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Even when she was a child, Megan’s parents knew she was competitive. She once jumped over a table to outrun her sister to the last hidden Easter egg. Now it’s a trait her friends see during their frequent game nights and an attribute her clients enjoy as she considers the best tax result for them.


On August 18, 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-14 “Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities.”  ASU 2016-14 requires a number of changes to the financial statements of NFPs.  These changes will be effective for fiscal years beginning on or after December 15, 2017.

This article is the third in a series discussing the changes required by ASU 2016-14.  In this article, we discuss a new requirement to disclose board designations of net assets.

What is Changing?

The FASB noted that one of its goals with this ASU is to improve information about the various internal and external limitations and restrictions on the resources of NFPs.  To accomplish that goal, in part, the FASB has added a new requirement that all NFPs provide disclosures about the amounts and purposes of governing board designations, appropriations, and similar actions that result in self-imposed limits on the use of resources.

Practically speaking, this means disclosing board designations (and similar self-imposed limits) on net assets without donor restrictions as of the balance sheet date.  This can be accomplished by using subtotals on the face of the balance sheet or in a footnote, such as the following example:


Alternatively, the disclosure requirement can be met in a narrative format in a footnote, such as the following example:


What are “Board Designations”?

The FASB provides a definition that helps us understand what should be considered a “board designation” on the net assets of an NFP:

Board-Designated Net Assets:  Net assets without donor restrictions subject to self-imposed limits by action of the governing board.  Board-designated net assets may be earmarked for future programs, investment, contingencies, purchase or construction of fixed assets, or other uses.  Some governing boards may delegate designation decisions to internal management.  Such designations are considered to be included in board-designated net assets.

Here are some key points from this definition:

  • Board designations are internal limits imposed by action of the governing board of the NFP. Board designations are not limits placed on resources by external parties such as lenders, although a board could choose to use such external limits as a basis for their designation.  Board designations are also not limits placed on resources by donors, which are disclosed separately as a component of net assets with donor restrictions.
  • Board designations can be for a broad range of topics. Common examples are operating reserves, quasi-endowments, and capital reserves.
  • Board designations can be made by management if the duty is assigned to management by the board.
  • Board designations do not exist at some NFPs. The requirement from FASB is to disclose such designations if they exist; however, there is no requirement from the FASB for all NFPs to create designations. Accordingly, those NFPs with no board designations would have nothing to disclose.

What Do I Do Now?

This new disclosure requirement creates a need for NFPs to have policies and/or practices regarding board-designations on net assets, even if the NFP has no designations.  We recommend NFPs consider the following actions to prepare for this new requirement in ASU 2016-14:

  • If your NFP has no board designations, then document that fact as evidence for your auditor.
  • If your NFP has board designations, then ensure your NFP has a written policy and procedures regarding board designations on resources.
  • The policy should specify if the board has delegated this responsibility to management.
  • Review existing board designations, if any, and take action on any that are out of date.

Want to Learn More?

This article focuses on one of the key changes required by ASU 2016-14.  In future articles we will discuss other key changes in more detail along with practical guidance on implementation issues.  In the meantime, please contact your Clark Nuber service team or Andrew Prather if you would like to discuss how these changes will impact your NFP’s financial statements.

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Articles and Publications

Avoid IRS Scrutiny of Your Cross-Border Transactions

Is your global company up to date on the latest IRS transfer pricing requirements? If it participates in the international exchange of goods, services, or intangible assets with related entities, it should be. The IRS has identified transfer pricing as one of its most prominent audit issues – and other revenue-strapped tax authorities are following suit. The good news is that you can mitigate the risk of potentially steep penalties of 20% – 40% on transfer pricing adjustments through proper documentation and implementation. A well-documented transfer pricing study will allow you to make that happen, proactively.


Transfer pricing restrictions aren’t limited to international transactions.—they also apply to domestic companies that do business across state lines with related parties. Transfer pricing typically refers to the prices for which related parties, such as a U.S. corporation and its foreign subsidiary, exchange goods, services or intangible assets in cross-border transactions. The IRS is concerned that companies will manipulate intercompany prices to shift profits and lower tax jurisdictions. To deter tax avoidance, transfer pricing rules require related businesses to set prices that are comparable to those charged in arm’s-length transactions using one of several accepted methods.

Offensive Strategy: Transfer Pricing Studies

To avoid having the IRS tell you what your standard should be, it’s best to determine your own transfer pricing standards. You can do this by providing the IRS documentation that affirms the factual relationship between your company and another entity. The documentation also allows you to provide your reasons for pricing methods and comparable companies you chose. A transfer pricing study examines the pricing of intercompany transactions between related parties and analyzes whether the transactions were conducted at arm’s-length. It also contemplates whether the transactions were conducted in a manner that will withstand scrutiny from the IRS and other tax authorities. In other words, IRS regulations employ the testing method that provides the most reliable measure of an arm’s-length result, as it relates to the facts and circumstances of the controlled transaction under review. A study will ensure you are adopting the correct testing. When conducted by an accounting professional, a transfer pricing study can also identify opportunities for strategic tax planning. These opportunities can reduce costs and improve your operations. For example, you may want to consider operational structure changes to minimize worldwide tax and promote more efficient cash repatriation and cash utilization structures.  For example, intercompany loans, subject to an arm’s length interest rate, can be used to move cash across various jurisdictions. By taking strategic steps now, you are far more likely to avoid tax surprises down the road. [caption id="attachment_912" align="alignleft" width="135"]Moses Man Color Print Resolution Posted by Moses Man, CPA[/caption] Moses Man  is a manager in the Tax Services Group at Clark Nuber PS. Reach him at © 2016 Clark Nuber PS All Rights Reserved

Is your Company Ready to Implement the DOL’s New Overtime Regulations?

The DOL’s Final Rule defines the exemptions for executive, administrative, professional, outside sales, and computer employees under the Fair Labor Standards Act. Up to this point, employees who performed managerial or professional duties and earned more than $23,660 per year, or $440 per week, were exempt from overtime. The Final Rule, however, increases that salary threshold to $47,476 per year, or $913 per week. Further, according to the Final Rule, “overtime” is not limited to the office or the workplace. Time spent telecommuting, on company business, or on electronic devices (i.e., checking and responding to work email on mobile phones) is also considered time spent performing work duties. The Final Rule also amends the salary basis test, allowing employers to use nondiscretionary bonuses and incentive payments, including commissions, to satisfy up to 10% of the new standard salary level. According to many experts, these changes will be felt most in retail, hospitality organizations, not-for-profit organizations, and among middle managers. All told, the DOL predicts that the new salary threshold could result in as much as $1.2 billion in additional overtime pay during its first year in effect. Final Rule Presents Big Challenges for Companies As for the way it may affect companies, the Final Rule has implications beyond overtime payment. Money that is used to cover additional overtime, for example, has to come from somewhere within the company. This means that employers may need to take actions to reduce expenses elsewhere. Some employers may decide to reduce fringe benefits – or even reduce employee raises – in order to offset those additional costs for newly covered employees. Then there’s the issue of employees who telecommute, or use electronic devices outside of company offices. Since employees do not have access to time cards while at home or on the go, it becomes difficult to accurately gauge the amount of time an employee works. To combat this problem, companies could decide to establish policies not allowing non-exempt employees from accessing company computer systems outside of the office. Alternatively, they could invest in new timekeeping technologies and processes. What Should Companies Do? You should begin by identifying the employees affected by the Final Rule. Evaluate whether your management and professional employees meet the “primary duties” test for exemption under the overtime rule. For those salary employees who will now be classified as non-exempt, begin keeping track of work hours immediately to determine how much overtime you’ll likely have to pay in the future. Evaluate the salary threshold versus overtime pay for every employee. Be sure to consider bonuses, commissions and incentive pay in calculating the employee’s salary and rate of pay. Communicate clearly with your employees about how and why company policy is changing and how the DOL’s action will affect their pay. Review your payroll processes and systems to ensure they are aligned with the Final Rule. Determine if your payroll systems are set up to accurately track hours worked for all non-exempt employees including break times. Consider revising employee manuals to include policies over checking emails or voice messages while working off-site. Evaluate and revise current job descriptions based on the results of your analysis of employee “primary duties” test. Clark Nuber will continue monitoring the latest news surrounding the Final Rule and all other relevant employment issues, and will share timely updates with you. Read the full news release and access more information from the DOL. Conclusion Employers have options for compliance with the new overtime regulations - whether it be raising salaries to maintain exemption, requiring managers to keep track of hours worked, or paying overtime or managing hours worked of non-exempt employees. Clark Nuber can assist you in evaluating your options and identifying an implementation plan that is right for you. Feel free to share this update with your HR and management teams to help them prepare for the new regulation. If you have questions, please contact us at © 2016 Clark Nuber PS All Rights Reserved

Lease Accounting Changes – Light at the End of the Tunnel?

Many companies worldwide will soon take a different view of their balance sheets. Entities that pay to lease real estate, airplanes, office equipment, fleet vehicles and other items will be required to recognize significant debt-like obligations and add billions onto their balance sheets. After more than a decade of drafts, surveys and redrafts of the Lease Accounting Standards, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have finally set effective dates for leaseholders to adopt the respective Lease Accounting Changes. FASB issued Accounting Standards Update (ASU) 2016-02 earlier this year. The new guidelines are outlined in the Accounting Standards Codification (ASC) Topic 842 and take effect December 2018. IASB’s changes, outlined in IFRS 16, take effect January 2019. What Does the Change Mean? Simply stated, the new standards require lessees to convert their operating leases (off-balance sheet) to capital leases (on-balance sheet), which reflects the lease’s liability (rent). Although the standards may seem onerous and complex, the overall goals of the proposed changes are simple - to create more transparency of a company’s assets and liabilities and avoid the accounting scandals that have plagued world economics. Of particular concern was the possibility of abuse of off-balance sheet reporting of liabilities. FASB is trying to create transparency by taking a very common and significant economic and legal liability (the obligation to make lease payments), which is often reported off the balance sheet (particularly with office leases), and create consistency by making everyone report it on the balance sheet. Variables - Altered Capital and Disclosures? The addition of lease liabilities to the balance sheet is expected to have a significant impact on financial ratios relied upon by the users of a company’s financial statements (i.e., investors, lenders, etc.). So, will these new rules create consistency for all? Not necessarily. Although all companies will play by the same rules, not all companies’ financial ratios will be affected in the same manner. Industries with modest leasing needs will appear to be performing better than those with higher leasing needs (such as retail, manufacturing, aerospace and healthcare). However, this doesn’t mean that companies with heavy leasing needs will suddenly become a poor investment choice. It is important to understand that investors, lenders and analysts will need to re-calibrate their metrics as a result. Financial ratios to pay attention to include:
  • Debt to Equity (D/E) - The debt to equity ratio is used to measure the amount of leverage, or debt, used in the business. This new standard will result in adding assets and liabilities to the balance sheet, with no impact on equity, which will cause a spike to the D/E ratio. With a higher leverage ratio, this is sure to cause discussion between companies and their lenders.
  • Return On Assets – Return on assets is used to measure a company’s return on the investment it makes in its assets. This ratio will take a hit as companies add assets to the balance sheet. Overnight, assets will rise and earnings will stay the same, causing the return as a percentage of those assets to decline.
  • Working Capital – As a measure of a company’s ability to pay its current liabilities with its current assets, the addition of the portion of leases to be paid over the next year to current liabilities will definitely skew the working capital ratio.
Important, but Not Important Companies have generally taken the liberty of burying their lease obligations deep within the Form 10-K footnotes.  Because finance and capital leases are already accounted for, it’s primarily the operating leases that need to be reflected on the balance sheets. This practice shouldn’t have much of an impact on corporate profits, and none of this should come as a surprise to the ratings firms and large institutional investor who typically have the off-balance sheet assets and liabilities already accounted for. It’ll be the small investors who don’t have the resources or experience to scrub through the massive amounts of footnotes who will generally be surprised by the changes. But let’s not let the tail wag the dog. The idea of moving lease assets and liabilities onto the balance sheet just isn’t that important throughout the financial and accounting circles. It’s acknowledged as more of a laborious headache than a safeguard of checks and balances. Take a back seat! What’s important when taking on a leased obligation is that companies negotiate and structure the best deal possible. Why? Because the goal of the new standards is to create transparency – not provide any benefits or leverage to either the lessor or lessee. While the accountants and finance people should work out the details, there needs to be open and frequent conversation between a company’s different groups (accounting, finance, treasury and any other department(s) responsible for the obligations of the lease). This will ensure that all goals and objectives are met. The proposed accounting changes might not change the outcome of the leasing decisions made by a company, but it’s certain to change the process companies undertake to come to consensus on the decisions. The two primary goals companies take into consideration when negotiating a lease are to satisfy operational needs and meet financial objectives.  Two variables govern these goals:
  1. Lease Versus Buy – With the knowledge that the assets will transfer to the balance sheet, companies will need to consider if it’s advantageous to continue leasing or instead purchase the asset. Companies can benefit from tax benefits through depreciation over the asset’s life or factor depreciation over the lease term.
  2. Lease Term – It may be tempting to negotiate a shorter lease term to lessen the impact the lease obligations will have on the balance sheet, but be careful! Short lease terms will generally cause higher rental rates. Concentrate on cash flows and negotiate the lease that will provide the best cash flow result.
Leasing should provide flexibility, so don’t become handcuffed with terms and conditions that don’t consider your company’s best interest.  Negotiate the best deal for your company and let the accounting and finance people work out the details. Next Steps There will be many decisions for companies to make over the next few years to best structure their entities for a smooth transition while continuing to provide shareholder value. With the issuance of the standards this year and (only) 2 ½ years before companies must start reporting under the new guidelines, there are mixed emotions about jumping in knee-deep and engaging new systems, policies and procedures – remember Sarbanes-Oxley? Executives of many companies were uncertain of the magnitude and cost associated with implementing the Sarbanes-Oxley compliance measure. It’s no wonder company leaders aren’t motivated to dive into the new lease accounting standards. Preparation, communication and execution are the fundamentals every company needs to address. Financial executives within companies will need to study the new guidance and assess the impact on their financial statements well ahead of the switch-over date.  Ratios involving cash flows and Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) will be unaffected, but those involving balance sheet accounts will likely be impacted heavily. The time is now to assess if the company has the resources/staffing and financial capacity to handle this task in-house or if the work should be outsourced. It is also time to understand the severity of the impact this will have on balance sheets and to develop a communication strategy with investors and lenders so there are no surprises. Consult your CPA if you have any concerns or questions about the new guidance. The long-anticipated standards for transparency and consistency in lease accounting will be here sooner than you think. © Clark Nuber PS and Adam Milhlstin, 2016.  All Rights Reserved

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