GAAP Update SCHFMA 2016 Fall Institute Ken Conner, CPA Shareholder Tiffany Brackett, CPA Senior Manager
This material was used by Elliott Davis Decosimo during an oral presentation; it is not a complete record of the discussion. This presentation is for informational purposes and does not contain or convey specific advice. It should not be used or relied upon in regard to any particular situation or circumstances without first consulting the appropriate advisor. No part of the presentation may be circulated, quoted, or reproduced for distribution without prior written approval from Elliott Davis Decosimo.
Elliott Davis Decosimo, LLC Current Accounting Standard Updates
Updates ASU 2015-17 - Balance Sheet Classification of Deferred Taxes November 2015 ASU 2016-01 Recognition and Measurement of Financial Assets and Financial Liabilities January 2016 ASU 2016-02 Leases February 2016 ASU 2016-03 - Intangibles-Goodwill and Other, Business Combinations, Consolidation and Derivatives and Hedging March 2016 ASU 2016-04 - Recognition of Breakage for Certain Prepaid Stored-Value Products March 2016 ASU 2016-05 - Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships March 2016 ASU 2016-06 - Contingent Put and Call Options in Debt Instruments March 2016
Updates ASU 2016-07 - Simplifying the Transition to the Equity Method of Accounting - March 2016 ASU 2016-08 - Principal versus Agent Considerations - March 2016 ASU 2016-09 Improvements to Employee Share-Based Payment Accounting March 2016 ASU 2016-10 - Identifying Performance Obligations and Licensing April 2016 ASU 2016-11 - Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting May 2016 ASU 2016-12 - Narrow-Scope Improvements and Practical Expedients May 2016
Updates ASU 2016-13 - Measurement of Credit Losses on Financial Instruments June 2016 ASU 2016-14 - Not-for-Profit Entities August 2016 ASU 2016-15 - Classification of Certain Cash Receipts and Cash Payments August 2016
Elliott Davis Decosimo, LLC New Lease Accounting Standard ASU 2016-02, Leases
ASU 2016-02, Leases Issued in February 2016 Effective dates: - Public business entities calendar year 2019 - All other entities calendar year 2020 Early adoption is permitted for all entities Elliott Davis Decosimo, LLC
Scope Includes leases of all property, plant, and equipment Excludes: - Leases of intangible assets - Leases to explore for or use minerals, oil, natural gas, etc. - Leases of biological assets - Leases of inventory - Leases of assets under construction Elliott Davis Decosimo, LLC
Healthcare Industry Impact Hospitals and healthcare systems will be affected due to the capital-intensive nature of their business between real estate and equipment. Many healthcare providers act as both landlords and tenants (outpatient facilitates, supply contracts, clinical equipment). Embedded leases vendor-owned clinical or diagnostics equipment that is usage or consumption based Elliott Davis Decosimo, LLC
Definition of a Lease 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 Elliott Davis Decosimo, LLC
Identified Asset A leased asset must be specifically identifiable either explicitly (e.g., by a serial number) or implicitly (e.g., the only asset available to satisfy the lease contract) - Substantive substitution rights need to be considered - Physically distinct portion of a larger asset could represent a specified asset (e.g., one floor of a building) - Capacity portion of a larger asset will generally not represent a specified asset (e.g., percentage of a storage tank) Elliott Davis Decosimo, LLC
Right to Control A lease contract conveys the right to control the use of the identified asset for a specified period of time Customer controls an identified asset when the customer: - Has the right to obtain substantially all of the economic benefits from its use - Has the right to direct its use Elliott Davis Decosimo, LLC
Lessee Accounting As of the lease commencement date, lessee recognizes: - Liability for its lease obligation (initially measured at present value of future lease payments) - Asset for its right to use the underlying asset (ROU asset) Equal to the lease liability Adjusted for lease payments made at or before lease commencement, lease incentives, and any initial direct costs Elliott Davis Decosimo, LLC
Lessee Accounting Lease would be classified as a finance lease if any of the following criteria are met: - Lease transfers ownership to lessee by end of lease term - Bargain purchase option (lessee reasonably certain to exercise) - Lease term is for major part of remaining economic life of underlying asset - Present value of sum of lease payments and any guaranteed residual value equals or exceeds substantially all of fair value of underlying asset - Underlying asset is of such a specialized nature it is expected to have no alternative use to the lessor at the end of the lease term Elliott Davis Decosimo, LLC
Lessee Accounting Finance lease - Interest expense calculated on lease liability - Amortization expense related to ROU asset - Reported as separate items on the income statement - Results in front-loading the expenses Elliott Davis Decosimo, LLC
Lessee Accounting Operating lease - Allocate total lease payments, including initial direct costs, evenly over the lease term to calculate periodic straight-line expense - Interest expense calculated same as finance lease - Amortization expense is plug figure (difference between straight-line and interest) - Reported as a single item on the income statement lease expense Elliott Davis Decosimo, LLC
Lease Example Lease term Economic life Purchase option 3 years (no renewal option) 5 years none Rent payments $100, paid in arrears, escalating $3 annually Interest rate 7% Fair value of asset $500 PV of lease payments is $270
Lease Example Operating lease illustration
Lease Example Financing lease illustration
Lease Example Financing leases recognize more expenses in the early years of the lease agreements compared to operating leases
Impacts Impact on debt covenants New accounting standard is likely to result in higher leveraged balance sheets - Debt to equity - Return on assets (ROA) - Current ratio/working capital Standard not effective until 2019 (public companies) or 2020 (all other companies). Think about what leases will look like at this point. Be sure to communicate with your lender and PLAN!
Short-Term Leases Lessee can elect (by asset class) not to record lease on the balance sheet if - Term of 12 months or less - Does not include a purchase option that the lessee is reasonably certain to exercise Lessee would include renewal options if the lessee is reasonably certain to exercise Elliott Davis Decosimo, LLC
Short-Term Leases Lessee would recognize lease payments as expense over the lease term on a straight-line basis Lessee would also be required to disclose certain information about the short-term lease If lease term increases to more than 12 months, or if it is reasonably certain that the lessee will exercise an option to purchase the underlying asset, lessee would no longer apply the short-term lease exception Elliott Davis Decosimo, LLC
Lessor Accounting Retains current lessor accounting approach for operating and capital (direct financing and salestype) leases Lease classification criteria will change, and the treatment of dealer s profit, if any, will be affected: - Dealer s profit would be recognized up front if the arrangement is a sales-type lease (i.e., the transaction qualifies as a sale under ASC 606) - Dealer s profit resulting from a direct financing lease, if any, would be deferred and recognized as interest income over the lease term Elliott Davis Decosimo, LLC
Lease Payments Lease payments include: - Fixed payments (including in-substance fixed lease payments) - Variable payments based on an index or rate (using index or rate that exists on lease commencement date) - Amounts that are probable will be owed under residual value guarantees (for lessees) and amounts at which residual assets are guaranteed by a lessee or by a third party (for lessors) - Payments related to renewal or termination options that the lessee is reasonably certain to exercise Elliott Davis Decosimo, LLC
Discount Rate Lessees use rate charged by lessor if the rate is readily determinable If the rate is not readily determinable, lessees use their incremental borrowing rate as of the date of lease commencement Private-company lessees can elect to use a risk-free rate Elliott Davis Decosimo, LLC
Effective Date Public business entities - Effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years All other entities - Effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020 Early application permitted Modified retrospective transition method Elliott Davis Decosimo, LLC
Transition Relief May elect not to reassess: - Whether any expired or existing contract is a lease or contains a lease - Lease classification of any expired or existing leases - Initial direct costs for any existing leases Required to adopt all 3 relief provisions and prohibited from applying the relief on a lease-bylease basis Elliott Davis Decosimo, LLC
Illustrative Disclosure In February 2016, the FASB amended the Leases topic of the Accounting Standards Codification to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for [fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.-public companies] [fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.-all other entities] The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows. Elliott Davis Decosimo, LLC
Considerations Adoption date Transition relief Inventory of leases Debt covenants Income taxes (apportionment formulas, franchise tax, etc.) Elliott Davis Decosimo, LLC
The New Revenue Recognition Standard Just in time for changing Hospital payments
Accounting Standards Update 2014-09 ASU 2014-09 Revenue from Contracts with Customers (Topic 606) was issued May 2014 to provide a single, principle-based revenue standard Effective Date - - Public entities - Annual reporting periods beginning after December 15, 2017 - Other entities Annual reporting periods beginning after December 15, 2018 - Earlier application is permitted for annual reporting periods beginning after December 15, 2016 Transition Full retrospective method is permitted, but not required
Initial Application Either - Retrospectively to each prior reporting period presented (Full retrospective method) - Retrospectively with the cumulative effect of initial application recognized at the date of initial application (Modified retrospective method)
Status Issued guidance - ASU 2014-09 - Revenue from Contracts with Customers May 2014 - ASU 2015-14 Deferral of the Effective Date August 2015 - ASU 2016-08 Principal versus Agent Considerations March 2016 - ASU 2016-10 Identifying Performance Obligations and Licensing April 2016 - ASU 2016-11 Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting May 2016 - ASU 2016-12 - Narrow-Scope Improvements and Practical Expedients May 2016
Implementation Steps Understand the new guidance Assess the accounting and disclosure requirements for all of the entity s revenue transactions Identify any required changes in accounting system Select a transition method Educate stakeholders Implement the new guidance
Objective of Standard Single, principle-based revenue standard - More robust framework for recognizing revenue - Clarified principles - Simplified preparation of financial statements - Increased comparability across industries - Convergence of U.S. and International Standards - Better disclosures
Underlying Principle An entity will recognize revenue to depict the transfer of goods or service to customers in an amount that reflects the consideration to which the entity expects to be entitled - Revenue will be recognized at the amount that the healthcare provider expects to receive as payment - Some types of revenue may need to be unbundled or components recognized separately in different time periods
Scope Applies in general to all contracts with customers except: - Leases - Financial instruments - Guarantees other than product warranties - Certain nonmonetary exchanges - Insurance contracts
Recognize Revenue An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer Transfer occurs when (or as) the customer obtains control of that good or service Control of an asset is the ability to direct the use of and obtain substantially all of the remaining benefits from the asset - Example: Patient receives a CT scan or a biweekly course of radiation treatment
Revenue Recognition Be thinking about what is to come, in way of: - Value based payments - Bundled episodes of care, particularly as a single entity controls all the dollars - Risk based contracting Application will develop to respond to contracts
Recognize Revenue Indicators of control: - The entity has a right to payment for the asset - The entity has transferred physical possession of the asset - The customer has the significant risks and rewards of ownership of the asset - The customer accepted the asset
Recognize Revenue An entity will recognize revenue over time if one of the following criteria is met: - The customer simultaneously receives and consumes the benefits provided by the entity s performance as the entity performs Services - The entity s performance creates or enhances an asset that the customer controls as the asset is created or enhanced - Construction - The entity s performance does not create an asset with an alternate use to the entity and the entity has an enforceable right to payment for performance completed to date
Recognize Revenue Collections taking longer than one year that are a significant part of the revenue stream may require an entity to separately value and recognize revenue using a specific collection portfolio - Example: When a hospital agrees to provide care paid for $X amount of years. Revenue would be separated into two components: one for service revenue and another for interest income.
Five Step Approach Identify contracts with customers Identify the separate performance obligations in the contract Determine the transaction price Allocate the transaction price to separate performance obligations Recognize revenue when (or as) each performance obligation is satisfied
Identify Contracts A contract is an agreement between parties that creates enforceable rights and obligations A contract can be written, oral or implied by an entity s customary business practice - Example: A contract would be created when a patient signs a form for consent and financial responsibility - Contracts for patients with commercial insurance or government-funded payment - A contract is not created when a patient does not have the mental capacity to sign or in emergency treatment circumstances
Identify Contracts Required criteria: - Approval and commitment of the parties - Identification of the rights of the parties - Identification of the payment terms - Collection of the consideration is probable
Identify Performance Obligations 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 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 distinct or a series of distinct goods or services that are substantially the same and have the same pattern of transfer
Identify Performance Obligations A good or service is distinct if both of the following criteria are met: - 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 - Distinct within the context of the contract The promise to transfer the good or service is separately identifiable from other promises in the contract Example: Three months of home health monitoring for a CHF Discharge or Physical Therapy following Knee replacement
Identify Contracts Contracts are combined and accounted for as a single contract if they are entered into at or near the same time with one customer and one or more of the following criteria is met: - The contracts achieve a single commercial objective and are negotiated as a package - The price or performance of one contract influences the amount of consideration to be paid in other contracts - The goods or services in the separate contracts represent a single performance obligation
Identify Performance Obligations Indicators that a good or service is distinct: - The entity does not provide a significant service of integrating the individual goods or services - The good or service does not customize or significantly modify another contractually promised good or service - The good or service is not highly dependent on or highly interrelated with other goods or services in the contract
Identify Performance Obligations It may be difficult to determine distinct services for revenue, such as when payments are involved for lengthy episodes of patient services - Revenue may run into multiple fiscal periods or involve different services over time Home Health Episodes But consider, Radiation or Chemo Regiments
Identify Performance Obligations When another party is involved in providing goods or services to a customer, an entity is required to determine whether the nature of its promise is to provide the good or service itself (principal) or to arrange for the good or service to be provided by the other party (agent). The gross amount of revenue is recognized by a principal. An agent recognizes revenue in the amount of any fee or commission in exchange for arranging the good or service to be provided.
Identify Performance Obligations An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer
Identify Performance Obligations Indicators that an entity controls the good or service before it is transferred include the following: - The entity is primarily responsible for fulfilling the promise to provide the specified good or service, including responsibility for acceptability - The entity has discretion in establishing the price for the good or service
Determine the Transaction Price The transaction price is the amount of consideration to which an entity expects to be entitled for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties
Determine the Transaction Price Variable consideration Constraining estimates of variable considerations The existence of a significant financing component Noncash consideration Consideration payable to the customer
Determine the Transaction Price Variable consideration - Variable consideration is consideration that is contingent on the outcome of future events - Variable consideration includes incentives, penalties, rebates and discounts - Variable consideration is estimated using either the probability-weighted amount or most likely amount - The approach that is expected to best predict the amount of consideration should be used
Determine the Transaction Price Constraining estimates of variable consideration - Variable consideration should be included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the associated uncertainty is subsequently resolved
Determine the Transaction Price Indicators that variable consideration could result in significant reversal of cumulative revenue: - Amount is highly susceptible to factors outside of the entity s influence - Resolution of uncertainty is not expected for a long time - The entity has limited experience with similar contracts - There is a large number and broad range of possible outcomes
Determine the Transaction Price Implicit price concessions for patients - Organizations must determine whether a patient s nonpayment for services are bad debt or price concession
Allocate the Transaction Price The transaction price is allocated to the separate performance obligations based on the relative standalone selling prices of the goods or services promised The best evidence of standalone selling price is the observable price when sold separately If no observable price is available, it is estimated using expected cost plus margin, market prices for similar goods or services, or the residual approach
Disclosures The objective is the disclosure of sufficient information to enable users 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: - Contracts with customers - Significant judgments and changes in judgments in applying guidance - Assets related to cost to obtain or fulfill a contract
Disclosures Key disclosures for nonpublic companies - Revenue recognized from contracts with customers - Impairment losses recognized on any receivables or contract assets arising from contracts with customers - Opening and closing balances of receivables, contract assets and contract liabilities - For performance obligations fulfilled over time, the methods used to recognize revenue
Disclosures Key disclosures for nonpublic companies - Information about performance obligations including: When the entity typically satisfies performance obligations The significant payment terms, including variable consideration and significant financing component The nature of goods or services that the entity has promised to transfer, including any transfer from a third party Obligations for returns, refunds and other similar obligations Types of warranties and related obligations - Judgments and changes in judgments made in applying guidance that significantly affect amount and timing of revenue recognition
Summary Revenue should be recognized based on existence of a contract Contracts should be enforceable Collection of amounts should be probable Amount of variable consideration should be considered on a contact-by-contract basis or by using a portfolio approach
Resources FASB Revenue Recognition Transition Resource Group - FASB.org Standards Revenue Recognition Transition Group AICPA - AICPA.org Interest Areas Financial Reporting Center Accounting and Financial Reporting Revenue Recognition - Accounting Guide on Revenue Recognition
Elliott Davis Decosimo, LLC New Not-For-Profit Standard
Not-for-Profit Financial Reporting ASU 2016-14 - Presentation of Financial Statements of Not-for-Profit Entities August 2016 2 main changes: - Classifying net assets - Preparing financial statements Standard effective for FS issued after December 15, 2017
Net asset classification 3 classifications (unrestricted, temporarily restricted and permanently restricted) to 2 classifications: - Net assets without donor restrictions - Net assets with donor restrictions Footnote disclosures required include: - Timing and nature of restrictions - Composition of net assets with donor restrictions at end of period
Underwater Endowments Endowments with current fair value less than the original gift amount, will now be classified in net assets with donor restrictions (current classification for underwater endowments is in unrestricted net assets) Disclosures will need to include: - the original amount of the endowment - the NFP s policy relating to spending from these funds - if the policy was followed
Board-designated Net Assets New enhanced disclosure requiring amounts and purposes of designations Placed-in-service approach required when releasing restrictions related to long-lived assets Options to imply restrictions and release restrictions over an asset s useful life will no longer be permitted
Transparency and Utility of Liquidity Information Quantitative and qualitative information about liquidity will be required, as well as how an entity manages its liquidity risk, and information about the availability of assets to meet cash needs for general expenditures within one year of the balance sheet date - Example: Presenting a classified balance sheet may be an effective way for organizations to comply with many of the new disclosure requirements.
Reporting Financial Performance Measures NFPs will now also need to report the amount of change in each of the two classes of net assets in the statement of activities Disclosures will be enhanced to provide additional information about the items included or excluded from the operating measure
Presentation of Investment Expenses A net presentation of investment expenses against investment return will be required on the face of the statement of activities External and direct internal investment expenses will be netted against the investment return A disclosure of the components of investment expense will no longer be required
Expenses Classified by Function and Nature An analysis of expenses by both function and natural classification will be required for all NFPs on a separate statement (statement of activities or footnotes) Separate statement of functional expenses is not required; it may be the most effective presentation option for NFPs with more than one program Additional disclosures will also be required regarding specific methodologies used to allocate costs among program and support functions
Presentation of Cash Flow Information NFPs may continue to present cash flows from operations using either the direct or indirect method NFPs will no longer be required to present the indirect method reconciliation if the direct method is used
Implementation of the New Standard FASB staff is encouraging early adoption of the standard Most of the new requirements are currently available as options within GAAP and can be used without formally adopting ASU 2016-14 early, except for the following items: - Combining the temporarily restricted and permanently restricted net asset classes into one net asset class - Presenting a deficit situation in endowments in a restricted net asset class rather than in unrestricted net assets - Eliminating the disclosure of investment expenses that are netted against investment returns - Eliminating the indirect method reconciliation when using the direct method on the statement of cash flows
Next Steps: New standard will impact all NFPs issuing GAAP-basis financial reports. A future Phase 2 of FASB's project is slated to address additional issues, including: - Operating measure: All other elements of the proposal not addressed in Phase 1, including: Whether to require intermediate measure(s) Whether and how to define such measure(s) and what items should be included - Alignment of measures of operations in the statement of activities with measures of operations in the statement of cash flows. There is currently no expected timeframe for the completion of the second phase.
Sources Article Name: FASB's New Standard Aims to Improve Not-for- Profit Financial Reporting By: AICPA Not-for-Profit Section Published: August 18, 2016 Website: https://www.aicpa.org/interestareas/notforprofit/resources /FinancialAccounting/Pages/new-standard-aims-to-improvenot-for-profit-financial-reporting.aspx
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Ken Conner, CPA Email: ken.conner@elliottdavis.com Phone: 423-267-4084 Website: www.elliottdavis.com Tiffany Brackett, CPA Email: tiffany.brackett@elliottdavis.com Phone: 864-242-5639 Website: www.elliottdavis.com Elliott Davis Decosimo ranks among the top 30 CPA firms in the U.S. With twelve offices across seven states, the firm provides clients across a wide range of industries with smart, customized solutions. Elliott Davis Decosimo is an independent firm associated with Moore Stephens International Limited, one of the world's largest CPA firm associations with resources in every major market around the globe. For more information, please visit elliottdavis.com.