On the Horizon -- FASB issues standard on NFP financial statements

Contents FASB issues new standard on financial statements of NFP entities AICPA board issues exposure draft on peer review program PCAOB issues annual report on inspections of broker-dealer auditors International Federation of Accountants      IAASB releases working group paper on external reporting
Comment letter issued

FASB issues new standard on financial statements of NFP entities The Board recently issued ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, which is intended to improve how a not-for-profit (NFP) entity classifies its net assets, as well as the information it presents in its financial statements about its (1) liquidity and availability of resources, (2) expenses and investment return, and (3) cash flows. The major provisions of ASU 2016-14 are summarized below.

Scope ASU 2016-14 applies to substantially all NFPs. Donors, grantors, creditors, and others that use an NFP’s financial statements are also affected.

Net asset classification The new guidance replaces the three classes of net assets (unrestricted, temporarily restricted, and permanently restricted) currently presented on the statement of financial position with two new classes of net assets, which are based on the existence or absence of donor-imposed restrictions. In addition, NFPs must present changes in each of the two new classes of net assets in the statement of activities.

The new guidance also

  • Changes the net asset classification of donor-restricted endowment funds when the fair value of the fund is less than either the original gift amount or the amount required to be maintained by the donor or by law (underwater endowment funds), and adds quantitative and qualitative disclosures about underwater endowment funds.
  • Eliminates, in the absence of explicit donor stipulations on capital gifts, the current option to release, over the estimated life of the acquired asset, the donor-imposed restrictions on gifts of cash or other assets to be used to acquire or construct a long-lived asset (the over-time approach). It further requires an NFP to release these restrictions when the asset is placed in service (the placed-in-service approach).
  • Enhances the current disclosure requirements related to net assets with donor restrictions to include how the restrictions affect the use of resources.

Liquidity and availability of resources The ASU includes specific disclosure requirements intended to improve a financial statement user’s ability to assess an NFP’s available financial resources, along with its management of liquidity and liquidity risk. These disclosure requirements include

  • Quantitative information, and qualitative information as necessary, about the availability of the NFP’s financial assets to meet cash needs for general expenditures within one year of the reporting date, including factors that may affect the financial assets’ availability
  • Qualitative information in the notes to the financial statements that is useful in assessing an entity’s liquidity and that communicates how an NFP manages its liquid resources to meet cash needs for general expenditures within one year of the reporting date

Expenses and investment return ASU 2016-14 requires an NFP to present expenses by both their natural and functional classification in a single location in the financial statements. This information can be presented on the statement of activities, as a separate statement, or in the notes to the financial statements. NFPs must also describe the methods used to allocate costs among program and support functions.

The new guidance also requires NFPs to present investment return net of related external and direct internal expenses, but eliminates the current requirement to disclose those netted expenses.

Operating cash flows NFPs continue to have the option to present cash flows using either the direct method or the indirect method. Those electing the direct method are no longer required to present or disclose the indirect method reconciliation.

Effective date, transition, and other matters The new guidance is effective for annual financial statements for fiscal years beginning after December 15, 2017 and for interim periods within fiscal years beginning after December 15, 2018. NFPs may early adopt ASU 2016-14; however, an NFP may initially adopt this new guidance only for an annual period or for the first interim period within the fiscal year of adoption.

NFPs must use a retrospective approach to adopt the new guidance in ASU 2016-14, but if comparative financial statements are presented, they have the option to omit certain information for any periods presented that are prior to the period of adoption. In the period of adoption, an NFP is required to disclose the nature of any reclassifications or restatements and their effects, if any, on changes in the net asset classes for each period presented.

The FASB is providing the following documents to help entities learn more about the new financial statement presentation guidance for NFPs:

In addition, the FASB will present a webcast on September 13 that will provide an overview of the new standard. Participants can register for the webcast and find additional information through this link to the FASB website.

AICPA board issues exposure draft on peer review program The AICPA Peer Review Board issued an exposure draft, Proposed Changes to the AICPA Standards for Performing and Reporting on Peer Review – Modifications to Peer Review Report to Specifically Disclose the Selection and Review of Single Audits as Must-Select Engagements and Modifications to Representation Letter to Reflect Scope of Engagements Performed and Selected.

The Peer Review Board has found that certain firms have not enrolled in the peer review program as required and that some firms have omitted “must-select” engagements from the scope of the review. The following changes are proposed to address those issues:

  • Modify the illustrative peer review reports for system reviews to specifically state that a single audit was selected and reviewed in the scope of the review
  • Require the firm representation letter to address all must-select engagements, including single audits, when performed by the firm and selected by the peer reviewer

Comments are due by September 30.

PCAOB issues annual report on inspections of broker-dealer auditors The PCAOB issued an annual report on its interim inspection program for auditors of brokers and dealers detailing the results of its 2015 inspections. The report covers the inspection of 75 firms and portions of 115 audits and the related attestation engagements. The report also includes examinations of broker-dealers’ compliance reports and reviews of broker-dealers’ exemption reports. The results of the inspections indicate high levels of deficiencies similar to the inspection results in prior years.

Deficiencies were identified in 96 percent of the firms inspected. Deficiencies were found in 77 percent of the audits, down from 87 percent in 2014; in 78 percent of the examinations of compliance; and in 34 percent of the reviews of exemption reports. Areas where deficiencies were identified include

  • Auditor independence appeared to be impaired in 7 percent of the audits, down from 25 percent in 2014
  • Auditing revenue in 70 percent of the audits
  • Auditing fair value measurements in 44 percent of the audits where procedures to test fair value measurements were inspected
  • Engagement quality reviews (EQR) in 57 percent of the audits, 48 percent of the examinations, and 34 percent of the reviews. Inspectors found seven instances where the auditor had not obtained an EQR for either the audit or the related review, which is a new requirement.

A fact sheet on the annual report is also available.

International Federation of Accountants IAASB releases working group paper on external reporting The International Auditing and Assurance Standards Board’s (IAASB) Integrated Reporting Working Group released a discussion paper, “Supporting Creditability and Trust in Emerging Forms of External Reporting: Ten Key Challenges for Assurance Engagements.” The paper sets out the principal findings from research and outreach regarding developments in emerging forms of external reporting (EER) frameworks and professional services most relevant to EER reports, and seeks feedback from stakeholders on whether new or revised standards or guidance are necessary.

The paper explores

  • The factors that can enhance creditability and trust, internally and externally, in relation to emerging forms of external reports
  • The types of professional services covered by IAASB international standards most relevant to these reports, in particular, assurance engagements
  • The key challenges in relation to assurance engagements
  • The type of guidance that might be helpful to support the quality of these assurance engagements

An FAQ, in addition to other materials, was also developed by the working group to supplement the paper.

Comments are requested by December 15.

Comment letter issued On August 15, the firm issued a comment letter in response to the PCAOB’s reproposed auditing standard, The Auditor’s Report on an Audit of Financial Statements when the Auditor Expresses an Unqualified Opinion and Related Amendments to PCAOB Standards (Reproposal).

© 2016 Grant Thornton LLP, U.S. member firm of Grant Thornton International Ltd. All rights reserved. This Grant Thornton LLP On the Horizon provides information and comments on current accounting and SEC reporting issues and developments. It is not a comprehensive analysis of the subject matter covered and is not intended to provide accounting or other advice or guidance with respect to the matters addressed in this publication. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this publication. For additional information on topics covered in this publication, contact a Grant Thornton client-service partner.