ABACC - Accounting & Tax Update - Fran Brown, Partner Dave Moja, Partner CapinCrouse LLP
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ABACC – Accounting & Tax Update Fran Brown, Partner Dave Moja, Partner CapinCrouse LLP
Accounting & Financial Reporting
ASUs We Will Be Covering Today • 2014-15 Going concern • 2015-01 Extraordinary items • 2015-03 Debt interest • 2015-11 Inventory • 2016-18 Restricted Cash • 2017-02 Consolidation guidance • 2017-07 Compensation retirement benefits
ASUs We Will Be Covering — At a High Level • 2016-14 NFP Financial Statements • 2016-02 Leases • 2014-09 Rev rec • 2015-07 NAV disclosures • Proposed ASU – Grants and Contracts
ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
Disclosures
• Disclosure is required when “substantial
doubt” exists
• “… when conditions and events, considered in the
aggregate, indicate that it is probable that the entity
will be unable to meet its obligations as they become
due within one year after the date that the financial
statements are issued…”
• Current auditing standards don’t give a definition of
“substantial doubt”
Triggers
Other
Negative indications
Internal External
financial of
matters matters
trends financial
difficulties
Time Horizon
3/1/20X3
• FASB Requirement:
12/31/20X2 One Year from
FS Issuance Date
• Prior Auditing
3/1/20X2 Standard
Requirement: One
• FS Issuance Date Year from Balance
12/31/20X1 Sheet Date
• Balance Sheet DateDisclosures
• Principal conditions or events
• Management’s evaluation
• Management’s plan
• Statement that there is “substantial doubt”
about the entity’s ability to continue as a going
concern
• This is only necessary when management’s plans
do not alleviate concernEffective Date • For annual periods ending after December 15, 2016 • How does this impact debt covenant waivers?
ASU 2015-01, Eliminating the Concept of Extraordinary Items
OLD RULES – Extraordinary Items • Criteria to be met to qualify as extraordinary: • Unusual in nature • Infrequency of occurrence • Both had to be met
NEW RULES – Nothing • Does not exist
ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs
Update
Debt issuance costs
related to a recognized
debt liability should be Recognition and
presented in the measurement guidance
balance sheet as a for debt issuance costs
direct deduction from are not affected
the carrying amount of
that debt liabilityEffective Date • Effective for fiscal years beginning after December 15, 2015
ASU 2015-11, Simplifying the Subsequent Measurement of Inventory
Concepts • Measure inventory at the lower of cost and net realizable value • Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation • Not in scope – LIFO or Retail Inventory Method
Effective Date • Fiscal years beginning after December 15, 2016 • Prospective application
ASU 2016-18, Restricted Cash
Update • Statements of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents • Transfers between cash, cash equivalents, and restricted cash or restricted cash equivalents are not reported as cash flows activities • Disclose in a narrative or tabular format the amounts, disaggregated by line item, that sum to the total amount shown in the SOCF
Effective Date • For fiscal years beginning after December 15, 2018
ASU 2017-02, Clarifying When a Not-for-Profit Entity That Is a General Partner or a Limited Partner Should Consolidate a For-Profit Limited Partnership or Similar Entity
Update
• This ASU was issued to clarify when a NFP that is
the General Partner or a Limited Partner should
consolidate a For-Profit Limited Partner or similar
entity
• Retains the consolidation guidance that was in
Subtopic 810-20 for NFPs by including it within
Subtopic 958-810
• Adds guidance to Subtopic 958-810 on when an
NFP limited partner should consolidate a for-profit
limited partnershipEffective Date
• Fiscal years beginning after December 15, 2016
• NFPs need to adopt ASU 2017-02 at the same time
they adopt ASU 2015-02 and should apply the same
transaction method elected for the application of
ASU 2015-02
• For NFPs that have already adopted 2015-02, will
need to be applied retrospectively for all relevant
periods beginning with the fiscal year in which
2015-02 was initially appliedASU 2017-07, Improving the Presentation of Net Periodic Pension Cost & Net Periodic Benefit Cost
Update
• Requires that an employer report the service cost
component in the same line item or items as other
compensation costs arising from services rendered by
the pertinent employees during the period
• The other components of net benefit cost are required to
be presented in the income statement separately from
the service cost component and outside a subtotal of
income from operations, if one is presented
• Only the service cost component is eligible for
capitalization when applicable (for example, as a cost of
internally manufactured inventory or a self-constructed
asset)Effective Date • Fiscal years beginning after December 15, 2018
ASUs We Will Be Covering — At a High Level • 2016-14 NFP Financial Statements • 2016-02 Leases • 2014-09 Rev rec • 2015-07 NAV disclosures • Proposed ASU-Grants and Contracts
ASU 2016-14, NFP Financial Statement
Final Words
• Implementing the ASU can take longer than you
think
• Start working on Expense Analysis by natural and
function and work through the format issues sooner
rather than later
• Assess your cost allocation methods – contact IT now if
you currently don’t allocate
• Attempt to construct the Board Designation before
doing the Liquidity & Availability disclosures
• Beginning sooner rather than later will make final
implementation so much easier.ASU 2016-02, Leases
Update
Recognition &
Lease Classification
New Definition Measurement
of a Lease Finance Lease
Right of Use Asset
Operating Lease
Lease Liability
Subsequent Short-Term Lease
Measurement ExceptionEffective Date
NFP entities that have issued, For All Other Entities
or are conduit bond obligators
for, securities that are traded,
listed, or quoted on an
exchange or an OTC market
Fiscal years Fiscal years
beginning after beginning after
December 15, 2018 December 15, 2019ASU 2017-09 Revenue From Contracts with Customers (“Topic 606”)
Scope
• This FASB ASU applies when an entity
• enters into contracts with customers to
transfer goods or services; or
• enters into contracts for the transfer of
nonfinancial assets
• Unless those contracts fall within the scope
of other standards, such as insurance, lease
contracts, or guarantees within the scope of
Topic 460Overview
Addresses
concerns Supersedes
regarding or amends
Joint Creates a
the existing
convergence new Topic in
complexity revenue
project the
and lack of recognition
between the Codification
consistency requirement
FASB and the
surrounding ASC 606 s (will
IASB
the replace ASC
accounting 605)
for revenueOverview (continued)
Eliminates
Avoids
transaction Provides more
inconsistencies
and industry- useful
Provides a of accounting
specific information
principles- treatment
revenue through
based across
recognition enhanced
approach different
guidance disclosure
geographies
under current requirements
and industries
GAAPGuidance • Recognize revenue to depict the transfer of promised goods or service to customers in an amount that reflects the considerations to which the entity expects to be entitled in exchange for these goods and services
Key Terms
Transfer Amount
Reflects
Transfer of promised consideration
goods and services expects to receive5-Step Process 1. Identify contracts 2. Identify performance obligations (PO) 3. Determine transaction price 4. Allocate transaction price 5. Recognize revenue when PO is satisfied
Application for Recognition Steps to apply the core principle:
Implementation Guidance
• Performance obligations • Licensing
satisfied over time • Repurchase agreements
• Methods for measuring • Consignment arrangements
progress
• Bill-and-hold arrangements
• Sale with a right of return
• Customer acceptance
• Warranties
• Disclosure of disaggregated
• Principal versus agent revenue
considerations
• Customer options for
additional goods or services
• Customers’ unexercised
rights
• Nonrefundable upfront feesConsiderations for NFPs • Contributions (out of scope) • Bifurcation (combination of exchange and contribution) • Membership Dues • Tuition and Fees • Licenses and Royalties
Effective Date
• For a public entity (including NFP entities that
have issued or are conduit bond obligors for
securities that are traded, listed, or quoted on
an exchange or OTC market)
• For annual reporting periods beginning after
December 15, 2017
• For all other entities
• For annual reporting periods beginning after
December 15, 2018AICPA Rev Rec Task Forces
• The AICPA has formed 16 industry task forces to help
develop a new accounting guide on revenue recognition
that will provide illustrative examples for how to apply
the new standard — one is for NFPs
• Implementation issues — finalized and included in AICPA
Revenue Recognition Guide:
• Tuition and housing revenues for NFP higher eds
• Contributions
• Bifurcation of Transactions Between Contribution and Exchange
Components
• Implementation issue — out for exposure
• Subscription and membership duesASU 2017-07 Disclosures for Investments in Certain Entities That Calculate NAV (or its equivalent)
Update • Removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient
Effective Date
• Retrospective application
NFP Entities
Fiscal years beginning after December 15, 2016Proposed ASU – Clarifying the Scope and Guidance for Contributions Received and Contributions Made
Proposed Accounting & Reporting
Proposed Accounting & Reporting • Applies to both contributions received and made • Proposed ASU requires: • A right of return or release must exist, and • The agreement must include a barrier
Indicators To Determine A Barrier
Including But Not Limited To:
• Inclusion of a measurable performance-
related barrier
• Whether a stipulation is related to the
purpose of the agreement
• The extent to which a stipulation limits
discretion by the recipient
• The extent to which a stipulation requires an
additional action or actionsProposed Effective Dates The effective date is the same as the new Revenue Recognition standard (Topic 606), but allows for early implementation.
Tax Update Tax Update
Tax Reform – Higher Education
• Excise Tax on Some Private Colleges &
Universities
• Each Unrelated Business Activity Stands Alone
with Respect to Profit/Loss
• Excess Compensation Excise Tax
• College Athletic Event Seating Rights
• UBIT on Certain Fringe Benefits
• Repeal of Advance Refunding BondsTax Reform – Higher Education • Whew! The provision that made “logo and name” licensing fees automatically (“per se”) unrelated business income did not make it out of the Senate. Thus, we escaped without this rule in the new law.
Tax Reform: On-premises Athletic Facilities = UBIT • Section 13703 of the new law contains a provision whereby the market value of providing exercise facilities (and specific other fringes) to staff and faculty would be considered unrelated business income and required to be reported on Form 990-T.
Tax Reform: On-premises
Athletic Facilities = UBIT
• “Unrelated business taxable income of an organization shall be
increased by any amount for which a deduction is not
allowable under this chapter by reason of section 274 and
which is paid or incurred by such organization for any qualified
transportation fringe (as defined in section 132(f)), any
parking facility used in connection with qualified parking (as
defined in section 132(f)(5)(C)), or any on-premises athletic
facility (as defined in section 132(j)(4)(B)).”
• “The Secretary shall issue such regulations or other guidance
as may be necessary or appropriate to carry out the purposes
of this paragraph, including regulations or other guidance
providing for the appropriate allocation of depreciation and
other costs with respect to facilities used for parking or for
onpremises athletic facilities.”Tax Reform: Moving Expense
Deductions Suspended
• Sections 11048 and 11049 of the new law suspend the
exclusion from income tax for qualified moving expense
reimbursements AND the deduction for moving expenses
through December 31, 2025 (except in the case of a
member of the Armed Forces of the United States on
active duty who moves pursuant to a military).
• Thus, IRC Section 217 has been amended by adding at
the end the following new subsection:
• “(k) SUSPENSION OF DEDUCTION FOR TAXABLE YEARS
2018 THROUGH 2025.”Tax Reform: Athletic Tickets Deduction Suspended • College Athletic Event Seating Rights. Historically, special rules applied to certain payments to institutions of higher education in exchange for which the donor/payor who met certain criteria received the right to purchase tickets or seating at an athletic event. Specifically, the donor/payor could treat 80 percent of a payment as a charitable contribution. The new law includes a denial of this deduction for periods after December 31, 2017.
Tax Reform: Private College/University Endowment Excise Tax • Excise Tax on some Private Colleges and Universities. There is a 1.4% excise tax on the net investment income (to be defined) of private colleges and universities that are “applicable educational institutions” (AEIs) — generally meaning the school has at least 500 students and 50% of its students are located in the U.S. The “threshold” computation applies to AEIs with an aggregate fair market value of the assets at the end of the preceding taxable year (other than those assets that are used directly in carrying out the institution’s exempt purpose) of at least $500,000 per student.
Tax Reform: What did not make it in? • Political Campaign Activity. The current “Johnson Amendment,” which prohibits any political activity by 501(c)(3) organizations, is not affected. • Private Foundation Taxes. The current 1% or 2% structure for taxes on investment income of private foundations is not changed from current law. • Tuition Reduction/Remission Rules Not Affected. Qualified tuition reductions will remain non-taxable. • Employer-Provided Educational Assistance Intact. The Section 127 provision for the non-taxability of certain employer educational assistance is not repealed.
Tax Reform: What did not make it in? • Housing for the Convenience of the Employer. The House bill contained a provision to provide limits on the amount that could be excluded from an employee’s income for employer-provided housing. This provision is not in the final bill. • UBIT on Research Activities. The House bill included a modification that subjected income from research activities whose results were not publicly available to unrelated business income taxes. The final bill does not include this provision. • Donor-Advised Fund Reporting. The final bill does not incorporate the House provision to increase reporting and disclosure of donor-advised funds.
Tax Reform: What did not make it in? • Private Activity Bonds. The House bill included a provision to make interest on private activity bonds taxable. This provision is not included in the final bill. • Inflation Adjustment for Charitable Mileage Deduction. The House proposed a provision to repeal the statutory charitable mileage rate and provide instead that the standard mileage rate used for determining the charitable contribution deduction shall be a rate which takes into account the variable costs of operating an automobile. This is not included in the final bill.
Tax Reform – Other Issues
• Repeal and replacement of the Affordable Care
Act – Not really
• Repeal of the “Johnson Amendment” – No!
• Excess benefit taxes and “rebuttable
presumption”
• Corporate tax rate (flat) – 21%
• Perceived effects on charitable givingPerceived Effects on Charitable
Giving
• For 100 years, our tax code has been a powerful
tool to encourage and empower Americans to
support their communities through charitable
giving.
• Tax reform provides a unique opportunity to explore policies
that could increase charitable investment in local
communities.
• The charitable deduction has been included in current tax
reform proposals, but efforts to increase the standard
deduction and lower rates have the unintended consequences
of limiting the effect of the charitable deduction and reducing
giving.Perceived Effects on Charitable
Giving
• A recent study by Independent Sector and Indiana
University indicates that current tax reform
proposals would reduce charitable giving.
• The study finds that doubling the standard deduction and
reducing the top rate to 35% could reduce charitable giving
by up to $13 billion per year.
• The Independent Sector/Indiana University study also found
that when those proposals incorporated an expanded
charitable deduction for all taxpayers, including people who
do not currently itemize on their taxes, charitable giving
would actually increase by an estimated $4.8 billion.Pouring Agreements Update • The 2016 snapshot entitled “Advertising or Qualified Sponsorship Payments?” still left hanging the situation of a “pouring agreement” whereby a donor/sponsor/partner makes a contribution to a college under an agreement that stipulates the college will only serve (“pour”) that donor/sponsor/partner’s soft drinks. It can be argued that this type of payment would not be deemed as “sponsoring” an event. However, the snapshot states, “The Regulations apply to all forms of corporate sponsorship activities and not just single events. Sponsored activities may include a single event, a series of related events, an activity of extended or indefinite duration, and/or continuing support of an exempt organization’s operation. A payment may be a qualified sponsorship payment regardless of whether the sponsored activity is related or unrelated to the organization’s exempt purpose(s).””
Pouring Agreements Update • “An exclusive provider arrangement limits the sale, distribution, availability, or use of competing products, services, or facilities in connection with an exempt organization’s activity. An exclusive provider arrangement generally results in a substantial return benefit to the payor. Thus, only the portion of the payment that exceeds the fair market value of the exclusive provider arrangement and any other benefit(s) received is a qualified sponsorship payment that does not constitute receipt of income from an unrelated trade or business.”
Pouring Agreements Update • “A payment that does not meet the criteria as a qualified sponsorship payment is not automatically subject to UBIT. Rather, the unrelated business income tax treatment of such unqualified payment is determined under the existing principles and rules found in IRC Sections 512, 513, and 514. Treas. Reg. Section 1.513-4(d)(1)(i).”
Minister’s Housing Allowance
• In November 2013, a federal judge held that the
minister’s housing allowance (under IRC section
107(2)) was unconstitutional because it “violates
the establishment clause of the First Amendment”
• This was in response to a case filed by a
foundation that sued because it did not believe its
officers could utilize this tax benefit
• The judge delayed the implementation of the ruling
until appeals had run their courseMinister’s Housing Allowance
• In 2014, the Seventh Circuit Court overturned the
lower court judge’s ruling
• However, the reversal was not based upon the
merits of the case, but on the “standing” of the
plaintiffs
• Ultimately, the officers of the foundation had not
had the IRS deny the minister’s housing
allowances claimed on their individual tax returnsMinister’s Housing Allowance
• In 2016, the foundation filed a new court case —
because its officers paid taxes on the housing
allowances apparently claimed on their individual
returns
• In August 2016, the federal government made its first
filing in this new case. In the government’s filing, it
conceded that, based upon their understanding of the
facts, the foundation’s officers have the legal standing
to challenge the housing allowance exclusion.
• The government maintained that the plaintiffs did not
have standing to challenge the parsonage exclusion –
IRC section 107(1)Minister’s Housing Allowance
• In October 2017, the District Court (Judge Crabb) held
that the Section 107(2) minister rental allowance
violates the First Amendment
• Previously dismissed case against Section 107(1)
• After the foundation’s executives — following the
directions of the Court of Appeals — filed individual tax
returns with housing allowances and had them denied
by the IRS, the judge found that they had standing to
challenge Section 107(2)
• On to the Court of Appeals… and beyond?!Department of Treasury Priority
Guidance Plan – Dual Use
Current language in the regulations – allocate
between the two uses “on a reasonable basis.”
• For the 14/15 year and 15/16 year and 16/17
year and 17/18 year, the Priority Guidance Plan
has listed:
• Guidance under §512 regarding methods of
allocating expenses relating to dual use
facilities.Dual Use Facilities and Cost
Allocation
• A dual use facility is used for both
exempt and nonexempt purposes.
• Examples:
• College athletic stadium used for concerts
• Charity’s community fitness center also used
by the public
• University golf courseMethods of Allocation • Reasonable given all facts/circumstances • Space-based methods • Time-based methods • Unit-based methods
Cost Allocations – Unit-based • College Y is a public charity in accordance with Internal Revenue Code sections 501(c)(3) and 170(b)(1)(A)(ii). In the past year, a donor gave Y a golf course. So now Y runs a golf operation that is used by students, faculty, alumni, and the general public. Fees charged are as follows: • General public $30 • Alumni $25 • Faculty $10 • Students $10
Cost Allocations – Unit-based
• The accounting team at Y knows that they have unrelated
business income for the greens fees paid by the general
public and alumni (but not students and faculty). They
have allocated expenses to the unrelated business income
on a “gross-to-gross” (gross revenue for unrelated golfers
over total gross revenue). So, for example, if each of the
four “types” of golfers above accounted for 250 rounds
per year, the expense allocation would look as follows:
($30 x 250 = 7,500) + ($25 x 250 = 6,250) =
13,750 / 18,750 = 73.33%Cost Allocations – Unit-based
• The IRS EO Examinations team prescribed a “unit-
based” allocation method modeled after NUMBER OF
ROUNDS as follows:
Number of unrelated (alumni & general public) rounds
of golf (numerator) / Total number of rounds of golf
(denominator)
= % of expenses allocable to unrelated business
income from golf fees
• This would result in a much lower expense allocation
percentage at:
500 rounds / 1,000 total rounds = 50.00%Form 1098-T Box 1 Only!
• The 2015 PATH Act contained a provision that eliminated
the option for educational institutions to either report on
Form 1098-T payments received (Box 1) or amounts
billed (Box 2).
• For forms required to be filed for 2016 and 2017, the IRS
announced that it would not impose penalties if an
institution reported the aggregate amount billed for the
calendar year for expenses paid (Box 2).
• Ultimately, the relief extended the rules in effect prior to
the PATH Act. However, in 2017 the IRS announced that
no further “Box 1” relief would be granted after 2017.Rebuttable Presumption of Reasonableness • Treas. Reg. 53.4958-6 • Approval by Independent Board (Committee) • Use of reasonable comparable data • Documentation of decision
Form 990 Reporting and ASU 2016-14
2018 Standard Mileage Rates • The 2018 optional mileage rates are as follows: Type Rate Business travel 54.5¢ per mile Medical & moving travel 18¢ per mile Charitable mileage travel 14¢ per mile**
Form 990 Extension Changes • A review of the new Form 8868 for 2017 reveals no Part II. Further, the draft instructions (under “What’s New”) state: There is now an automatic 6-month extension of time to file instead of the previous 3-month automatic extension and subsequent request for an additional 3-month extension. The form and instructions have been revised accordingly.
IRS – Issue Snapshots
• Knowledge Management (KM)
• Knowledge Networks (K-Nets)
• In 2016 EO completed 8 Issue Snapshots
• In 2017 EO completed 8 Issue Snapshots
• K-Nets will continue to prepare and post technical Issue
Snapshots for EO employees and the general public
• The TE/GE “Issue Snapshots” may be found at
www.irs.gov/government-entities/tax-exempt-and-
government-entities-issue-snapshotsIRS – Issue Snapshots – UBIT
• Advertising or Qualified Sponsorship
Payments? (9/29/16)
• Volunteer Labor Exclusion from Unrelated
Trade or Business (5/12/17)
• Identification and Treatment of Income from
Mailing Lists (5/24/17)
• Exclusive Provider Arrangement within
Qualified Sponsorship Agreements (6/16/17)IRS – Issue Snapshots – UBIT • Exclusion of Bingo from Unrelated Business Activity (10/18/17) • Rents from Personal Property, “Mixed Leases,” and the Rental Exclusion from UBTI (10/18/17) • Exclusion of Rent from Real Property from Unrelated Business Taxable Income (10/18/17)
IRS “Case Selection Model”
• “Data-Driven Decision Making”
• 200 – 250 “Queries”
• R.A.A.S. (Research, Applied Analytics &
Statistics)
• 2017 – 6,100 Examinations
• College & University Compliance Program
• Employment Tax AuditsIRA Charitable Rollover Made
Permanent (2015)
• For taxpayers 70.5 years of age
• Up to $100,000
• Direct distribution to a public charity
• PERMANENT
• No changes (i.e. higher limit, DAFs, 59.5 years
old)
• Tax reform?2018 – Other Matters of Interest • Coaches’ Apparel • Fuel Credits • QSEHRA (Small Institutions) • UBIT: The Required Minimum Level of Knowledge
Questions?
Thank you. Fran Brown, Partner Dave Moja, Partner CapinCrouse LLP CapinCrouse LLP fbrown@capincrouse.com dmoja@capincrouse.com 617.535.7534 321.258.9907
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