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Accounting 101 for development directors: Five things to know

12.11.18

Good fundraising and good accounting do not always seamlessly align. While they all feed the same mission, fundraisers work to meet revenue goals while accountants focus on recording transactions in compliance with accounting standards. We often see development department totals reported to boards that are not in line with annual financial statements, causing confusion and concern. To bridge this information gap, here are five accounting concepts every not-for-profit fundraiser should know:

1.

GAAP Accounting: Generally Accepted Accounting Principles (GAAP) refers to a common set of accounting standards and procedures. There are as many ways for a donor to structure a gift as there are donors?GAAP provides a common foundation for when and how you should record these gifts.

2.

Pledges: Under GAAP, if there is a true, unconditional “promise to give,” you should record the total pledge as revenue in the current year (with a little present value discounting thrown in the mix for payments expected in future periods). A conditional pledge relies on a specific event happening in the future (think matching gift) and is not considered revenue until that condition is met. (See more on pledges and matching gifts here.) 

3.

Intentions: We sometimes see donors indicating they “intend” to donate a certain amount in the future. An intention on its own is not considered a true unconditional promise under GAAP, and isn’t recorded as revenue. This has a big impact with planned giving as we often see bequests recorded as revenue by the development department in the year the organization is named in the will of the donor—while the accounting guidance specifically identifies bequests as intentions to give that would generally not be recorded by the finance team until the will has been declared valid by the probate court.

4.

Restrictions: Donors often impose restrictions on some contributions, limiting the use of that gift to a specific time, program, or purpose. Usually, a gift like this arrives with some explicit communication from donors, noting how they want to apply the gift. A gift can also be considered restricted to a specific project if it is made in direct response to a solicitation for that project. The donor restriction does not generally determine when to record the gift but how to record it, as these contributions are tracked separately.

5. Gifts vs. Exchange: New accounting guidance has been released that provides more clarity on when a gift or grant is truly a contribution and when it might be an exchange transaction. Contact us if you have any questions.


Understanding the differences in how the development department and finance department track these gifts will allow for better reporting to the board throughout the year—and fewer surprises when you present financial statements at the end of the year. Stay tuned for parts two and three of our contribution series. Have questions? Please contact Emily Parker of Sarah Belliveau.

 

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Accounting and Assurance

A capital campaign is a big undertaking. During the planning stage of a capital campaign you need to not only focus on your donor outreach strategy, but also on outreach materials. From an accounting standpoint, the language you use can have a big impact on how the funds will be tracked and ultimately used by the organization. We recommend our clients share their outreach materials with us early in the process so we can measure them against standard accounting practice and regulations. Here are a few things to consider and plan as you get started.

Three components to understand

1.

Pledges. Make sure you understand the difference between a pledge and an intention. From an accounting perspective, only an “unconditional promise to give” is recorded as revenue—an intention to give does not usually meet that criteria. It’s especially important to have this conversation if there is a planned giving element of the campaign, because accounting for bequests can be confusing at times. (You can learn more about intentions here).

2.

Matching Gifts. Matching gift drives can be very successful aspects of your campaign. Be aware that pledges to match gifts from other donors are not considered revenue for accounting purposes until those conditions have been met.

3.

Gift Restriction. For many donors, capital campaigns are particularly appealing, because they fund exciting and tangible projects. Donors who give for a specific building project or scholarship fund are imposing a restriction on how you can use that money. Restrictions can be explicit, as in the case when a gift is accompanied by a note describing the purpose of the gift. However, accounting guidelines also stipulate that restrictions can be implicit—arising from the circumstances surrounding the gift, not necessarily specific instructions from the donor. For example, if a campaign appeal for a new community building focuses just on that project, gifts in response to that appeal may be restricted to building expenses, and can’t be spent on other expenses of the organization.

Not sure where to start? Here are three helpful tools to get the conversation going.

Three must-haves to build your campaign

1.

Gift Acceptance Policy. Hopefully, your not-for-profit has a written gift acceptance policy. If not, start there. A gift acceptance policy outlines guidelines for pledges, restrictions, and the full range of contribution types-from stocks and bonds to real estate and life insurance policies. A good policy serves as a guide for fundraisers and protects the organization from accepting gifts that may not be beneficial.

2.

Campaign Counting Policy. An essential part of campaign planning is the development of a counting policy, which outlines what gifts are counted toward the overall goal—and how. This is especially important because the campaign counting may differ from how your accounting team records the revenue of the campaign.

3. Pledge Form. Finally, there is the pledge form, where it all comes together. A campaign pledge form should align with the organization’s gift acceptance and counting policies and be written in a way that ensures pledges and gift restrictions are accounted for properly.


In developing each of these tools, be sure to involve your finance department, but also outside experts, such as your legal counsel or your auditing firm, as they can add extra support and knowledge. While launching a capital campaign can seem daunting, proper planning allows the rest of the campaign to run smoothly.  Have questions? Please contact Emily Parker or Sarah Belliveau.

Article
A CPA's guide to starting a capital campaign

Read this if you are a broker-dealer. 

Effective January 1, 2023, the Financial Industry Regulatory Authority (FINRA) and other industry self-regulatory organizations adopted certain changes to the securities industry continuing education (CE) and registration rules to train registered persons more effectively.

These upcoming changes, which include the annual Regulatory Element for each registration category and the extension of the Firm Element to all registered persons, are expected to help make sure all registered persons receive timely and relevant training. See below for some of these changes.

Annual Regulatory Element for each registration category Extension of Firm Element
of all registered persons

Annually, by December 31st, registered persons will be required to complete the CE Regulatory Element

Registered persons will receive content tailored specifically to each representative or principal registration category they hold

Failure to complete the Regulatory Requirement annually will cause the registered person to be automatically designated as CE inactive by FINRA

The CE rules have been amended to:

  • Extend the annual Firm Element requirement to all registered persons
  • Allow firms to consider their training programs relating to the anti-money laundering compliance meeting toward satisfying an individual's annual Firm Element requirement

The current minimum Firm Element training criteria has been revised to require the training to cover topics related to professional responsibility and the role, activities, or responsibilities of the registered person


Firms should begin to prepare now for these changes. FINRA and the CE Council are committed to developing resources and guidance to support firms as they assess their education needs and develop their training requirements. FINRA is committed to providing more information as it becomes available. 

What can you do now to comply with these upcoming rule changes by January 1, 2023?
Review FINRA’s Regulatory Notice 21-41 and FINRA’s CE Transformation resource page to become familiar with upcoming changes. Review the 2023 Regulatory Element topics on FINRA’s website.

If you have any questions about your specific situation or would like more information, please contact our Broker-dealers team. We're here to help. 

Article
Important changes to securities industry continuing education

Read this if you think your organization may have to prepare an HRSA audit.

Many healthcare providers who have never done an audit before may be required by the Health Resources and Services Administration (HRSA) agency to do so this year because they received Provider Relief Funding (PRF). We’re helping you prepare by answering some common queries about the PRF audit:

Will my organization have to complete a PRF audit?

The HRSA requires organizations to complete a federal single audit when they expend more than $750,000 of federal funding in one year, regardless of whether those federally sourced funds came directly from the federal government or were passed from a state or local government. Healthcare providers who received $10,000 or more from the PRF during a given period must report on usage.

For many providers, this is the first time they’ve received over $750,000 in federal funding. As a result, these providers will need to complete the single audit for the first time.

Other providers, especially physician practices, may not meet the single audit expense threshold, but that doesn’t mean they’re free from audit obligations. While they may not have to complete a single audit, if they received funding from the PRF, they may need to complete a HRSA-required audit—and the data requests for these audits are, in some cases, more involved than those for the single audit.

What will the HRSA’s PRF audit look like?

The audit will address the data used by the providers to report on their usage of PRF money. That means they will need to provide support for lost revenue and expenses that justify the use of the funds that they received.

The HRSA is going to drill down on the revenue numbers, specifically looking at the general ledger (GL) and other select revenue tests. On the expenses side, they’re going to look at the GL, invoice dates, payments and more.

To complete this audit, HRSA will require a significant amount of supporting documentation. Ideally, most of these documents should already have been copied and set aside as support in anticipation of financial reporting requirements. Below is a partial list of items that could be requested during the audit:

  • General Ledger details
  • Listing of expenses reimbursed with PRF payments grouped into specified categories
  • Listing of patient care revenue by payer
  • Listing of other sources of assistance
  • Listing of expenses reimbursed with the other assistance received
  • Detailed inventory listing of IT supplies
  • Budget attestation from CEO or CFO and board minutes showing ratification of the budget before March 27, 2020
  • Documentation of lost revenue methodologies
  • Audit financial statements
  • CMS cost reports for Medicare and Medicaid
  • Other supporting documentation

If certain documentation isn’t available, providers will need to request copies from their vendors. Missing documentation may make it difficult to justify the use of funds, in which case, providers may have to repay a portion or all of their provider relief funding.

It’s possible that certain expenses were not allowable under PRF. However, that doesn’t necessarily mean providers will have to repay their funds. Providers may have other lost revenue or expenses that would be allowed under PRF—but only if they have the documentation to prove it. That’s why it’s crucial that providers have all relevant documentation for expenses and lost revenue over the periods they received provider relief funding.

What challenges should I anticipate when it comes to completing the audit?

According to the 2022 BDO Healthcare CFO Outlook Survey, 35% of respondents identified CARES Act/PRF reporting as a regulatory concern.

Much of this concern likely stems from a lack of resources as well as audit inexperience. Many providers who will have to complete an HRSA audit don’t have the necessary resources to dedicate to navigating the process. In addition, they may not know the type, scope, or time frame of documentation they need to pull. They may also struggle to locate certain documentation, especially documentation that’s more than two years old.

Finding the right people to sift through the information to ensure its accuracy can be extremely difficult, especially if the documents are not filed electronically. This problem is even greater right now, given the professional services labor shortage that makes it difficult to hire the right people for the job if they aren’t already employed at your organization.

What should my next steps be?

To get ready for a potential HRSA audit, there are at least three immediate steps you should take:

  1. Select a responsible point person. One person should be responsible for coordinating the process to ensure that nothing falls through the cracks or is overlooked.
  2. Keep your PRF filing reports on hand. Pull any related supporting documentation and collate it into one place if it isn’t already.
  3. Identify what support is needed by doing a gap analysis. Determine where you need additional support or expertise and seek to close these gaps before the notification of any audit process.

Insufficient documentation may result in the recapture of provider relief funding by the HRSA. Fortunately, a lack of documentation is preventable with the right support and resources in place.

Article
HRSA audit preparation: All you need to know

Read this if you are responsible for cybersecurity at your organization.

Cybersecurity threats aren’t just increasing in number—they’re also becoming more dangerous and expensive. Cyberattacks affect organizations around the globe, but the most expensive attacks occur in the US, where the average cost of a data breach is $9.44 million, according to IBM’s 2022 Cost of a Data Breach Report. The same report shows that the cost of a breach is $10.10 million in the healthcare industry, $5.97 million in the financial industry, $5.01 million in the pharmaceuticals industry, and $4.97 million in the technology industry.

Cyber threat actors are a serious danger to your company, and your customers, stakeholders, and shareholders know this. They expect you to be prepared to defend against and manage cybersecurity threats. How can you demonstrate your cybersecurity controls are up to par? By obtaining a SOC for cybersecurity report.

What is a SOC for cybersecurity report?

It provides an independent assessment of an organization’s cybersecurity risk management program. Specifically, it determines how effectively the organization’s internal controls monitor, prevent, and address cybersecurity threats.

What’s included in a SOC for cybersecurity report?

The report is made up of three key components:

  1. Management’s description of their cybersecurity risk management program, aligned with a control framework (more on that below) and 19 description criteria laid out by the AICPA.
  2. Management’s assertion that controls are effective to achieve cybersecurity objectives.
  3. Service auditor’s opinion on both management’s description and management’s assertion.

Why should you consider a SOC for cybersecurity report?

A SOC for cybersecurity report offers several important benefits for your organization, which include:

  • Align with evolving regulatory requirements. The cybersecurity regulatory environment is constantly evolving. In particular, the SEC’s cybersecurity guidelines are becoming stricter over time. A SOC for cybersecurity report can demonstrate you’re aligned with these guidelines. If you’re a public company or are considering going public in the future, you need to be prepared to meet not just the SEC’s guidelines of today, but their evolved guidelines in the future.
  • Keep your board of directors informed. Your board is responsible for ensuring the business is effectively addressing and mitigating risks—and that includes cyber risk. A SOC for cybersecurity report offers your board a clear and practical illustration of your organization’s cybersecurity risk management controls.
  • Attract and retain more customers. It’s becoming increasingly common for companies to require that their vendors have a SOC for cybersecurity report. Even for companies that don’t require such a report, it’s important to know their vendors are keeping their data safe. Having this report differentiates you from vendors who have not prepared one.
  • Improve your cybersecurity posture. A SOC for cybersecurity report can identify current gaps in your cybersecurity risk management program. Once you’ve addressed these gaps, you can show your customers, stakeholders, and shareholders that you’re continuously improving and evolving your cybersecurity risk management approach.

How do I prepare for my SOC for cybersecurity assessment?

There are several steps you should take to prepare for your assessment.

  1. Choose your control framework. You have several options, including the NIST Cybersecurity Framework, ISO 27002, and the Secure Controls Framework (SCF). There are multiple online resources to help you choose the framework that’s right for your organization.
  2. Determine who your key internal stakeholders are for your cybersecurity risk management program. You’ll need to select a point person to be responsible for ensuring the independent services auditor has all the documentation they need to complete their assessment and act as liaison across internal and external stakeholders.
  3. Collect all cybersecurity-related documentation in one location. Make sure you have an organizational system that makes sense to your point person so it’s easy for them to pull the appropriate materials to give to the independent services auditor.
  4. Conduct a readiness assessment. You can work with an independent services auditor to conduct such an assessment which will identify gaps you can address before performing the attestation.
  5. Select an independent services auditor to perform the attestation. SOC for cybersecurity services are provided by independent CPAs approved by the AICPA. Ideally, you’ll want to select a firm that is experienced in your industry, has a diverse and robust team of cybersecurity professionals, and is accessible when and where you need them.

As always, if you have questions about your specific situation or would like more information about SOC for cybersecurity services, please contact our IT security experts. We’re here to help.

Article
Yes, you need a SOC for cybersecurity report—here's why

Read this if you are a business owner or leader in a company.

To expand or contract a business as market conditions change requires flexibility, agility, and foresight. For companies who want to be positioned as well as possible at the forefront of a recession, taking concrete steps now can ease the pain of an economic downturn or other unforeseen challenge.

How can companies navigate economic uncertainty and build resilience in their organizations?

  • Contain costs. When met with financial constraints—or the need to rapidly invest in growth areas—it will be critical to contain unnecessary expenses. Consider what costs can be pared back:
    • Can you pause certain projects and initiatives and reallocate funds where there is the greatest opportunity for growth?
    • Do you need to maintain your physical workplace, or can you trim the overhead?
    • Can you consider alternative staffing models to reduce costs?
  • Build a safety net of liquidity. Whether your business needs a capital reserve to invest in areas of growth or to pay the bills while waiting out the storm, conserving liquidity will help fortify the financial health of your company. Investigate all potential funding sources available, as well as the terms attached to potential loans and grants.
  • Cultivate a nimble workforce. An adaptable workforce is key to scaling your business up or down. Be prepared to: reskill and upskill your existing workers to fill new roles; staff for agility so workers can serve as pinch hitters to serve areas with spikes in demand; and consider hiring contractors and freelancers in roles with a lot of variance of demand.
  • Outsource infrastructural needs. One way to minimize fixed costs and help ensure best-in-class operational agility is by hiring external experts for non-core business functions, such as technology, finance, accounting, and human capital resources. Business operations are critical to maximizing workforce productivity and financially navigating a challenging climate. External experts working with companies across industries to scale during a recession can offer tried and true best practices to chart what would otherwise be uncharted territory.

While it’s impossible to know precisely what lies ahead, companies that take these four steps will be better poised to contend with whatever comes their way—whether it be a recession or an unprecedented growth opportunity.

Article
Four levers for building resilience

Read this if you are subject to Medicaid DSH audits.

The Medicaid DSH program, created in 1981, provides funding to hospitals in the form of DSH payments. Federal law requires that state Medicaid programs make DSH payments to hospitals that serve a disproportionately high number of Medicaid beneficiaries and uninsured low-income patients, to help offset uncompensated care costs (UCC). With healthcare costs steadily outpacing income growth and inflation, these DSH payments serve as an important and sometimes necessary reimbursement mechanism. 

In most states, hospitals that receive Medicaid DSH payments are subject to an annual DSH audit, to determine the DSH UCC limit and to compare it against DSH payments received from the Medicaid state agencies. The DSH UCC limit uses information from the Medicare cost report, as well as Medicaid and uninsured patient detail, to calculate the UCC. 

Upon completion of the DSH audit, the Medicaid state agency or its contractor will compare the UCC to the DSH payments issued during the state fiscal year to determine if a hospital is in a shortfall, where DSH payments were less than the UCC, or a "longfall", where DSH payments were greater than the UCC. If it is determined that a hospital is in a longfall, the state’s Medicaid plan may require hospitals to pay some or all of the DSH funds back. With potentially significant financial implications, it is in the hospital’s best interest to understand the requirements and to complete the audit in a timely and accurate fashion. 

Completion of the DSH audit can be a daunting task. For some, the mere mention of the words “DSH audit” is enough to send chills down one’s spine. It is best assigned to those with solid reimbursement, revenue cycle, hospital operations, and information management system (IT) knowledge. 

It is not uncommon for hospitals to have a consulting firm, such as BerryDunn, complete the DSH audit on their behalf. While the DSH audit may seem like a heavy lift, we hope the following tips will assist you in tackling the audit and getting through the process smoothly and efficiently. 

  1. Allow enough time for completion of the DSH audit. A considerable amount of time and effort is needed to collect, reconcile and summarize the internal claims data and to enter information into the required schedules. The time needed to complete the audit will depend on your organization’s available resources and complexity of the IT and financial systems. Typically, this process takes one to two weeks to complete, sometimes longer. Creating the patient data support files themselves is arguably the most time-consuming aspect of the process. 
  2. Review the minimum federal requirements for DSH payment eligibility and document your organization’s qualifications. To receive DSH payments, hospitals must have a low-income inpatient utilization rate (LIUR) greater than 25 percent, or the hospital must have a Medicaid utilization rate (MIUR) that is at least one standard deviation above the mean rate of all hospitals in the state that receive Medicaid payments. States may distribute DSH payments to other hospitals provided they have a MIUR of at least one percent, and if they offer obstetric services that they have at least two OB/GYN on staff.
  3. Take time to understand how DSH payments are calculated in your state and if any recent state Medicaid plan changes may affect your organization’s eligibility and amount of qualifying payments. 
  4. Carefully review any audit instructions provided, paying particular attention to types of claims, service dates, and required supporting information. 
  5. Gather all the data files needed for completion of the DSH audit before diving in, including the cost report(s) for the period under audit, patient data support files that support the Medicaid and uninsured populations, and audited hospital financial statements (if applicable). Remember: bad data in, bad data out!
  6. Reconcile the state claims data. If the state claims data is used by the state Medicaid agency or its contractor to complete a portion of the audit, we strongly recommend a reconciliation of the state claims data to internal records, to help ensure all eligible claims, inpatient days, and charges are included.
  7. Identify and capture all Medicaid and uninsured patients. When completing schedules, hospitals should ensure they are identifying and capturing all Medicaid and uninsured patients, and accurately report the charges and payments for these patients for the DSH audit. Certain data elements are required, including patient demographic data and hospital charge and payment information. 
  8. Review insured patients' claims with no insurance payment. For uninsured patient charge capture, hospitals may benefit from reviewing insured patients’ claims with no insurance payment. Some claims, meeting state Medicaid plan coverage requirements, could be included as “uninsured” if they meet one of the three exclusion requirements: (1) service was not covered by insurance, but is covered by a Medicaid state plan; (2) patient’s benefits were exhausted prior to the admission/service date, and (3) patient reached the lifetime insurance limit. Some accounts that appear to be insured on the surface may in fact be eligible for inclusion in the calculation of the UCC. Remember, claims denied by insurance, such as untimely filing, lack of pre-authorization, or medically unnecessary services, should not be reported. In many cases, the only way to know for sure if an account can be included is through research of patient notes and financial information. Leave no stone unturned! It could be the difference between a longfall and a shortfall in your UCC.
  9. Review your work prior to submission. Many states will provide a checklist with the audit package, to ensure all data elements have been included with the submission. Even if the hospital has resources to complete the audit, consider arranging for a third-party review of the DSH audit and other submission items to help ensure the accuracy and completeness of the data. 
  10. Schedule time to review audit adjustments. The Medicaid state agency or its contractor will likely provide an adjustment report for your review. Plan your time for review of the audit adjustments, as the window for response or amendments may be very narrow. Take note of the adjustments, especially the high dollar ones, and either confirm that they are accurate or make revisions as necessary. This is another opportunity to bring in an advisor for a second review. 

Should you have any questions about or during the DSH reporting process, please do not hesitate to reach out to Andrew Berube and Olga Gross-Balzano at BerryDunn. We’d be pleased to serve as a second set of eyes to your process or alleviate the time requirements on your finance team. 

Andrew Berube
aberube@berrydunn.com
207-239-9893

Olga Gross-Balzano
OGross-Balzano@berrydunn.com
207-842-8025

Article
Medicaid Disproportionate Share Hospital (DSH) audits: 10 tips for a successful audit

Read this if you want to understand the new lease accounting standard.

What is ASC 842?

ASC 842, Leases, is the new lease accounting standard issued by the Financial Accounting Standards Board (FASB). This new standard supersedes ASC 840. For entities that have not yet adopted the guidance from ASC 842, it is effective for non-public companies and private not-for-profit entities for reporting periods beginning after December 15, 2021.

ASC 842 (sometimes referred to as Topic 842 or the new lease standard) contains guidance on the accounting and financial reporting for agreements meeting the standard’s definition of a lease. The goal of the new standard is to:

  • Streamline the accounting for leases under US GAAP and better align with International Accounting Standards lease standards 
  • Enhance transparency into liabilities resulting from leasing arrangements (particularly operating lease contracts)
  • Reduce off-balance-sheet activities

What is the definition of a lease under the new standard?

ASC 842 defines a lease as “A contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.” 

This definition outlines four primary characteristics to consider: 1) an identified asset, 2) the right to control the use of that asset, 3) a period of time, and 4) consideration.

(For a deeper dive into what constitutes a lease, you can download the BerryDunn lease accounting guide here.) 

How will this affect your organization?

  • Lease arrangements have to be classified as finance, operating, or short-term leases. In general accounting for the lease asset and liability is as follows:

    • For finance leases, use the effective interest method to amortize the liability, and amortize the asset on a straight-line basis over the lease term. Note that this has the effect of “front-loading” the expense into the early years of the lease.

    • For operating leases (e.g., equipment and some property leases), the lease asset and liability would be amortized to achieve a straight-line expense impact for each year of the lease term. ASC topic 842 establishes the right-of-use asset model, which shifts from the risk-and-reward approach to a control-based approach. 
  • Lessees will recognize a lease liability of the present value of the future minimum lease payments on the balance sheet and a corresponding right of use asset representing their right to use the leased asset over the lease term. 
  • The present value of the lease payments is required to be measured using the discount rate implicit in the lease if its readily determinable. More likely than not it will not be readily determinable, and you would use a discount rate that equals the lessee’s current borrowing rate (i.e., what it could borrow a comparable amount for, at a comparable term, using a comparable asset as collateral).
  • It will be critical to consider the effect of the new rules on your organization’s debt covenants. All things being equal, debt to equity ratios will increase as a result of adding lease liabilities to the balance sheet. Lenders and borrowers may need to consider whether to change required debt to equity ratios as they negotiate the terms of loan agreements.

Time to implement: What do you need to do next?

The starting place for implementation is ensuring you have a complete listing of all known lease contracts for real estate property, plant, and equipment. However, since leases can be in contracts that you would not expect to have leases, such as service contracts for storage space, long-term supply agreements, and delivery service contracts, you will also need to broaden your review to more than your organization’s current lease expense accounts. 


We recommend reviewing all expense accounts to look for recurring payments, because these often have the potential to have contracts that contain a lease. Once you have a list of recurring payments, review the contracts for these payments to identify leases. If the contract meets the elements of a lease—a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration—your organization has a lease that should be added to your listing.

Additionally, your organization is required to consider the materiality of leases for recognition of ASC 842. There are no explicit requirements (that, of course, would make things too easy!). One approach to developing a capitalization threshold for leases (e.g., the dollar amount that determines the proper financial reporting of the asset) is to use the lesser of the following: 

  • A capitalization threshold for PP&E, including ROU assets (i.e., the threshold takes into account the effect of leased assets determined in accordance with ASC 842) 
  • A recognition threshold for liabilities that considers the effect of lease liabilities determined in accordance with ASC 842

Under this approach, if a right-of-use asset is below the established capitalization threshold, it would immediately be recognized as an expense. 

It's important to keep in mind the overall disclosure objective of 842 "which is to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases". It's up to the organization to determine the level of details and emphasis needed on various disclosure requirements to satisfy the disclosure objective. With that objective in mind, significant judgment will be required to determine the level of disclosures necessary for an entity. However, simply put, the more extensive the organization's leasing activities, the more comprehensive the disclosures are expected to be. 

Don't wait, download our lease implementation organizer (Excel file) to get started today! 

Key takeaways and next steps:

  •  ASC 842 is effective for reporting periods beginning after December 15, 2021
  • Establish policies and procedures for lease accounting, including a materiality threshold for assessing leases
  • Develop a system to capture data related to lease terms, estimated lease payments, and other components of lease agreements that could affect the liability and asset being reported
  • Evaluate if bond covenants or debt limits need to be modified due to implementation of this standard
  • Determine if there are below market leases/gifts-in-kind of leased assets

If you have questions about finance or operating leases, or need help with the new standard, BerryDunn has numerous resources available below and please don’t hesitate to contact the lease accounting team. We’re here to help. 

Lease accounting resources 

Article
ASC 842 lease accounting—get started today before it's too late

Read this if you are at a financial institution. For more CECL information, tune in to the latest episode of BerryDunn’s CECL Radio podcast. It features Susan Weber and David Stone discussing how to handle unfunded commitments and debt securities during CECL preparation.

I love a big surprise! Of course, I mean the fun, uplifting kind—like birthday parties, a best friend’s unexpected visit, or that special anniversary gift. Not that other kind of surprise that’s more like biting into an apple only to find half a worm. Calculating a loss reserve for unfunded commitments is not a new concept, but the reach and significance of it may end up surprising institutions. How much? A review of 2020 public filings and disclosures shows that some adopters saw unfunded commitment reserves increase millions of dollars, from one percent of total reserves pre-adoption to six percent or more post-adoption. In this article, we take a close look at unfunded commitments under CECL, in an effort to help you avoid that “other kind” of surprise.  

Within the CECL standard (Accounting Standards Codification (ASC) 326 – Financial Instruments-Credit Losses), key considerations for estimating reserves tied to unfunded commitments are covered in section 326-20-30-11. The section lays out three key fundamentals: it applies to credit commitments that are not unconditionally cancellable, and that institutions should consider how likely the commitment is to be funded, and its expected life. 

First, let’s look at unconditionally cancellable—this essentially means that unless an institution can, at any time and for any reason, cancel its commitment to lend, then the commitment has to be included in this part of the estimate. Institutions may be surprised to discover that a portion of its commercial sales pipeline should now be included in unfunded commitment balances. Why? Because commitment letters issued to business loan applicants are often considered legally binding and they typically do not contain language that would make them unconditionally cancellable by the institution. This makes sense when you realize the primary goal of the commitment letter is to assure the applicant that the bank is committed to making the loan. This discovery, in turn, has led those involved in CECL implementation to develop (1) processes to ensure commercial loan pipelines are sufficiently detailed enough to know what, when, and how these commitments should be included in the calculation, and (2) internal controls that assure the accuracy, completeness, and timeliness of the information. 

Next up—how likely is it that the commitment will be funded? For unused portions of existing loans and lines, this may mean taking a look at average utilization rates. For in-scope pipeline commitments, institutions may find that they need to dig through information that is not commonly held in a central system to come up with a success or close rate. The likelihood of funding may vary widely between products or segments, and over its expected life. For example, the expected funding of a residential or commercial real estate construction line may approach 100%, whereas only 40% or less of a revolving line may ever be used. These funding rates become the basis for “discounting” the unfunded balances subject to reserve estimation and should be re-evaluated on some periodic basis, which can be detailed in the institution’s CECL model documentation related to governance and monitoring.

Finally, let’s look at the expected life of the loan component. This language and expectation are consistent with on-balance sheet credit, leading institutions to (1) make sure they are able to segment their off-balance sheet commitments in the same pools used for boarded loans, and (2) apply the appropriate pool reserve factor to unfunded commitments over the expected life of that type of loan. One-way institutions may accomplish this is by making sure that they are using the same fully adjusted reserve factor and expected life assumptions for unfunded pools as they do for their funded pool counterparts. 

You may discover that your CECL model or software vendor does not provide for unfunded commitment calculations, or only provides support for the available credit portion of loan facilities boarded to your core loan system. In either case, this means institutions must consider, support, and complete calculations outside of the model. Writing clear step-by-step instructions and ensuring a robust independent review/approval process will help off-set risks posed by such manual calculations.

Could you use an experienced resource to help you document or validate your CECL model?  

No matter what stage of CECL readiness you are in, we can help you navigate the requirements as efficiently and effectively as possible. For more information, visit the CECL page on our website. If you would like specific answers to questions about your CECL implementation, please visit our Ask the Advisor page to submit your questions.

For more tips on documenting your CECL adoption, stay tuned for our next article in the series. You can also follow Susan Weber on LinkedIn.

Article
Unfunded commitments and CECL: You may be in for a big surprise

Read this if you are a Chief Compliance Officer at a broker-dealer.

On August 3, 2022, the Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 22-18 (the Notice), which addresses the increasing number of reports regarding registered representatives and associated persons (representatives) forging or falsifying customer signatures, and in some cases signatures of colleagues or supervisors, through third-party digital signature platforms. The Notice details multiple FINRA Rules that may be violated in the case of a forgery or falsification and also provides five scenarios member firms reported to FINRA in which representatives forged or falsified customer signatures, including the methods firms used to identify the forgeries or falsifications. The detection methods outlined are:

  • Customer inquiries or complaint investigations
  • Digital signature audit trail reviews
  • Email correspondence reviews
  • Administrative staff inquiries
  • Customer authentication supervision

There is no doubt that digital signatures provide convenience for customers. But this convenience can sometimes lead to unethical or non-compliant behavior. Even situations that representatives believe pass the “straight face” test may be considered non-compliance under FINRA regulations. Member firms should review the Notice carefully and implement some of FINRA’s detection methods, if not already implemented. Some of these methods are likely already in place since they may be duplicative of methods used to satisfy other FINRA Rules. For instance, reviewing customer inquiries or complaints is likely already occurring to satisfy FINRA Rule 4530, Reporting Requirements. As always, if any questions arise, please don’t hesitate to reach out to BerryDunn’s broker-dealer services team.

Article
Digital signatures: FINRA sends reminder on supervision obligations