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An Overview of Standards Issued by the: Financial Accounting Standards Board (FASB) Governmental Accounting Standards Board (GASB) Review of Capital Asset Reporting in Accordance w/OMB Presented by Kevin J. McHugh

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Title: An Overview of Standards Issued by the: Financial Accounting Standards Board (FASB) Governmental Accounting Standards Board (GASB) Review of Capital Asset Reporting in Accordance w/OMB Presented by Kevin J. McHugh


1
An Overview of Standards Issued by
theFinancial Accounting Standards Board
(FASB)Governmental Accounting Standards Board
(GASB)Review of Capital Asset Reporting in
Accordance w/OMBPresented byKevin J. McHugh
  • Leading Excellence in Research Costing Practices

General Conference 11/2 11/4, 2016
2
Financial Accounting Standards Board (FASB)
3
FASB Lease Accounting Standard Update ASU
2016-02, Issued February 25, 2016
  • The Financial Accounting Standards Board (FASB)
    initiated a joint project with the International
    Accounting Standards Board (IASB) in 2006 with
    the purpose of revising lease accounting
    standards. After approximately 10 years, both
    Boards finalized their respective lease
    accounting standards earlier this year. These new
    standards fundamentally change the rules that
    govern all accounting for all leases, which
    include both real and personal property leases.
    This new standard may have far reaching
    implications in areas such as
  • Accounting/Financial Reporting
  • Real Estate
  • Tax
  • Technology
  • Asset Management

4
FASB New Lease Standard is Here Next Steps?
  • Step one
  • Identify your leases and perform a Data Gap
    Analysis
  • Review Service Agreements that may contain
    embedded leases.
  • Historically, Services Agreements and Operating
    Leases were off balance sheet now no longer
    the case
  • To determine if an arrangement contains lease,
    you should determine if there is an
    identifiable asset that the supplier cannot
    substitute and that your institution controls.

5
FASB New Lease Standard is Here Next Steps?
  • Step Two
  • The Lessee needs to classify each lease as
    either a Finance lease or an Operating
    lease.
  • If the asset is deemed to be specialized and
    not expected to have an alternate use at the end
    of the term, it should be considered as a finance
    lease.
  • This effort is important as the classification
    determines the two lease categories will have an
    impact on the income statement, with expenses
    being recognized on a straight line basis for
    Operational leases and front end loaded for
    Finance leases.
  • Develop an implementation roadmap that would
    include all impacted areas.

6
FASB New Lease Standard is Here Next Steps?
  • Other Credentials
  • This new Standard impact extends beyond the
    financial statements
  • For treasury, leases are no longer considered to
    be off balances sheet financing, thus adding to
    the balance sheet might impact debt covenants.
  • With the implementation on this new Standard,
    along with on-going allowance and disclosure
    requirements might necessitate new or updated
    processes, systems controls that could impact
    IT and Operations.
  • You should have discussions with your Independent
    Auditors FA Compliance Consultants and Federal
    Cognizant Agency, regarding this new standard.

7
What is the effective date?The FASB Accounting
Standard Update, ASU 2016-02 Leases, was issued
on February 25, 2016
  • The new Guidance is effective as follows
  • For Public Business Entities, the standard is
    effective for annual periods beginning after
    December 15, 2018 (i.e., calendar periods
    beginning after January 1, 2019).
  • For all other entities, the standard is effective
    for annual periods beginning after December 15,
    2019 (i.e., calendar periods beginning after
    January 1, 2020).
  • Early adoption would be permitted for all
    entities.

8
Governmental Accounting Standards Board
(GASB) Overview
9
GASB Statement No. 81, Irrevocable Split
Interest Agreements
  • On March 29, 2016, the Governmental Accounting
    Standards Board (GASB) issued Statement No. 81,
    Irrevocable Split Interest Agreements.
  • Split Interest agreements are a type of giving
    agreement used by donors to provide resources to
    two or more beneficiaries, include a public
    college, university or hospital.
  • These agreements can be created through trusts,
    or other legally enforceable agreements, in which
    a donor transfers resources to an intermediary to
    hold and administer fro the benefit of the
    institution and at least one other beneficiary.
  • Examples of split interest agreements include
  • Charitable Lead Trusts
  • Charitable Remainder Trusts
  • Life interests in real estate
  • The GASB states The types of agreements
    addressed by statement 81 can represent
    significant resources for certain public
    colleges, universities, and hospitals. This
    guidance will lead to more constant accounting
    for these agreements, which will allow users to
    access more comparable information about them.

10
GASB Statement No. 81, Irrevocable Split
Interest Agreements
  • This Satement provides recognition and
    measurement for situations in which a Public
    Institution is a beneficiary of the agreements by
    requiring the institution to recognize assets,
    liabilities and deferred inflows of resources at
    the inception of the agreement.
  • In addition
  • Requires that a Public Institution recognize
    assets that represent a beneficial interest, need
    to be administered by a third party, if the
    institution controls the present service capacity
    of beneficial interests.
  • The overall objective is to enhance the
    transparency and decision usefulness of
    external financial reports.
  • Lastly The requirements are for reporting
    periods beginning after December 15, 2016 and
    should be applied retroactively, with earlier
    implementation encouraged.

11
More GASB Statements to be Issued
  • May, 2017 Lease Accounting Standards For Public
    Institution Of Higher Education
  • January, 2018 Other Post Employment Benefits
    (OPEB) Standard to be issued

12
Review of Capital Asset Reporting in Accordance
with OMB
13
Internal Controls Real and Personal Property
  • Internal Controls for Property and Equipment
  • Property and Equipment asset classifications
    represent a significant investment by your
    institution for its overall day to day operations
    and represents a major portion of your
    Institutions balance sheet. There are several
    requirements for financial reporting, insurance,
    Facilities Administrative (FA) Cost Reporting,
    OMBs Uniform Guidance, stewardship requirements
    and the like that dictate that proper Internal
    Controls are indeed in place and working at your
    Institution. Some examples of effective Internal
    Controls for Property and Equipment include
  • Property identifying moveable equipment.
  • Properly labeling equipment with an asset tag
    (Barcode/RFID).
  • Using proper asset classification codes.
  • Notifying your Property Control
    department/manager of equipment acquired other
    than through the standard University procedures.
  • Alerting Property Control of equipment
    traded/exchanged, transferred, lost, stolen,
    salvaged, or scrapped.
  • Conducting periodic inventories
    annually/biannually depending upon your
    institutions policies.

14
Internal Controls Real and Personal Property
  • To determine your higher education organization
    has effective Internal Controls Navigant
    recommends the following eight steps in assessing
    your institutions Internal Controls for property
    and equipment
  • Design a questionnaire comprising approximately
    25 to 30 questions to address the basics with the
    five control components.
  • Conduct interviews either as a focus group or
    individually depending upon the size of your
    departments.
  • Summarize the results based upon the interviews
    and identify strengths and weaknesses in each of
    the five control components.
  • Determine if your department managers share the
    same belief that internal controls are important
    and active in their respective areas. If so, your
    risk should not be as great. If they do not share
    in that belief, your risk may rise significantly.
  • Make your institutions executive management team
    aware of any reportable conditions or concerns
    identified in the assessment process.
  • Validate your internal assessment/review
    processes in the event of probable audit review.
  • Document your final assessment and identify your
    institutions strengths and weaknesses and
    document corrective action plan(s), as and if
    necessary.
  • Document your new or updated policies for
    implementing periodic and consistent monitoring
    plans to ensure compliance.

15
Internal Controls Real and Personal Property
  • If proper Internal Controls are not in place,
    your institution will run the risk of being
    non-complaint and may face the following
    additional risks
  • Equipment not identified in the inventory
    process, but still on your books (unrecorded
    retirements)
  • Equipment identified in the inventory process,
    but not tagged or identified within your
    inventory system (unrecorded additions)
  • Lack of support or inaccurate representation of
    your overall asset base, resulting in an audit
    finding or, in the event of an insurance loss,
    lack of proof of loss for any potential insurance
    claims.
  • Reduced value of the inventory system which
    effects depreciation, which impacts the FA
    cost rates, and might result in an
    internal/independent or Federal audit finding.
  • Equipment inventory overstated would result in
    potential over insurance and/or potential
    independent or internal audit finding.

16
Overview/Review of the Importance of Building
Componentization and Moveable Equipment
Inventories
17
If you are considering a Building
Componentization study, or update to your
current studyWhat are the Next Steps?
Determine the Buildings to be Included
Identify the Building Components
Perform a Lifing Analysis Based Upon Your
Institutions Experience
Review Existing and Determine Historical Cost
Information
Identify and Deduct Federal Contribution
18
What are the Next Steps?
Identify and Segregate The Fixed Equipment Costs
Review Use Allowance/Depreciation Already Taken
Calculate Depreciation for Each Component
Implement Perpetuation Policies/Procedures to
Capture Construction Activity
19
How do I know if this is best for my institution?
  • Consider a Diagnostic Review Study
  • Select three (3) buildings used in Organized
    Research
  • Determine Federal Contribution
  • The three buildings should be of different
    vintages
  • Old
  • Middle Aged
  • New
  • Perform a comparison analysis of the results of
    the three buildings (calculation of depreciation)

20
How do I know if this is best for my institution?
  • If the analysis is towards implementation of
    componentized depreciation, then move forward
    with those remaining buildings used in Organized
    Research
  • Be consistent in your selection of buildings to
    be componentized (Typically all buildings with
    _X_ and greater of organized research activity)
  • Do not cherry pick!

21
BUILDING COMPONENTIZATION
  • Why is it important to have an accurate Building
    Componentization Study?

22
Why Maintain an Accurate Building
Componentization Study?
  • Federal State Financial Reporting Requirements
  • Possible Misleading Financial Statements
  • Qualified Auditors Report Uniform Guidance (
    Former A-133)
  • Stewardship of your Current Assets
  • Inadequate Maintenance Management
  • Risk Management Property Insurance
  • Basis for Capital Budgeting

23
Moveable Equipment
  • Why is it important to have an accurate and
    complete inventory?

24
Why Maintain an Accurate Moveable Equipment
Inventory?
  • Federal state financial reporting requirements
  • Possible misleading financial statements
  • Qualified Auditors Report Uniform
    Guidance(Former A-133)
  • Stewardship of fixed assets
  • Inadequate maintenance management
  • Risk management property insurance
  • Basis for capital budgeting
  • Possible purchase of unneeded assets
  • Disposal of surplus property
  • Public scrutiny

25
Problems Controlling Fixed Assets
  • Budget cut-backs, thus staff reductions
  • Assets are not fixed
  • Staff turnover
  • People do not think it is important
  • People protective of their assets, purchased
    under their grants
  • Assets transferred from another institution

26
Benefits of a Good Fixed Asset System
Financial Reporting
27
Asset Control
  • Capitalized
  • Controlled
  • Expensed
  • Distinction is Important

28
Capitalization Policy Considerations
  • What to Capitalize
  • Useful Life
  • Cost (Threshold)
  • Considerations
  • Number of Assets to be Recorded
  • Volume of Transactions
  • Materiality Effect on Financial Status
  • Periodic Review

29
Capitalization Threshold Considerations
  • Issues to Consider
  • Uniform Guidelines
  • Institutional Controls
  • Prior approval of cognizant agency
  • Impact on direct costs in future years
  • Disclose changes in policy in to your cognizant
    Federal Agency as well as your Institutions
    Independent Auditors
  • Educate your auditors as to Federal Reporting
    Issues (Componentization/Lifing/Capitalization
    Thresholds in Particular)
  • Lifing (realistic) needs to be reflected in their
    workpapers

30
Capitalization Threshold Considerations
  • Issues to Consider
  • Impact upon FA What will be the effect with
    the GAP assets?
  • Property Record Maintenance
  • Higher capitalization threshold equates to
    accounting for big items
  • Easier
  • Sophisticated, recognizable items
  • Less movement
  • Fewer items
  • Economies
  • Efficiencies
  • Auditability

31
Capitalization Threshold Considerations
  • Do we go from 500 to 5,000 or look at impact
    at lower thresholds?
  • Minimum dollar or historical cost amount to
    qualify as a fixed asset
  • Reconsideration of major vs minor equipment
    designations

32
Capitalization Threshold Analysis
From To Result
500 2,500 Typically reduced assets by 70 and Basis decreased by 15

2,500 5,000 Typically reduced assets by 85 and Basis decreased by 20
33
Property Accounting Guidelines Your Institution
Needs One!
  • Policies and Procedures
  • Responsibilities Policy
  • Timing
  • Leased Assets
  • Capitalization
  • Costing
  • Donated Assets
  • Tagging Procedures
  • Transaction Forms
  • Coding Structures
  • Introduction
  • Internal Controls
  • Transaction Types
  • Additions
  • Changes
  • Retirements
  • Adjustments

34
  • Other Important Considerations

35
Other Important Considerations
  • Asset Lifing Needs to be based upon
    Institutional experience, not Industry
    Standards, or Publications.
  • Our experience indicates the need for significant
    collaboration between your Independent Auditors
    and your FA Consulting Team and your Valuation
    Consultants.

36
  • Questions?

37
Contact Information
  • Kevin J. McHugh
  • Managing Director
  • Navigant Consulting, Inc.
  • 685 Third Avenue, 14th Floor
  • New York, NY 10017
  • Main Number 1 646 227 4701
  • Fax 1 646 227 4299
  • kevin.mchugh_at_navigant.com
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