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Dallas Theological SeminaryTeach Truth. Love Well.When FASB ReportingChanges Collides with EDFederal RegulationsDale LarsonVice Pres for Businessand Finance/CFOdlarson@dts.edu214-887-50211Overview Title IV Financial Responsibility Standard Common misapplication of ED regulations Recent FASB Changes: Impact on ED Ratios ED’s Proposed Changes in Ratio Definitions Now on hold – What’s Next New eZ-Audit Instructions – not that eZ to understand What Accreditation Evaluators Want To See FASB Liquidity/Availability Measures – if time permitsTeach Truth. Love Well.2Title IV Financial ResponsibilityStandards Must demonstrate financial health to participate inTitle IV Intended to guard against precipitous closure Ensure adequate resources to provide education Three key ratios are calculated, weighted, andcombined into a “composite score” Cover NFP and proprietary institutions with distinctdefinitions and formulas for eachPublic institutions are exemptTeach Truth. Love Well.1
ED Fin Resp Score RatiosPrimary ReserveRatio Measures if institutionhas financialresources to supportits mission Evaluates whetherfinancial reserves aresufficient to meetcurrent and futureoperatingcommitmentsEquity Ratio Captures institution’soverall capitalizationstructure Measures amount oftotal resourcesfinanced bycontributions oraccumulated earningsNet IncomeRatio Provides a directmeasure ofinstitution’s“profitability” Assesses college’sability to operatewithin its meansTeach Truth. Love Well.Primary Reserve RatioExpendable Net AssetsTotal Expenses40%Expendable Net Assets (unrestricted net assets) (temporarilyrestricted net assets) – (annuities, term endowments and life incomefunds that are temporarily restricted) – (intangible assets) – (netproperty, plant and equipment) (post employment and retirementliabilities) (all debt obtained for long term purposes) – (unsecuredrelated-party receivables)Total Expenses total unrestricted expenses taken directly from theaudited financial statementsTeach Truth. Love Well.Expendable Net AssetsTotal ExpensesExpendable Net Assets unrestricted net assets temporarily restricted net assetsSubtract from net assets: - annuities, term endowments and life income funds thatare temporarily restricted - intangible assets - unsecured related-party receivables - net property, plant and equipmentAdd back to net assets all debt obtained for long term purposes post employment and retirement liabilitiesTeach Truth. Love Well.2
Equity RatioModified Net AssetsModified Assets40%Modified Net Assets (unrestricted net assets) (temporarilyrestricted net assets) (permanently restricted net assets) –(intangible assets) – (unsecured related party receivables)Modified Assets (total assets) – (intangible assets) – (unsecuredrelated party receivables)Teach Truth. Love Well.Net Income RatioChange in Unrestricted Net Assets20%Total Unrestricted RevenueChange in Unrestricted Net Assets is taken directly from the auditedfinancial statementsTotal Unrestricted Revenue is taken directly from the audited financialstatements (and includes net assets released from restriction duringthe fiscal year)Teach Truth. Love Well.Composite Score DistributionScale ranges from -1.0 to 3.0 (not a ranking)9Fail-1 to .9Zone1.0 to 1.4Pass1.5 to 3.0Teach Truth. Love Well.3
Composite Score Consequences Zone alternative (1.0 - 1.4)Special disbursement requirementsEnhanced monitoring by EDMay remain “in the zone” for up to threeyears Failing (below 1.0)Provisional certificationMust provide ED letter of credit for at least10% of prior year Title IV fundsLetter of creditfor 50% of prioryear Title IVfunds FinanciallyresponsibleTeach Truth. Love Well.10ED Often Makes AdjustmentsItemWhat ED Does Ratio ResultAdds all types of losses: investment, pension planchanges, etc. is part of Total ExpensesDecreases primaryreserveExcludes long-term lines of credit, working capitalloans, moreDecreases primaryreservePOST-EMPLOYMENT &RETIREMENT LIABILITIESExcludes liability for D.B. pension benefits fromdefinition of Retirement LiabilitiesDecreases primaryreserveUNSECURED RELATEDExcludes pledges from board members as relatedparty receivablesDecreases equity andprimary reserveRESTRICTED NET ASSETSAssumes all TRNA endowments are termendowments (time limits non-expendable)Decreases primaryreserveNET PPESubtracts construction-in-progressIncreases primaryreserveTOTALInconsistently includes gains with revenue; butmay net losses against revenueIncreases/decreasesprimary reserveTOTALEXPENSES(RATIO DENOMINATOR)LONG-TERMDEBTPARTY RECEIVABLESTEMPORARILYUNRESTRICTEDREVENUETeach Truth. Love Well.What Difference Can This Make?One Institution’sExperienceTotal Assets: 1billionRevenues: 700millionScore with DOEInterpretation ofAccumulated Gains,Pension LiabilitylossesScore withInstitution’sInterpretation ofAccumulated Gains,Pension LiabilitylossesAmount Spent onLegal Costs andLOC while inconversation withDOEFY 121.01.6FY 131.22.5 290,000FY 140.92.2386,000FY 150.11.7286,000FY 160.01.6110,000FY 170.92.5TBDSpent to date 1,072,000Teach Truth. Love Well.4
Financial Reporting Changes FASB ASU 2016-14 Presentation of Financial Statements of Not-for-ProfitEntities (Topic 958) Upends the current formulas used in calculatingcomposite scores for nonprofit institutions. FASB ASU 2016-2 Leases Right-of-Use Asset: PPE? Intangible Asset? What about related long term liabilities?Teach Truth. Love Well.ED Worries That Perm. RestrictedNet Assets will Not Be DisclosedNet estrictedRevisedGAAPWithout DonorRestrictions*With Donor Restrictions*Amount, purpose,and type of boarddesignations **Nature and amountof donor restrictions Disclosures* NFPs may choose to disaggregate further** New disclosure requirement14AICPA Not-for-Profit Industry ConferenceTeach Truth. Love Well.Primary Reserve Ratio Expendable Net AssetsTotal ExpensesExpendable Net Assets unrestricted net assets temporarily restricted net assetsSubtract from net assets - annuities, term endowments and life income funds thatare temporarily restricted - intangible assets - unsecured related-party receivables - net property, plant and equipmentAdd back to net assets post employment and retirement liabilities all debt obtained for long term purposesTeach Truth. Love Well.5
Net Asset Display - Disaggregated FASB Requires Only Two Net Asset Classes on Balance Sheet Do your users still want to know the Permanently RestrictedNet Asset amount?Teach Truth. Love Well.16Net Asset Disclosure – Option 1Disclose the composition of net assets with donor restrictions and howthese affect the use of resources – 958-210-45-09Teach Truth. Love Well.17Helping ED Locate RestrictedLife Income Funds – Option 2Teach Truth. Love Well.186
Term Endowments – NotExpendable Net Assets ED defines “Term Endowments” to include accumulated gains This is then adjusted for 1 year of spending payout per Augustannouncement. ED abandoned FASB’s definition of Term Endowment after FASBissued FAS 117-1 Endowments Subject to UPMIFA (time restriction)Teach Truth. Love Well.19Total Expense: DenominatorPrimary Reserve RatioWhat isTotalExpense?IntermediateMeasure ofOperationsED’sExpense(losses)?20Total Expense ED would add to Total Expense all “losses”; includes investmentlosses, pension changes if negative and any other debits withinnon-operating section (without donor restrictions)Teach Truth. Love Well.217
ASU 2016-02 Leases Lessees should recognize a right-of-use asset and a leaseliability for virtually all leases (Finance and Operating). For Operating Leaseso Term – not for a major part of remaining economic life(most will use 75%)oPresent Value – not substantially all of the FV ofunderlying asset (most will use 90%) Will Negatively Impact the Equity RatioModified Net AssetsModified Assets An Increase in Modified Assets Lowers Equity Ratio ED intends to issue an announcement on treatment of leasesTeach Truth. Love Well.22ED Subcommittee for FinancialResponsibility (Nov-Feb 2018) July 2018 Proposed Borrower Defense / Fin Resp Regulations1. Total Expense – clarified that it does not include investmentlosses or post-employment and DB Pension Plan losses.Does include Nonservice Component of Net periodic Cost2. Operating Lease liability considered part of long term debt3. Right-of Use Asset treated like Property Plant and Equip, net4. Defined Benefit Pension Liabilities treated as retirementliabilities5. Board pledges treated as secured related party receivables6. Construction in progress is part of PP&ESupplemental Schedule to report Perpetually Restricted NetAssets and all components used in calculating ratiosED missed Oct 1, 2018 deadline – No Changes Forthcoming7.Teach Truth. Love Well.23If No Change to RegulationsWhat Now? Instructions for Not-for-Profit Institutions to InputFinancial Statement Data into the eZ-Audit SystemDue to Changes Resulting from ASU 2016-14 IFAP Electronic Announcement August 29, 2018 eZ-Audit System has not yet been updated to reflectchanges to Accounting Standards Instructions given to facilitate transition ProfitInstinputFinStateDateeZAuditSys.htmlTeach Truth. Love Well.248
Line 15Teach Truth. Love Well.25Adjustments to Net AssetsTeach Truth. Love Well.26Making Net Asset Adjustments Only if you know ED’s modified definition of “Term Endowments” do the instructionsmake any sense. ED’s modified definition for term endowments is not found in anyofficial guidance or announcements.Deduct from amount included in line #15, i.e., 8,056,900, “the unrestricted earnings,plus any other earnings that are released from restrictions,” i.e., (1,920,369).Teach Truth. Love Well.279
Adjustments to Net AssetsWhat I reportedWhat ED wanted Using FASB’s definition of Term Endowments and making adjustmentswould likely result in negative numbers. Using ED’s revised Term Endowment definition (Calculation B) would be asignificant amount or 6,136,531. Expendable Net Assets would then only include one year’s of availablespending from accumulated endowment gains.Teach Truth. Love Well.28Explain What You DidTeach Truth. Love Well.29Not Required by FASB butEvaluators Want to Know A Clear Indicator of Operational Outcome aka, Intermediate Measure of Operations (Within Changes inNet Assets without Donor) - before non-operating items Two full years statements of activities (not justcomparative totals) Net Investment in Plant PP&E, net less related debt Breakout in AP construction vs AP trade (Is arequired supplemental disclosure in CFS, i.e.,noncash financing activities) Clear distinction of debt related to capital vsoperational (purpose of debt)Teach Truth. Love Well.3010
Examples:Net Investment in PlantAP related to ConstructionTeach Truth. Love Well.31ED’s Interest in “Financial Assets Available forGeneral Expenditures within One Year”Option 1: Disclosed Just What is Available; Did Not ShowWhat Was Subtracted From Financial Assets 958-210-50-1ATeach Truth. Love Well.32Option 2: Explain How We Determined What WasAvailableTeach Truth. Love Well.3311
No Matter Which Format You Still Need To KnowHow To Get ThereTeach Truth. Love Well.34Questions?Dale Larson214-887-5021dlarson@dts.eduTeach Truth. Love Well.12
Total Expenses total unrestricted expenses taken directly from the audited financial statements 40% Teach Truth. Love Well. Expendable Net Assets Total Expenses Expendable Net Assets unrestricted net assets temporarily restricted net assets Subtract from net assets
