receiving commensurate value in return Based on: Resource provider is not synonymous with the general public Indirect benefit received by the public as a result of transferred assets is not commensurate value received by the resource provider Execution of the resource provider s mission is not commensurate value Is there expressed intent asserted by both the recipient and resource provider is to exchange resources that are of commensurate value? 31

32 Revenue Recognition of Grants and Contracts by Notfor-Profit Entities Based on (continued): Resource provider has full discretion in determining the amount of transferred assets Penalties assessed on recipient for failure to comply with agreement are limited to the delivery of unspent assets 32

33 Revenue Recognition of Grants and Contracts by Notfor-Profit Entities Once the agreement with resource provider has been determined to be a contribution: Amendments require that an entity determine whether a contribution is conditional or unconditional Clarification on determining conditional contributions Donor imposed conditions must have: A barrier A right of return to the promisor for assets transferred or a right of release of the promisor from its obligation to transfer assets 33

34 Revenue Recognition of Grants and Contracts by Notfor-Profit Entities Indicators helpful in determining whether an agreement contains a barrier: Agreement includes a measurable performance-related barrier or other measurable barrier Stipulations that are related to the purpose of the agreement Limited discretion by the recipient Recipient required to undertake additional actions 34

35 Revenue Recognition of Grants and Contracts by Notfor-Profit Entities Example: Procurement Arrangement NFP receives funding to perform a research study from local government Agreement requires NFP to: Plan the study Perform the research Summarize and submit the research to the local government Local government retains the rights to the research study NFP concludes that the arrangement is a transaction in which commensurate value has been exchanged (reciprocal). NFP is to perform a study for the local government and turn over the findings to the local government Local government retains the rights the study STOP! No need to go to next step. 35

36 Revenue Recognition of Grants and Contracts by Notfor-Profit Entities Example: Research Grant ISSUE #1: Reciprocal or Non-reciprocal? University is awarded grant from federal government to conduct research University must follow rules and regulations established by the Office of Management and Budget University must incur qualified expenses to be entitled to transfer of assets from federal government Any unspent funding during the grant period is forfeited and any drawn down funding that does not have related qualifying expenses must be returned University is required to submit summary research findings to federal government, but retains the rights to the findings University concludes that the grant is not a transaction in which commensurate value has been exchanged (non-reciprocal). The federal government does not receive commensurate value Receives indirect benefit because the research findings serve the general public University and general public receive the primary benefit of any findings 36

37 Revenue Recognition of Grants and Contracts by Notfor-Profit Entities Example: Research Grant ISSUE #2: Conditional or Unconditional? University concludes that the grant is conditional. Grant agreement limits University s discretion on how the assets are to be spent (qualifying expenses) Right of return and release Following the rules of the OMB alone is not a barrier to entitlement of the assets because it is not related to the purpose of the agreement 37

38 Revenue Recognition of Grants and Contracts by Notfor-Profit Entities Example: Contribution from a Private Foundation NFP receives a grant from a PF in the amount of $400,000 to provide specific career training to disabled veterans Grant requires NFP to provide training to at least 8,000 disabled veterans during the next year, with specific minimum targets that must be met each quarter PF specifies that a right of release from the obligation in the agreement that it will only give NFP $100,000 each quarter if, and only if, NFP demonstrates services have been provided to 2,000 disabled veterans during the quarter NFP concludes that the grant is conditional. Right of release from obligation within the agreement PF requires NFP to achieve specific levels of service that would be considered a performance-related barrier 38

39 Revenue Recognition of Grants and Contracts by Notfor-Profit Entities Example: Contribution for a Research Grant NFP s mission is working with gluten-related allergies NFP applies for and receives a $100,000 grant from a corporate foundation to perform research on gluten-related allergies over the next year Grant agreement includes the following: Right of return General budget submitted with grant application must be followed or approval must be obtained for any significant deviations on spending Requirement that at the end of the grant period a report must be filed with the corporate foundation that explains how the assets were spent 39

40 Revenue Recognition of Grants and Contracts by Notfor-Profit Entities Example: Contribution for a Research Grant NFP concludes that the grant is unconditional. General budget included in the grant proposal is not a barrier to entitlement because adherence to a general budget allows for broad discretion Reporting requirement alone is not barrier because it represents an administrative requirement and not related to the purpose of the agreement 40

41 Polling Question #3 In order to be considered a conditional contribution there must be: A. A barrier B. A right of return to the promisor C. A right of release of the promisor from its obligation D. Both A and B E. Both B and C 41

42 Revenue Recognition of Grants and Contracts by Notfor-Profit Entities Transition Approach A B 42

43 Revenue Recognition of Grants and Contracts by Notfor-Profit Entities Transition Approach Modified Prospective Approach Completion of Grant #1 Start of Grant #2 Completion of Grant #2 Start of Grant #3 Effective Date No restatement of recognized revenue No restatement of revenue recognized prior to effective date Recognize only the previously unrecognized revenue, using new guidance Begin recognizing revenue using new guidance 43

44 Revenue Recognition of Grants and Contracts by Notfor-Profit Entities Timeline of the Project Issued Proposed Update Comment Period Deadline Final ASU August 3, 2017 November 1, 2017 Q

45 Revenue Recognition of Grants and Contracts by Notfor-Profit Entities Although accounting for contributions is primarily an issue for not-forprofit entities, the amendments would apply to all entities (not-for-profit organizations and business entities) that receive or make contributions Applies to both contributions received by a recipient and contributions made by a resource provider Does not apply to transfers of assets from the government to business entities Presentation within the financial statements to label revenue (e.g. contribution, grant, donation) that is accounted for within the scope of subtopic is not a factor for determining whether an agreement is within the scope of that guidance Resource provider entity type is not a factor 45

46 Questions?

47 Thank You Jeff Holt Partner EisnerAmper LLP William Epstein Director EisnerAmper LLP

48 This publication is intended to provide general information to our clients and friends, It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.