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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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
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Financial Accounting Standards Board (FASB)
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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

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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.

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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.

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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.

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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.

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Governmental Accounting Standards Board
(GASB) Overview
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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.

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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.

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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

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Review of Capital Asset Reporting in Accordance
with OMB
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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.

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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.

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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.

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Overview/Review of the Importance of Building
Componentization and Moveable Equipment
Inventories
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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
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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
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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)

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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!

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BUILDING COMPONENTIZATION

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

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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

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Moveable Equipment

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

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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

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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

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Benefits of a Good Fixed Asset System
Financial Reporting
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Asset Control

• Capitalized
• Controlled
• Expensed
• Distinction is Important

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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

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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

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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

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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

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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
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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

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• Other Important Considerations

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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.

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• Questions?

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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 [phone]
• kevin.mchugh_at_navigant.com