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Not-for-Profit Entities: 2012/2013 Audit & Accounting Considerations A Governmental Audit Quality Center and Not-for-Profit Expert Panel Web Event November.

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Presentation on theme: "Not-for-Profit Entities: 2012/2013 Audit & Accounting Considerations A Governmental Audit Quality Center and Not-for-Profit Expert Panel Web Event November."— Presentation transcript:

1 Not-for-Profit Entities: 2012/2013 Audit & Accounting Considerations A Governmental Audit Quality Center and Not-for-Profit Expert Panel Web Event November 1, 2012

2 Governmental Audit Quality Center Administrative Notes Troubleshooting Tips No Audio? Ensure that your computer speakers are turned on and that the volume is turned up. Check to ensure that audio streaming is enabled on your computer If the presentation slides stop advancing during the presentation you should: Hit the red “Exit” button located to the right of the main screen; this will close out of the presentation and re-launch the webcast If you are still having audio or other technical difficulty. Check with your IT personnel at your firm. Call the AICPA Service Center at

3 Governmental Audit Quality Center Administrative Notes We encourage you to submit your technical questions – please limit your questions to the content of today’s program. You can submit your questions at any time during this Web event by clicking on the “Q &A” tab on the bottom of your screen. You can also download slides in PDF or PowerPoint by clicking on “Handouts” tab. This event is being recorded and will be posted in an archived format to the GAQC Web site. 3

4 Governmental Audit Quality Center Continuing Professional Education To document your participation and obtain CPE, you must click “OK” on 75% of pop-up markers. There will be a total of 8 participation pop-up markers during the event (i.e., about 1 every 15 minutes). To track your progress on the pop-up markers, click on the Participation tab on lower portion of screen. At the end of today’s presentation we will provide steps for obtaining your CPE certificate. Contact the Service Center for help with obtaining CPE at or If you are not receiving CPE for this event, ignore the pop-up markers if they appear. 4

5 Governmental Audit Quality Center Presenters Frank Jakosz, CPA Frost, Ruttenberg & Rothblatt, P.C. Stuart J. Miller, CPA Crowe Horwath LLP Andrea Wright, CPA Johnson Lambert LLP Moderating Chris Cole, CPA AICPA 5

6 Governmental Audit Quality Center AICPA Not-for-Profit Expert Panel The AICPA Not-for-Profit (NFP) Expert Panel is comprised of member volunteers who specialize in the practice of NFP accounting or auditing. Expert Panel Members represent the AICPA NFP community to: Provide input to the Financial Accounting Standards Board (FASB) Not-for-Profit Advisory Council on emerging industry issues for NFPs. Monitor and report on FASB standard setting projects and participate in the development of comment letters on standards that impact NFPs. Propose and develop articles, white papers and publications that address practice issues for NFPs. Expert Panel information, publications and meeting minutes can be found at /Expert_Panel_Not_for_Profit_Entities.aspx /Expert_Panel_Not_for_Profit_Entities.aspx 6

7 Governmental Audit Quality Center What We Will Cover NFP Trends Challenges relating to new auditing standards Challenges relating to the application of accounting standards in the NFP environment and recent FASB standard-setting activity GAQC Resources 7

8 Governmental Audit Quality Center NFP Trends 8

9 Governmental Audit Quality Center Payments in Lieu of Taxes (PILOT) State and local governments’ attempt to raise additional revenues Nature of entity Ownership or use of property Primarily affects higher education institutions Replacement of foregone property tax revenues to local governments o Offsetting costs of providing services to institutions Hospitals, churches and other NFPs 9

10 Governmental Audit Quality Center Payments in Lieu of Taxes (PILOT) Historically, PILOT payments have been “voluntary” Some cities attempting to change to mandatory payment for services Increasing percentage of organizations making some form of payment Variety of type of ‘payments’ and arrangements Economic Impact Studies by organizations Cost sharing /’good neighbor’ practices Taking responsibility for waterways, fire stations, security equipment, etc. 10

11 Governmental Audit Quality Center Payments in Lieu of Taxes (PILOT) Some accounting, reporting and audit issues For services rendered? o Current or past An amount to accrue and as of when? Commitment disclosure? Contribution? 11

12 Governmental Audit Quality Center Cause Related Marketing 12 May be known as: Cause-related marketing programs Cause-related marketing campaigns How they work An agreement between a business and a nonprofit to raise money for a particular cause. The business expects to profit by selling more products and the nonprofit benefits both financially and by having a higher public profile as a result of its business partner’s marketing efforts. An Example: American Express and the restore the Statue of Liberty campaign

13 Governmental Audit Quality Center Cause Related Marketing The Accounting Considerations Program Fundraising Management and general All of the Above Types of cause-related marketing programs (not all inclusive) Fundraising/licensing component Sponsorship/licensing component Licensing with royalty payments 3 rd party charitable sales/licensing component Unsolicited online component (social media) Hybrid arrangements 13

14 Governmental Audit Quality Center New Market Tax Credit (NMTC) Program Established by Congress in 2000 Spur new or increased investments into operating businesses and real estate projects located in low- income communities. Since inception, ~700 awards of ~ $33 billion in tax credits More information: ogramID=5 ogramID=5 14

15 Governmental Audit Quality Center How it Works 15

16 Governmental Audit Quality Center NMTC –The Details Investors to receive a tax credit against their federal taxes in exchange for making equity investments in specialized financial institutions (community development entities, or CDEs) Must make investments in low-income communities; wide variety of allowable activities (loans, equity investments NFPs that serve low-income communities may receive NMTC funding for capital projects Funding from CDEs is often in the form of loans or equity investments in NFPs’ real estate projects. The transactions and underlying agreements are complex and have specific audit risks that should be considered by the auditor of the NFP. 16

17 Governmental Audit Quality Center Audit Risks Proper accounting for the loan or equity investment by the NFP in the investment fund Proper accounting for the loan (note payable) or equity investment the NFP receives from the CDE Risk that the NFP will not include appropriate disclosures related to the NMTC Program funding Future funding commitments related to the loan/equity investment by the NFP to the investment fund Standard disclosures related to loan or equity investment from the CDE Disclosure of the put/call option at end of tax credit period Accounting for the exercise of the put/call 17

18 Governmental Audit Quality Center LC3 organizations What are they? Low-profit limited liability companies Business structure requirements Must significantly further the accomplishment of one or more charitable or educational purposes No significant purpose is the production of income or appreciated property Must not be organized to accomplish any political or legislative purposes. Mirrors definition of Program Related Investments (PRIs) 18

19 Governmental Audit Quality Center Challenges Relating to New Auditing Standards 19

20 Governmental Audit Quality Center SAS No.118 American Institute of Certified Public Accountants Auditing Standards (SAS) No. 118: Other Information in Documents Containing Audited Financial Statements This SAS addresses the auditor’s responsibility in relation to other information in documents containing audited financial statements and the auditor’s report thereon. In the absence of any separate requirement in the particular circumstances of the engagement, the auditor’s opinion on the financial statements does not cover other information, and the auditor has no responsibility for determining whether such information is properly stated. This SAS establishes the requirement for the auditor to read the other information of which the auditor is aware because the credibility of the audited financial statements may be undermined by material inconsistencies between the audited financial statements and other information. Annual “Glossy” reports fall into this category 20

21 Governmental Audit Quality Center SAS No. 119 American Institute of Certified Public Accountants Auditing Standards (SAS) No. 119: Supplementary Information in Relation to the Financial Statements As a Whole This SAS addresses the auditor’s responsibility when engaged to report on whether supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole. The information covered by this SAS is presented outside the basic financial statements and is not considered necessary for the financial statements to be fairly presented in accordance with the applicable financial reporting framework. This SAS also may be applied, with the report wording adapted as necessary, when an auditor has been engaged to report on whether required supplementary information is fairly stated, in all material respects, in relation to the financial statements as a whole. The Schedule of Expenditures of Federal Awards (SEFA) falls under SAS No. 119 (Click here to access GAQC SEFA Practice Aids which have been updated for SAS No. 119 and are open to the public)Click here 21

22 Governmental Audit Quality Center SAS No. 119 SAS No. 119 establishes presumptively mandatory requirements that certain conditions are met in order to opine on whether supplementary information is fairly stated in relation to the financial statements as a whole. These conditions include that: The supplementary information was derived from, and relates directly to, the underlying accounting and other records used to prepare the financial statements. The supplementary information relates to the same period as the financial statements. The financial statements were audited, and the auditor served as the principal auditor in that engagement. Neither an adverse opinion nor a disclaimer of opinion was issued on the financial statements. The supplementary information will accompany the entity’s audited financial statements, or such audited financial statements will be made readily available by the entity. 22

23 Governmental Audit Quality Center SAS No. 119 SAS 119 establishes a presumptively mandatory requirement that the auditor obtain the agreement of management that it acknowledges and understands its responsibilities: For the fair presentation of the supplementary information in accordance with the applicable criteria. To provide the auditor with certain written representations. To include the auditor’s report on the supplementary information in any document that contains the supplementary information and that indicates that the auditor has reported on such supplementary information. To present the supplementary information with the audited financial statements or, if the supplementary information will not be presented with the audited financial statements, to make the audited financial statements readily available to the intended users of the supplementary information no later than the date of the auditor’s report. 23

24 Governmental Audit Quality Center SAS No. 120 SAS No.120, Required Supplementary Information, the auditor’s responsibilities with respect to information that a designated accounting standard setter requires to accompany the basic f/s. Defines “designated accounting standard setter: as a body designated by the AICPA council to establish GAAP (i.e., the FASB, GASB, IASB and the Federal Accounting Standards Advisory Board) Defines “required supplementary information” as information required to accompany an entity’s basic f/s; Establishes the auditor’s objectives when a designated accounting standards setter requires information to accompany the basic f/s; Requires auditors to apply certain specified procedures to the required supplementary information; and Establishes the reporting requirements with respect to required supplemental information. Applicable to GASB type schedules 24

25 Governmental Audit Quality Center Clarity changes (other than group audits) SAS 122- supersedes all prior standards First redrafting of US GAAS since 1972 Effective for audits of years ending on or after December 15, 2012 with early adoption not permitted Re-codification and renumbering of AU sections New format Introduction-scope, effective date Objective Definitions Requirements o Unconditional (must) o Presumptively mandatory (should) Application and other explanatory material 25

26 Governmental Audit Quality Center Forming an opinion and reporting on financial statements Requires auditor to describe management’s responsibility for the preparation and fair presentation of the financial statements in greater detail Requires use of headings throughout auditor’s report Prior to issuance, communicate with those charged with governance the circumstances that lead to expected modification to the auditor’s opinion and the proposed wording of the modification. 26 Modification to the Opinion in the Auditor’s report

27 Governmental Audit Quality Center Explanatory paragraph replaced Emphasis-of-matter paragraph Going concern Consistency of financial statements Subsequent events (could also be other-matters paragraph) Other-matters paragraph Required supplementary information Reporting in compliance with contracts or regulations Restricting the use of the auditor’s report Other information in documents containing audited financial statements GAQC currently working to update all report illustrations in the AICPA Audit Guide, Government Auditing Standards and Circular A-133 Audits 27

28 Governmental Audit Quality Center Special purpose framework Formerly Known as “other comprehensive basis of accounting” or OCBOA Cash Tax Regulatory (statutory) Management required to agree to include equivalent disclosures by GAAP as part of engagement terms 28

29 Governmental Audit Quality Center Special Purpose Framework Two new AICPA publications (both include the latest clarity standards): Accounting and Financial Reporting Guidelines for Cash and Tax Basis Financial StatementsAccounting and Financial Reporting Guidelines for Cash and Tax Basis Financial Statements Applying OCBOA in State and Local Government Financial StatementsApplying OCBOA in State and Local Government Financial Statements GAQC holding separate Web event (open to the public) titled, The New AICPA OCBOA Publications: What They Are and How They Apply to Governments and Not-for-Profits, to be held on Wednesday, November 7, 2012, from 1:00PM - 3:00PM (Eastern Time) – click here to learn more.click here 29

30 Governmental Audit Quality Center Client acceptance and continuance If scope limitation imposed by management or those changed with governance of an entity that is not required to have an audit by law or regulation such that the auditor anticipates issuing a disclaimer- auditor should not accept the engagement 30

31 Governmental Audit Quality Center Consideration of Laws and Regulations Auditor is required to inspect correspondence with regulatory authorities Introduction of inherent limitations of an audit vs. no assurance 31

32 Governmental Audit Quality Center Communications With those charged with governance Ineffective communication may be scope limitation or a deficiency- see AU-C 260 Internal control-New requirements Communicate orally or in writing to management other deficiencies in internal control identified during the audit that have no been communicated to management by other parties, that are in the auditor’s judgment warrant management’s attention Include in written communication an explanation of the potential effects of material weaknesses and significant deficiencies 32

33 Governmental Audit Quality Center Audit evidence Legal letters External confirmations Opening balances Unable to perform procedures on sample item Substantive analytical procedures- required documentation Estimates Related party transactions Specialists Materiality and AU-C 320 Performance Materiality- adjustment of materiality set at the financial statement level to the assertion level 33

34 Governmental Audit Quality Center Use of Specialists Management’s specialists (AU-C 500) Specialists whose work is used by the entity in preparing the financial statements Auditor’s specialists (AU-C 620) Specialists whose work is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence. 34

35 Governmental Audit Quality Center Group Audits AU-C Section 600: Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors).11 For purposes of GAAS, the following terms have the meanings attributed as follows: Component. An entity or business activity for which group or component management prepares financial information that is required by the applicable financial reporting framework to be included in the group financial statements. Component auditor. An auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit. A component auditor may be part of the group engagement partner’s firm, a network firm of the group engagement partner’s firm, or another firm. 35

36 Governmental Audit Quality Center Group Audits AU-C Section 600: Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors).07 Audit risk is a function of the risk of material misstatement of the financial statements and the risk that the auditor will not detect such misstatements. In a group audit, detection risk includes the risk that a component auditor may not detect a misstatement in the financial information of a component that could cause a material misstatement of the group financial statements and the risk that the group engagement team may not detect this misstatement. 36

37 Governmental Audit Quality Center Group Audits Materiality.31 The group engagement team should determine the following: a.Materiality, including performance materiality, for the group financial statements as a whole when establishing the overall group audit strategy. b.Whether, in the specific circumstances of the group, particular classes of transactions, account balances, or disclosures in the group financial statements exist for which misstatements of lesser amounts than materiality for the group financial statements as a whole could reasonably be expected to influence the economic decisions of users taken on the basis of the group financial statements. In such circumstances, the group engagement team should determine materiality to be applied to those particular classes of transactions, account balances, or disclosures. c.Component materiality for those components on which the group engagement team will perform, or request a component auditor to perform, an audit or review. Component materiality should be determined taking into account all components, regardless of whether reference is made in the auditor’s report on the group financial statements to the audit of a component auditor. To reduce the risk that the aggregate of uncorrected and undetected misstatements in the group financial statements exceeds the materiality for the group financial statements as a whole, component materiality should be lower than the materiality for the group financial statements as a whole, and component performance materiality should be lower than performance materiality for the group financial statements as a whole. d.The threshold above which misstatements cannot be regarded as clearly trivial to the group financial statements. 37

38 Governmental Audit Quality Center Case in Point We have a client that has 30 locations/entities in 10 different countries. All 30 entities are about the same size and we have calculated overall materiality to be $1,000,000. Tolerable Misstatement equals $750,000. Accounts receivable equals $700,000 per location/entity, thus AR = $21,000,000. Conclusion A: AR is immaterial at each location based on OM and TM, therefore the risk of material misstatement is minimal and we will pass further testing. Conclusion B: AR is immaterial at each individual location, but material to the overall financial statements so we will test AR at 20 of the 30 locations and apply analytics to the other locations based on our risk assessment process. 38

39 Governmental Audit Quality Center Group Audits – Effective with new clarified audit standards What is a Group Audit? Factors to consider: Governance structure Management structure How centralized is financial reporting Centralized operations Physical locations Control environment Nature of activity Uniqueness of entity Other indicators: Physical location of assets Financial information provided by others Existence of multiple G/L or other financial information If risk assessments vary or legal or regulatory differences exist 39

40 Governmental Audit Quality Center Group Audits When will a group audit exist based on the previous indicators? When another audit firm is used to perform part of the audit (always) When auditors in the same firm but different offices audit different sections of an audit based on any of the indicators (generally) o Chicago office audits the primary government o Springfield office audits the foundation which is a discretely presented component unit When a client entity has two distinct operating locations that operate independently (generally) o Example – The University has 2 different campuses that are operated and are accounted for separately as well as combined. This would be a group audit When the client has blended component units which are legally separate entities audited by the same Crowe office (generally) Group audits will be prevalent within governmental engagements. 40

41 Governmental Audit Quality Center SAS No. 126 Statement on Auditing Standards No. 126, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern Issue Date: July 2012 Effective Date: This Statement on Auditing Standards is effective for audits of financial statements for periods ending on or after December 15, Supersede SAS No. 59, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern 41

42 Governmental Audit Quality Center SAS No. 126 SAS No. 126 addresses the auditor’s responsibilities in an audit of financial statements with respect to evaluating whether there is substantial doubt about the entity's ability to continue as a going concern. This SAS applies to all audits of financial statements regardless of whether the financial statements are prepared in accordance with a general purpose or a special purpose framework. This SAS does not apply to an audit of financial statements based on the assumption of liquidation (for example, when [a] an entity is in the process of liquidation, [b] the owners have decided to commence dissolution or liquidation, or [c] legal proceedings, including bankruptcy, have reached a point at which dissolution or liquidation is probable). 42

43 Governmental Audit Quality Center SAS No. 126 The following are the most significant changes to the requirements in prior standards: SAS-126 requires the auditor to obtain written representations from management if conditions or events have been identified that indicate there could be substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time. SAS-126 requires the auditor to reassess the going-concern status of the entity by performing certain procedures when determining whether to eliminate the going-concern emphasis- of-matter paragraph from a reissued report. 43

44 Governmental Audit Quality Center FASB Project The Liquidation Basis of Accounting and Going Concern (Formerly Disclosures about Risks and Uncertainties) Phase I: The objective of this phase of the project is to provide guidance about how and when an entity should apply the liquidation basis of accounting. Phase II: The objective of this phase of the project is to provide guidance about (a) whether and how an entity should assess its ability to continue as a going concern and (b) if so, the nature and extent of any related disclosure requirements. 44

45 Governmental Audit Quality Center Getting to Know the AICPA Clarity Standards Clarity section of AICPA.org Standards Videos Mapping from extant to new standards More Listen to archived GAQC member web events Implementing the Clarified SASs in a Governmental and Not-For Profit Audit Environment: What, When, and How?Implementing the Clarified SASs in a Governmental and Not-For Profit Audit Environment: What, When, and How? Understanding the Potential Impacts of the New Group Audits SAS on Your Governmental and NPO Audit EngagementsUnderstanding the Potential Impacts of the New Group Audits SAS on Your Governmental and NPO Audit Engagements 45

46 Governmental Audit Quality Center OMB Circular A-133 Compliance Supplement Final issuance Supplement issued in July 2012 Includes 243 individual programs Accessing the Final Supplement Upon issuance, go to OMB's Web site at "Grant Management Circulars" link: (scroll down to the "Audit Requirements" section)www.whitehouse.gov/omb/grants/ Both current and prior Supplements available (use the correct version!) OMB previously provided a draft Supplement for Audit “Planning” Purposes Previously posted on GAQC Web page and open Do not use the draft now that the final is issued 46

47 Governmental Audit Quality Center OMB Circular A-133 Compliance Supplement Program changes by the numbers New, deleted, changed programs Updated Matrix in Part 2 for programmatic changes Review Appendix V for details of all changes made Don’t overlook Appendix VII Effect of Recovery Act Awards on major program determination Guidance List of Recovery Act programs not covered by Parts 4 or 5 but that could be subject to a single audit and list of Recovery Act programs not subject to single audit Late Filings and Low-Risk Auditee Status Treatment of Large Loan and Loan Guarantee Programs 47

48 Governmental Audit Quality Center OMB Circular A-133 Compliance Supplement GAQC members can listen to an archived Web event titled, 2012 OMB Compliance Supplement and Related Best Practice Tips The event is held annually and provides participants with an overview of important information in the latest Compliance Supplement and also provides tips for ensuring that auditors are avoiding common pitfalls associated with using the Supplement. 48

49 Governmental Audit Quality Center Technical Update – Government Auditing Standards Final 2011 edition issued Main change relates to independence, especially when performing nonaudit services Very few changes made from interim version previously posted Effective date same as AICPA clarity For financial audits for periods ending on or after 12/15/12 No early implementation However, auditors need to be independent for entire audit period New Yellow Book independence requirements for nonaudit services may need to be considered as early as 1/1/12 49

50 Governmental Audit Quality Center Technical Update – Government Auditing Standards Resources for 2011 Yellow Book (should be referred to in other AICPA offerings – all open to the public) Archived GAQC Web event, The New 2011 Yellow Book: What You Need to Know Now, provides a more in-depth discussion on 2011 Yellow BookThe New 2011 Yellow Book: What You Need to Know Now GAQC practice aid titled, 2011 Yellow Book Independence— Nonaudit Services Documentation Practice Aid (free PDF version for AICPA members)2011 Yellow Book Independence— Nonaudit Services Documentation Practice Aid Archived GAQC Web event, Understanding the AICPA's Yellow Book Independence Practice Aid for Performing Nonaudit ServicesUnderstanding the AICPA's Yellow Book Independence Practice Aid for Performing Nonaudit Services Ethics comparison of AICPA standards versus GAO 50

51 Governmental Audit Quality Center Accounting Standards in the NFP Environment and Recent FASB Standard- Setting Activity 51

52 Governmental Audit Quality Center Who are Related Parties Included in the Not-for-Profit Entities Industry Developments Audit Risk Alert ASC includes the following as related parties Affiliates of the entity Entities for which investments in their equity securities would be required to be accounted for by the equity method by the investing entity (excludes those investments that have adopted the Fair Value Option Trusts for the benefit of employees, such as pension and profit sharing trusts Principal owners of the entity and members of their immediate families Management of the entity and members of their immediate families Other parties with which the entity may deal if one party controls or can significantly influence the management or operating policies NFP specific relationships Brother sister organizations Unconsolidated supporting organizations National and local affiliates 52

53 Governmental Audit Quality Center Reporting of Related Entities Included in Not-for-Profit Entities Industry Developments-2012 Audit Risk Alert Guidance applies to relationships with entities and interest in entities that provide goods or services that accomplish the purpose or mission for which the NFP exists or that serve the NFP’s administrative purposes Relationships that are NOT “investments” of the NFP o Similar type guidance related to reporting ownership of for-profit entities in circumstances in which those entities are not required to be consolidated and the objective is to invest in the entity for investment return is proposed for the AAG Information presented: Describes common relationships Identifies where relationships are discussed within FASB ASC 53

54 Governmental Audit Quality Center Three scenarios addressed in table Initial assessment of related entity: NFP, for- profit, or Special Entity Relationships with NFP Entities Relationships with For-Profit Entities Relationships with Special Entities 54

55 Governmental Audit Quality Center Relationships with another NFP Six situations, including: Controlling financial interest through direct or indirect ownership of the majority voting interest in the other NFP Control of another NFP through majority voting interest of its board and economic interest exists NFP receives distributions from a related fund-raising foundation, but does not control the foundation 55

56 Governmental Audit Quality Center Relationships with a for-Profit Entity Eleven situations, including: NFP is the GP of a for-profit limited partnership that has governing provisions that are the functional equivalent of a limited partnership NFP is a limited partner of a for-profit limited partnership that is engaged in activities other than real estate activities NFP has an interest in an LLC NFP has a contractual management relationship with another entity in which it does not have a controlling financial interest 56

57 Governmental Audit Quality Center Relationships with Special Entities Five situations, including: NFP is engaged in a leasing transactions with a special purpose entity lessor NFP has entered into a joint operating agreement with another entity NFP is a sponsor in a R&D arrangement 57

58 Governmental Audit Quality Center NFP Consolidating a For-Profit Subsidiary- Presentation Questions from members on consolidation have been received by the AICPA Technical Hotline How would an NFP present a 100% ownership interest in a for-profit subsidiary on its consolidated financial statements? 58

59 Governmental Audit Quality Center Expert panel suggests In accordance with presentation requirements of ASC In an analogous manner that is appropriate for the method of reporting financial performance and financial position in ASC 958, Not-for-Profit Entities ASC —as if the consolidated group were a single economic entity o Assets of the for-profit presented in asset section of NFP’s statement of financial position, liabilities of the for-profit subsidiary are presented in the liabilities section, and so forth. Presentation of equity section of for-profit presented in net assets section of NFP o Dependent upon how ownership interest in the for profit was acquired  If contributed to NFP with a donor imposed restriction, the equity of the NFP would be reported within a restricted net asset class dependent upon the donor’s restriction  Absent donor restrictions, included in UR of the NFP  If for-profit sub was acquired in an exchange transaction, the equity interest would be included in UR 59

60 Governmental Audit Quality Center Conservation Easements Questions on proper accounting treatment of conservation easements from members have been received by the AICPA Technical Hotline specifically related to:  Donation of Land with a Conservation Easement  Donations of Conservation Easements 60

61 Governmental Audit Quality Center Donation of Land with a Conservation Easement How does an NFP record a donation of land that includes a conservation easement? Determine Unit of Account Is land and easement one or two units of account? (consider guidance in ASC ) Consider if easement is specific to land (i.e., is easement an attribute of the land that would transfer to market participant?) If yes, record land as asset at FV taking into account the restriction (easement) If land and easement are accounted for as separate assets: Conservation easement is an intangible asset (noncurrent if the NFP presents a classified balance sheet) at its FV as of donation date Consider ASC through 45-7 to determine if contribution is UR, TR or PR o If easement is legally attached to land but donor does not stipulate the use of the land, the easement is a legal restriction not a donor restriction o Restrictions that are stipulated by the donor specific to the NFP, are not reflected in the measurement of the land, but rather the classification of the net asset 61

62 Governmental Audit Quality Center Donations of Conservation Easements How does an NFP record a donation of a conservation easement (without receiving or possessing an interest in the land)? As an intangible asset (noncurrent if the NFP presents a classified balance sheet) At FV as of date of donation Consider guidance in ASC through 45-7 to determine if contribution revenue should be UR, TR, or PR 62

63 Governmental Audit Quality Center GIK Headlines “Donated Pills Make Some Charities Look Too Good On Paper”, Forbes “Controversy Over Drug Values at Aid Groups: A Look at a Key Player”, Chronicle of Philanthropy “The Alice in Wonderland World of Charity Valuation”, Charity Watchdog “GIK’s Gone Wild”, TheNonProfitCFO 63

64 Governmental Audit Quality Center GIK ASC820 Guidance for GIK Valuations Definition of fair value – “the price that would be received to sell an asset…in an orderly transaction between market participants at the measurement date” Necessary assumptions Transaction occurs in the principal (or, if absent, most advantageous) market Transaction costs not included Highest and best use of asset 64

65 Governmental Audit Quality Center GIK Principal Market US market – Is the US the typical “principal market” based on volume of transactions? Developed world market : What GIK would have an international or developed world principal market? o Goods produced for developing world market needs, such as water sachets or mosquito nets. How to identify developed market values for a reasonable level of effort? 65

66 Governmental Audit Quality Center GIK Market Participants Those who are able to transact for the goods in reciprocal transactions Beneficiaries of programs are not included Donors are not included because by definition, a donation is a non-reciprocal transaction 66

67 Governmental Audit Quality Center GIK Highest and Best Use Challenges occur under this concept: Branded product’s highest and best use may be to sell to market participants who value brand, but product’s utility may be similar to lower valued, unbranded product – does branding impact value? Branding may be an indication of a different quality product – would higher quality goods which are branded result in higher fair values? Contrary to “highest and best use”, the perception often is that GIK values should be conservative – should it be conservative, aggressive, or “fair” value? 67

68 Governmental Audit Quality Center GIK Produce to Give Type Goods Partnerships between NFPs and corporate donors are on the rise When goods are produced to give specifically to a NFP, what impact does that have to their value? Should quality and utility of goods be key indicators of value, or should the intended market place, which in this case is no market, be key in valuation? 68

69 Governmental Audit Quality Center Proposed / Issued Accounting Standard Updates (ASUs) For NFPs Issues identified as the result of the Expert Panel recognizing practice issues that needed to be addressed to resolve a conflict in practice  Classification of the Sale of Donated Securities in the Statement of Cash Flows –ASU October 2012  Donated Services Received From Employees of an Affiliate 69

70 Governmental Audit Quality Center Classification of the Sale of Donated Securities in the Statement of Cash Flows ASU update requires an NFP to classify cash receipts from the sale of donated financial assets consistently with cash donations received in the statement of cash flows if those cash receipts were from the sale of donated financial assets that upon receipt were directed without any NFP- imposed limitations for sale and were converted nearly immediately into cash. Operating unless restricted to a long-term purpose, e.g., endowment or plant, then classified as financing activities Consistent with cash contributions 70

71 Governmental Audit Quality Center Donated Services Received From Employees of an Affiliate EITF Issue No. 12-B, Donated Services Received From Employees of an Affiliated Entity Considering change to ASC (NFP AAG paragraph 5.93) - contributed services should be recognized if employees of separately governed affiliated entities regularly perform services (in other than an advisory capacity) for and under the direction of the donee [and the recognition criteria for contributed services are met] 71

72 Governmental Audit Quality Center Proposed ASU – Affiliate Services Scenario – services purchased (costs paid) by one affiliate are provided without cost to another, often by personnel being assigned to another affiliate Potential change – report all services received (paid for by affiliate) at cost 72

73 Governmental Audit Quality Center Proposed ASU – Affiliate Services EITF reached a consensus that the expenses related to all personnel services that are regularly performed for the recipient NFP should be recognized in the NFP’s stand-alone financial statements and should be measured at the actual costs incurred by the affiliate under common control Contributed services criteria would no longer be applied when reimbursement isn’t sought ED issued for a 60-day comment period, ending September 20th 73

74 Governmental Audit Quality Center Split Interest Agreements Initial measurement is FV of assets- FV of liabilities= contribution FV of assets Obtaining information from 3 rd parties Engaging an expert 74

75 Governmental Audit Quality Center GAQC Resources 75

76 Governmental Audit Quality Center GAQC Resources GAQC Web Site can be a resource! (www.aicpa.org/GAQC)www.aicpa.org/GAQC 76

77 Governmental Audit Quality Center GAQC Resources Archived news alerts and member web eventsTools and Practice Aids Illustrative Report Examples and Peer Review Checklists Member discussion forum Links to other key organizations, news items and documents Marketing toolkitGovernmental event and conferences summary 77

78 Governmental Audit Quality Center Just Released! Auditee Resource Center – Open to the Public Why quality audit important? Auditee resources – some existing resources for auditors and some new (single audit, Yellow Book, other compliance audits, and financial statements audits) o Archived Web events o Practice aids o Articles o Access to GAQC Alerts Links to Publications Link to Conferences and other training available Access the Auditee Resource CenterAuditee Resource Center 78

79 Governmental Audit Quality Center GAQC Resources – A Sampling of Tools & Aids New! Yellow Book Independence Practice AidYellow Book Independence Practice Aid Single Audit Practice Aids SEFA Practice Aids (both for the auditor and auditee) Internal Control Practice Aids Illustrative Auditor’s Reports Peer Review Checklists Archived GAQC Alerts and GAQC Web eventsGAQC AlertsGAQC Web events AICPA Audit Guide, Government Auditing Standards and Circular A-133 AuditsGovernment Auditing Standards and Circular A-133 Audits 79

80 Governmental Audit Quality Center GAQC Resources – Archived GAQC Web Events from Past Year Understanding Indirect Costs The HHS Head Start Program* GASB and FASB Updates Challenges with Fair Value Measurements for NPOs* New 2011 Yellow Book* New Group Audit Standards Impact on Governmental and NPO Audits New HUD Rules for Banks* Understanding the Effect of the Clarified Auditing Standards on Governmental and NPO Audits Updated SEFA Practice Aids (for SAS 119) Subrecipient Monitoring: An Auditee and Auditor Perspective* Understanding the New AICPA Yellow Book Independence Practice Aid* Annual GAQC Webcast on Planning for 2012 Governmental and NPO Audits 2012 Compliance Supplement and Related Best Practices 80 * Open to the Public

81 Governmental Audit Quality Center Questions ????? 81

82 Governmental Audit Quality Center How do I get my CPE certificate? Just follow these steps: 1.Log on to CPA2Biz.com.CPA2Biz.com 2.Click on “My Account” at the top of the page and enter your CPA2Biz/AICPA username and password. 3.Click on “My Web Events” tab. 4.Click on “AICPA Learning Center Transcripts and Certificates” link (a new window or tab will open). 5.On the AICPA Learning Center, click on “My Transcript” in the left-hand menu. 6.Locate your completed course and click on “Go” to retrieve your certificate. If you need assistance with locating your certificate, please contact the AICPA Service Center at or 82

83 Governmental Audit Quality Center Evaluations Please take a few minutes to let us know what you thought about today’s Web event. Click on the link below to begin a short evaluation. https://www.surveymonkey.com/s/B26XWDT 83


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