1. Part 1 - Advanced Issues in Consolidation: Practical Solutions for the Resolution of Common Consolidating Headaches Friday, October 5, 2012 3:00-4:00 PM ET Presenters: Gayle Harrold and Winell Belfonte STRENGTH MATTERS ® Best Practices in Financial Reporting Webinar Series Made possible by the generous support of The John D. and Catherine T. MacArthur Foundation Audio Conference Info  Call-in #: 866-363-6079  Passcode: 851 497 0973 Audio Conference Info  Call-in #: 866-363-6079  Passcode: 851 497 0973 Issues With Consolidated Financial Statements Webinar Series

2. About STRENGTH MATTERS A national collaborative sponsored by NeighborWorks ® America, Housing Partnership Network (HPN), and Stewards of Affordable Housing for the Future (SAHF), with ongoing support from The John D. and Catherine T. MacArthur Foundation. Our partners also include: Calvert Foundation Enterprise Community Loan Fund F.B. Heron Foundation Ford Foundation Housing Assistance Council Housing Partnership Fund Local Initiatives Support Corporation Low Income Investment Fund Mercy Loan Fund NeighborWorks ® Capital

3. Website Info  www.strengthmatters.net www.strengthmatters.net  Please register if you have not already.  Site provides access to over 20 financial reporting best practices papers and other resources.  Upcoming Webinars and recordings of past sessions are posted.

4. www.strengthmatters.net

5. Getting Started  All participant lines will now be muted.  Have a question? Please use the Chat feature and send the Presenter (Gayle Harrold) or the Host (Francie Ferguson) your question.  To ask via phone, please wait for a pause in the presentation and un-mute your phone to speak: #6.

6. Learning Objectives  Identify key challenges to consolidating financial statements.  Evaluate options to address common hurdles in consolidating.  Apply practical solutions learned today in your organization’s consolidating process.

7.  So you are already consolidating…  It seemed like it would be straight forward…  Balance Sheet Eliminations-overview  Income Statement Eliminations-overview  Development Fees, Intercompany Receivables & Payables and Investment Accounts  Charts of Accounts  Classification Issues  Non-Controlling Interests  Cash Flows  Financial Statement & Implementation Issues  Conclusion  Strength Matters Web Site Agenda

8.  You have determined what you own, how much you own of it and whether or not you control the day to day decision making for each entity  You have identified your intercompany balances/transactions  The companies to be consolidated all have the same year end or are within 3 months of the parent company’s year end  When you consolidate, you lose a few brain cells over…. eliminating entries controlling and non-controlling interests So you are already consolidating…

9. It seemed like it would be straight forward… And then…..  Development Fees – are there options for eliminating these fees?  Your intercompany receivables are reserved at the parent company level  Your investment in your subsidiaries does not align with the equity in the deal  You self-manage but the properties use a different chart of accounts  You use property management companies each of whom uses a different chart of accounts AND….

10. …don’t forget…  Non-controlling interests – how should this be calculated & reflected in your financial statements  You know what you should eliminate….but it is a manual process or your audit firms pulls it together at year end.

11. Other issues to address?  Are there other obstacles you have encountered that you’d like us to discuss today?  Please use #6 to unmute your phone to ask a question, or use the Chat function via WebEx.

12.  Notes Receivable/Payable  Development Fees Receivable/Payable  Interest Receivable/Payable  Asset Management Fee/Incentive Fees Receivable/Payable  Operating Deficit Loans Receivable/Payable  Due to/from accounts  Development Fees capitalized in Building Costs  Investment Accounts/Partnership Capital Accounts Balance Sheet Eliminations

13. Income Statement Eliminations  Interest Income/Expense  Asset Management Fee/Incentive Fee Income (Expense)  Resident Service Fee Income/Expense  Other fees between entities  Development Fee Income  Depreciation Expense for capitalized development fees  Distributions to partners

14. Development Fees Removing your development fees from the project’s building costs – accounts potentially affected:  Property’s Books Building Costs Accumulated Depreciation Depreciation Expense  Sponsor’s Books Development Fee Revenue Net Assets Deferred Development Fees

15. Elimination of Development Fees  Direct approach: Remove cost from building Remove accumulated depreciation Remove current year depreciation expense Remove undepreciated value of development fee from net assets

16. Elimination of Development Fees 1996 Cumulative Fee capitalized by 2004 $ 1,144,615.00 Straight Line - 27.5 years27.5 Depreciation per year $ 41,622.36 Years of service 1996 - 201115.67 Accumulated Depreciation 1997 - 2011 652,222.44 2007 Cumulative Fee capitalized in 2007 $ 134,123.00 Straight Line - 27.5 years27.5 Depreciation per year $ 4,877.20 Years of service 1996 - 20114.17 Accumulated Depreciation 1997 - 2011 20,321.67 2009 Fee Capitalized in 2009 $ 36,579.00 Straight Line - 20 years Depreciation per year $ 1,828.95 Years of service 1996 - 2011 $ 3.00 Accumulated Depreciation1997 - 2011 5,486.85 Total Building - Total Capitalized Fee $ 1,315,317.00 Straight Line – see above Depreciation per year $ 48,328.51 Accumulated Depreciation 678,030.95 Net Assets 685,614.56 December 31, 2011drcr Building - Capitalized fee 1,315,317 Accumulated Depreciation 678,031 Depreciation Expense 48,329 Net Assets 685,615 total 1,363,646 Entry to Eliminate Un-depreciated Development Fee

17. Elimination of Development Fees  Can you consider the margin on development fees received?  If you have a history of tracking your overhead costs and have a means of determining what your profit on development fees are then you can consider eliminating only the profit, not the entire development fee.  If you can consider the margin, than only the profit is eliminated, not the cost of development fees ( actual overhead incurred by the sponsor).

18. Questions?  Please use #6 to unmute your phone to ask a question, or use the Chat function via WebEx.

19. Intercompany Receivables & Payables  Sponsor has a note & interest receivable that is fully reserved Eliminate the reserve against net assets, then eliminate the note & interest receivable against the payable  Sponsor records fees on a cash basis, property records them on an accrual basis Eliminate the fee recorded by the sponsor – will have portion of income/expense that remains un-eliminated

20. Investment Accounts  Investment account on parent companies books does not align with their equity in the underlying entity Misstated investment accounts result from a failure to record losses, excess losses have been recorded (tax basis used or losses in excess of investment recorded) or distributions have not been properly recognized by the parent  These findings may require a prior period adjustment

21. Sample Eliminations Worksheet 12/31/2011(DR) CR Co 10 & 33 New Madison Park IV - Related Party BalancesGL of MPDC New MP IV LP Assets Buildings $ 1,315,317 Accumulated Depreciation $ (678,031) Investment New MPIV LP Note & Interest Receivable from NMPIV LP Development Fee & Interest Receivable $ 245,000 Due from New MPIV LP - Company 33 $ 30,000.00 Total Assets $ 275,000.00 $ 637,286 Liabilities & Fund Balance Note & Interest Payable from NMPIV LP Development Fee & Interest Payable $ 245,000 Sponsor Loan from Parent $ 30,000 Beginning Net Assets $ 685,615 $ - Contributed capital $ - $ 271,946 Impact on Net Income (Loss) $ 352,226 $ 128,609 Total Liabilities & Fund Balance $ 1,037,841 $ 675,555 Balance $ 1,312,841.00 1,312,841.00 Income Statement Neighborhood Network Fees pd to MPDC $ 57,780 Property Distributions Received $ 271,946 Incentive Management Fee paid $ 7,500 Interest Income/Expense recorded on Notes Payable Interest Income/Expense recorded on Developer Fees $ 15,000 Subtotal $ 352,226 $ 80,280 Depreciation $ 48,329 Total Income Statement Impact $ 352,226 $ 128,609

22. Questions?  Please use #6 to unmute your phone to ask a question, or use the Chat function via WebEx.

23. Charts of Accounts  Your charts of accounts are not aligned While it would be ideal to have the same chart of accounts for all entities, it is not typical. Approach – consider grouping the companies with like charts of accounts and then prepare summary entries by financial statement line item only to accomplish the consolidation

24. Classification Issues  Reserves are recorded somewhere between current and long term assets on your properties’ financial statements reserves for operations & escrows for insurance and taxes should be classified as restricted current assets. replacement reserves should be classified as restricted long- term assets  The property records certain expenses differently than you would at the parent company level. – e.g. - payroll is recorded within Repairs & Maintenance at the property level but should be recorded as payroll expense on the statement of functional expense by the non-profit parent consider how material the classification issue is – if material, calculate and post an entry to the consolidation to adjust

25. Classification Issues  Classification of Cash If your financials present your properties in a column that is separate from your parent company, then all of the properties’ cash should be classified as non- restricted. If you issue single column consolidated statements, then the cash for those properties that are not wholly- owned should generally be classified as restricted

26. Non-Controlling Interests & Eliminations  How much of your eliminating entry is to be made against your net income and net assets and what is to be eliminated from the non-controlling interests’ share of net income and net assets?  Reporting requirements – Your statement of changes in net assets requires that both your net assets and the non- controlling interest in net assets is presented by net asset classification – unrestricted, temp restricted and perm restricted. Keep a roll-forward of your non-controlling interests and update it annually with their share of income/expense & distributions

27. Sample: Non-Controlling Interests December 31, 2011Parent Company New MP IV New Madison Park IV - Related Party BalancesUnrestricted GPLP Net Assets Non-Controlling InterestTotal Impact of Eliminations on Net AssetsCR (DR) and Non-Controlling Interest 1%99% Items eliminated from Net Income (loss) impacting Net Assets Depreciation Expense $ 483 $ 47,846 $ 48,329 Network Fees $ 57,780 $ 578 $ 57,202 $ 57,780 Incentive Fees $ 7,500 $ 75 $ 7,425 $ 7,500 Interest on Development Fees $ - $ 150 $ 14,850 $ 15,000 Distribution to MPDC $ 271,946 $ - $ 337,226 $ 1,286 $ 127,323 $ 128,609 Impact of Items to be eliminated from Net Assets Distribution from Partner's Capital to Parent by MPIV $ 271,946 $ - $ 271,946 Unamortized Developer Fee $ 733,944 Total Eliminations from Net Assets on Balance Sheet $ 1,071,170 $ 273,232 $ 127,323 $ 400,555 Net Asset Rollforward Beginning Balance of Net Assets/Minority Interest $ (415,939) $ 250,846 $ (165,093) before net loss and eliminating entries (see cap rollforward) Net Income $ 2,033 $ 201,257 $ 203,290 Distributions $ (271,946) $ (181,298) $ (453,244) Ending Net Asset Balance, after Net Income $ (685,853) $ 270,806 $ (415,047) Total Eliminations from Net Income $ 1,286 $ 127,323 $ 128,609 Elimination of Distribution from Net Assets $ 271,946 $ 273,232 $ 127,323 $ 400,555 Ending Net Asset Balance, after eliminations $ (412,620) $ 398,129 $ (14,492)

28. Sample Roll-Forward of Net Assets

29. Questions?  Please use #6 to unmute your phone to ask a question, or use the Chat function via WebEx.

30. Cash Flows Eliminations & the Cash Flows  Use the cash flows prepared for each property and then layer on your eliminating entries  Eliminating entries = Change in related party balances last year =/- the change in the related party balance this year

31. Financial Statement/Implementation Issues First Year Issues -  Will you present a single stand alone audit without comparative statements or restate the prior period presented?  If you present a stand alone audit, your opinion will refer only to that audit – may/may not be allowed by your external users. You will need to restate opening net assets so you will still have to consider the impact of consolidation on the prior year.  If you restate, you will restate the prior year’s financials, including opening net assets so you really need to look at consolidation issues/eliminating entries going back two years.

32. Financial Statement/Implementation Issues Ongoing Issues –  Where do eliminations occur? – depends upon whether you issue single column consolidated financials or consolidating financials – this will change as your company grows/changes  What is the most efficient way to capture eliminating entries? Set up eliminations company Code all related party accounts so that you can easily run reports to identify all accounts to be considered for consolidation/elimination purposes

33. Conclusion  Consolidation of controlled entities can involve a significant amount of upfront investigation to identify assets/liabilities & revenues/expenses to be eliminated  If your intercompany accounts are not in balance, you may have current or prior period adjustments to contend with  You may need to reconsider your consolidated financial statement format - new columns? Consolidating statements instead of consolidated for more transparent results  Although this presentation will show you how to consolidate using Excel, automation of the process is preferred and will depend upon your financial software. Excel, while useful, will not be your friend in the end.

34. Questions?  Please use #6 to unmute your phone to ask a question, or use the Chat function via WebEx.

35. www.strengthmatters.net Visit the Strength Matters Website, and REGISTER to access:  21 White Papers addressing numerous accounting and reporting topics Consolidations White Papers – 3a, 3b & 4a, 7  Templates for Management’s Discussion & Analysis Cash Flow forecasting Summary of Debt Template Project Pipeline Template…..and more!

36. Contact Information  Gayle Harrold: 617-849-6224, gharrold@madison-park.org gharrold@madison-park.org  Winell Belfonte: 301-961-5546, winell.belfonte@reznickgroup.com winell.belfonte@reznickgroup.com  Frances Ferguson: 512-441-5441, fferguson@nw.org fferguson@nw.org  Lindsay Wells, 617-821-0463, consult.lwells@gmail.com consult.lwells@gmail.com

37. Stay Tuned! Upcoming Webinars:  Parts 2 & 3 in the Issues With Consolidated Financial Statements Series Part 2: Financial Statement Formats - Maximizing Readability for Your Board and External Users (Fall 2012 - date TBD) Part 3: Consolidated Financial Statements 101 (early 2013 - date TBD)  More Webinars coming in 2013! Visit www.strengthmatters.net to view recorded Webinars and download presentations.www.strengthmatters.net

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