Keeping Your Financial Statement Disclosures Crisp, Complete and Under Control

Keeping Your Financial Statement Disclosures Crisp, Complete and

Under Control October 15, 2012

1

Speaker Biography

Mike is the Managing Director in Charge of the Firm’s National Not-For-Profit Practice and serves on the National Not-For-Profit Executive Committee. Additionally, Mike leads the New England Not-For-Profit Practice. He joined the Firm in 2004 prior to a long tenure at the Boston office of another top ten national accounting firm. Mike has more than 25 years of audit experience and exclusively serves not-for-profit organizations. He serves as the lead audit partner on colleges, universities, secondary schools, cultural and human services organizations.

Michael T. Burns, CPA Managing Director/Shareholder CBIZ & Mayer Hoffman McCann P.C.

2

Objectives for the Session

• To heighten your awareness of opportunities to improve financial statements and footnotes

• To provide practical suggestions in making these improvements

• To assist you in evaluating completeness of your current disclosures

3

Why Are the Financials and Footnotes So Important?

• Why should we care?

• Who are the readers of the financial statements?

• What do the financials and footnotes say about your organization?

4

Where Can Improvements be Made?

• Do the financials make the most possible sense compared to internal presentations? – Common issue with Audit Committees and Boards when trying to

compare budget to actual as well as other management provided reports to the external audited financial statements

• Potential improvement – Review internal presentation documents for opportunities to mirror

audited financial statements where possible • Operating and non-operating activities • Same revenue and expense categories and captions/terminology used • Temporary and permanently restricted net asset activity • Depreciation

5


• Do your footnotes contain ancient history? – When was the last time the footnotes were read from beginning to

end? – Sometimes historical information that was once important may not be

important to the years of the financial statements being presented

• Potential improvement – Review for terminology referring to years for which financial

information is not being presented (i.e. longer than the last 2 years) – Reword or remove any information that is no longer relevant to the

financials being presented

6


• Does the description of the organization do justice to what the organization currently does? – When was the last time the organizational description disclosure was

reviewed and compared to current activities?

• Potential improvement – Review the current disclosure – Review the 990 for any information disclosed that could be relevant to

disclose in the financial statements – Update for any improvements or changes to recent activity

• Locations of operations • Programmatic activity • Major sources of revenue

7


• Do you have financial statement lines (and thus disclosures) covering immaterial items? – When was the last time you reviewed the statement of financial

position, statement of activities and statement of functional expenses for evidence of immaterial and/or irrelevant line items?

– Organizations change over time and inevitably matters that were once material may no longer be material to the organization’s overall financial position

• Potential improvement – Review line items and ask how relevant and material they are to

the overall financial position of the organization – Combine like items – Review disclosures for opportunities for combination or deletion

8


• Is there information on the face of the financial statements that is better suited in a footnote? – Common area for this is fixed asset activity

• Potential improvement – Look for areas on the statement of financial position or statement

of activities where there is detailed information – Consider moving the detailed information to a footnote or just a

line item on the face of the financial statements

9


• Do your policies follow a logical sequence relative to the statement of financial position (balance sheet) and statement of activities? – Often new disclosures are just added to the end of the previous

disclosures and are not reviewed for consistency with the presentation of the core financial statements or for logical flow of sequence

• Potential improvement – Review order of footnotes and compare to order and flow of the core

financial statements – Review order of organizational policy note for flow and order

10


• Do you have a revenue recognition policy that covers the complexity of the earned and contributed support of the organization? – As revenue sources grow and become more material to an

organization, the revenue recognition policy disclosure should be updated

• Potential improvement – Review each significant revenue line item on the statement of

activities and look for a corresponding revenue recognition policy disclosure

– Ask if an existing disclosure is adequate relative to current activity – Add any missing information

11


• Do you have a policy for each major financial statement caption? – Financial statement line items are frequently added but sometimes

the corresponding policy disclosure gets overlooked

• Potential improvement – Review the significant line items on the financial statements – Are there significant line items without a corresponding policy

disclosure? – Add any missing disclosures

12


• Is there clarity as to what is included in temporarily restricted net asset disclosures? – Often this disclosure goes on inertia with some changes for new

activities – Often accumulated unspent gains is just one line item in the table of

disclosure

• Potential improvement – Disclosure transparency related to:

• Time restrictions • Purpose restrictions • Time and purpose restrictions

– Accumulated unspent gains in a separate table by spending purpose • General operating endowment vs. types of restricted endowments

13


• Is there clarity as to what is included in permanently restricted net asset disclosures? – Commonly there is a lack of transparency between operating

endowments and restricted endowments

• Potential improvement – Table in the footnote by major restriction type

14


• Are related party disclosures clear and evident? – This is often an area that receives little attention in the footnotes

but can be meaningful to the readers of the financial statements in helping to understand the interrelationships of the organization

• Potential improvement – Describe the nature of the relationship – Disclose transaction activities during the year – Disclose balances due to/from at the end of the year

• Receivables/payables – Review 990 reporting for consistency with financial statement

disclosures

15


• Do your footnotes duplicate and repeat things that only need to be said once? – Common areas of duplication

• Fair value • Investments • Endowments • Net assets

• Potential improvement – Review for duplications – Determine where the information is best presented - once

16


• Do you use tables rather than text when possible? – Common areas we have seen text used vs. tables

• Useful lives of fixed assets • Future lease commitments • Future debt commitments

• Potential improvement – Review disclosures for text where multiple numbers are being

reported – Is there an opportunity to put the information in a table?

17

Recent Disclosure Changes – Are You Getting Them Right?

• Investments: – Did you modify standard footnotes for the use of the net asset

value (“NAV”) practical expedient? – Is there disclosure about significant transfers in and out of levels

and why? – Did you show gross purchases and sales of Level 3 investments? – Have investments been sufficiently “disaggregated” to show

nature of risk by industry, geography or nature of security? – Have methods of determining fair values been disclosed for non

practical expedient fair value?

18

• Derivatives: – Are you showing derivatives in table format with the requisite items? – Have you looked at samples of standard wording to be sure your

report conforms with best practices?

• Loans and trade receivables: – Methods used to estimate losses – Charge off polices – When loans get placed on non accrual status – Aging data


19


• Endowments and funds functioning as endowments: – Do you really understand what is in the schedule? – Should pledges be included or not? – Should it tie to investments or not? – What is the spending policy computing on? – Are required disclosures included?

• Interpretation of relevant law and spending policy – Including 7 factors for determining an appropriation

• Funds with deficiencies • Return objective and risk parameters • Strategies employed for achieving objectives

20

Commonly Missed Disclosures

• Letter of credit details omitted as to maturity, cost and related terms which is backing long term debt

• Considerations relative to the AICPA Financial Reporting Whitepaper covering pledges, beneficial interest and split interest agreements are not considered – Discount rates are the most common issue

• Existence of union contracts covering major groups of employees

• Long term employment contracts with executives

• Information on significant conditional promises not yet recorded

21


• Information regarding major suppliers and outstanding arrangements

• Disclosure of self insurance activity

• Specific estimates and assumptions in summary of significant accounting policy note

• Non-qualified benefit plans (457) and the existence of “employee only” retirement plans

• Investment return detail reconciled to the face of the financials

• Title and use restrictions on gifted/granted assets

22


• The organization’s policy regarding implying time restrictions of long lived assets

• Cash that is restricted to some use by donors, funders or others

• Disclosures about short term use of donor restricted cash items

• Footnotes not tailored to cover NAV practical expedient

• Supplemental fair value disclosures not made or complete for financial instruments not carried at FMV (Conduit debt issuers, those using derivatives, those with assets over $100m)

23


• Non-recurring fair value measures are not sufficiently evident in footnotes

• Consideration of discounting of non interest bearing notes

• If the organization makes contributions to others, are disclosures relative to timing of those planned payments made

• Information on the organization’s major programs

• Not clear what fair value level assumption was used for supplemental disclosures and on non recurring fair value methods

24

Before Example Footnotes

32

After Example Footnotes

40

Before and After - What Were the Major Changes

• Broke out operations and estimates as own policy

• Sequenced and added policies for major financial statement lines

• Kept policies as policies with numbers and details going in detailed footnotes

• Broadened uncertain income tax disclosures

• Consolidated notes into policies when it made sense

• Updated wording to follow more common practices

41

Final Thoughts, Questions or Issues

Keeping Your Financial Statement Disclosures Crisp, Complete and Under Control

Economy & Finance

Transcript of Keeping Your Financial Statement Disclosures Crisp, Complete and Under Control