11/5/2015 WHAT FASB IS TRYING TO DO TO YOUR FINANCIALS: THE NEW NFP REPORTING PROPOSAL. Presented by Connie Benton Cagle and Derek Pierce

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1 WHAT FASB IS TRYING TO DO TO YOUR FINANCIALS: THE NEW NFP REPORTING PROPOSAL Presented by Connie Benton Cagle and Derek Pierce 1

2 OVERVIEW OF TODAY S DISCUSSION Background Perceived weaknesses in NFP reporting Primary objectives of proposed accounting standard update Main provisions & sample proposed financial statements Comment letters and concerns Questions BACKGROUND Current guidance (FAS 117) issued 20 years ago FASB NFP Advisory Committee formed in 2010 Exposure draft issued April 22, 2015 Comments submitted by August 20, 2015 FASB currently in redeliberations 2

3 COMMON NFPs IMPACTED Charities Foundations Private Colleges & Universities Nongovernmental Health Care Providers Cultural Institutions Religious Organizations Trade Associations PERCEIVED WEAKNESSES IN NFP REPORTING Complexity with three net asset classes Confusion regarding statement of cash flows Donors, creditors & other users Difficulty in assessing an entity s liquidity Inconsistent reporting of expenses No clear operating measure defined 3

4 PRIMARY OBJECTIVES OF PROPOSED ASU Provide intuitive financial information to donors, grantors, lenders & other users Liquidity Financial Performance Streamline Cash Flows net asset classifications Allow NFPs to tell their financial story SIX KEY TOPICS ADDRESSED Note Disclosures Net Asset Classification Cash Flow Statement Liquidity Reporting of Expenses Financial Performance /Operating Measures 4

5 NET ASSET CLASSIFICATION Current GAAP Unrestricted Temporarily restricted Permanently restricted * Underwater endowments included in unrestricted net assets Proposed GAAP Without donor restrictions With donor restrictions * Underwater endowments netted with donor restricted net assets LIQUIDITY Qualitative Disclosures Quantitative Information Define time horizon used to manage liquidity (i.e., 30, 60, 90 days) & basis Strategy for addressing risks that may affect liquidity Policy for establishing liquidity reserves Financial assets available to meet cash needs within time horizon Financial liabilities due within that time horizon 5

6 FINANCIAL PERFORMANCE/OPERATING MEASURES CURRENT PRACTICE FINANCIAL PERFORMANCE/OPERATING MEASURES PROPOSED GUIDANCE Require operating indicator Operating activities based on two criteria Mission (charitable & business activity) Resources used to carry out an NFP s purpose for existence Availability for current period activities Not limited by external/internal restrictions 6

7 STATEMENT OF ACTIVITIES Section Description Examples Operating Charitable & Business Patient revenue, tuition, (w/o donor restrictions) unrestricted contributions, depreciation expense Non operating (w/o donor restrictions) With donor restrictions Investing & Finance Investment earnings, interest expense Restricted contributions, donor endowment earnings STATEMENT OF ACTIVITIES Operating measure BEFORE transfers reflects legally available amounts generated by or used in operations including releases of donor restrictions Internal decisions to designate available assets as unavailable (or vice versa) shown below subtotal Board Reasoning for Transfers 1. Foster comparability across NFPs 2. Allow NFPs to tell their financial story 7

8 REPORTING OF EXPENSES All NFPs required to report operating expenses by nature & function Options: include in SOA, separate statement or notes Require investment expenses to be netted with investment return Netting limited to external & direct internal expenses REPORTING OF EXPENSES Example: FUNCTION N A T U R E * Example obtained from FASB 8

9 STATEMENT OF CASHFLOWS Require direct method for operating cash flows Reclassify certain items to better align with new SOA Operating All fixed asset activities Investing Interest/dividends on investment portfolio Financing Interest paid STATEMENT OF CASH FLOWS DIRECT METHOD Example: Cash Flows from Operating Activities Cash received from program services/patients/students Cash received from donors Cash received from donors restricted for long lived assets Cash paid to employees Cash paid to suppliers Purchase of equipment Net cash provided by operating activities $ $ 9

10 REACTIONS TO PROPOSED STANDARD 264 Comment Letters 10 Workshops 3 Roundtables REACTIONS TO PROPOSED STANDARD Overall Common Themes Support for FASB s overall objective to update current model Desire to maintain as much consistency as possible between NFPs and for profit reporting Desire for proposal that better takes into consideration differences among NFPs Concern regarding cost to implement proposed changes 10

11 REACTIONS TO PROPOSED STANDARD Overall Support Combining temp and perm net assets Disclosing policy for spending underwater funds Classifying underwater endowments with restricted net assets Reporting expenses by nature and function Concern regarding cost to implement proposed changes REACTIONS TO PROPOSED STANDARD Overall Disagreement Presentation of internal transfers on face of SOA Classification of interest expense as non operating Classification of capital gifts as operating Removal of HC entities to present classified balance sheet and current performance indicator Aligning operating items on SCF and SOA 11

12 REACTIONS TO PROPOSED STANDARD Mixed Feedback Qualitative and quantitative liquidity info Intermediate measures of operations Direct method cash flows FASB MEETING DECISION 10/28/15 ASU divided into 2 worskstreams Workstream 1 (before 6/30/16) Net assets classification scheme Presentation of expenses Improved disclosures around operating measures Improved disclosures around liquidity Direct method of cash flows Workstream 2 (after 6/30/16) Operating measure Statement of cash flows realignment 12

13 QUESTIONS? Connie Benton Cagle, CPA // Managing Director// Derek Pierce, CPA, FHFMA // Director // bkd.com 13