Community Foundation of Northwest Indiana, Inc.

Transcription

1 0 Community Healthcare System Community Foundation of Northwest Indiana, Inc. Community Hospital St. Catherine Hospital St. Mary Medical Center August20,2015 Technical Director Financial Accounting Standards Board 401 Merritt 7 PO Box 5116 Norwalk, CT Proposed Accounting Standards Update, Presentation of Financial Statements of Not-for Profit Entities (File Reference No ) Dear Technical Director, We appreciate the opportunity to comment on the Financial Accounting Standards Board's Proposed Accounting Standards Update, Presentation of Financial Statements of Not-for-Profit Entities. Our organization is Community Foundation of Northwest Indiana, Inc. (CFNI), a not for profit health care provider operating 3 acute care hospitals and a continuing care retirement community with annual revenue of approximately $1 billion. We are subject to industry guidance under ASC 954 as well as the guidance under consideration in the subject proposal. We support the FASB's initiative to improve clarity, transparency and usefulness to financial statement readers. We believe key considerations should include comparability for business oriented NFPs to their For-Profit peers. Questions for Respondents Statement of Financial Position and Liquidity Question 1: Do you agree that the disclosures about the nature of donor-imposed restrictions and their effects on liquidity in notes to financial statements would help ensure that necessary information is not lost by combining the temporarily and permanently restricted classes of net assets into one donor restricted category for purposes of presentation in the statement of financial position (balance sheet)? If not, please identify the information lost and why it is necessary. (See paragraphs BC22-BC23 and BC27-BC32.) Donald S. Powers Drive, Suite 201, Munster, Indiana www. comhs.org

2 We agree that the disclosures about the nature of donor-imposed restrictions and their effects on liquidity in notes to financial statements would help ensure that necessary information is not lost by combining the temporarily and permanently restricted classes of net assets into one donor restricted category for purposes of presentation in the balance sheet. We believe temporarily restricted funds have material differences in how the principal amount of the donation can be used as compared to permanently restricted funds, and that is an important consideration when a financial statement reader considers the organization's liquidity. Question 2: Do you agree that the aggregated amount by which endowment funds are underwater should be classified within net assets with donor restrictions rather than net assets without donor restrictions? If not, why? {See paragraph BC24.) We agree that the aggregated amount by which endowment funds are underwater should be classified within net assets with donor restrictions rather than net assets without donor restrictions. To the extent that the donor imposes restrictions on how the donation is invested, we don't believe the current presentation fairly displays the organization's financial position by restricting net assets to cover the underwater amount. The donor's intent was not to hamper the organization with the donation, but to help it. Question 3: Do you agree that disclosures describing the NFP's policy on spending from underwater endowment funds, together with the aggregated original gift amount or the amount that is required to be maintained by donor or by law, would provide creditors, donors, and other users with information useful in assessing an NFP's liquidity and potential constraints on its ability to provide services without imposing undue costs? Why or why not? {See paragraph BC32.) We agree that disclosures describing the NFP's policy on spending from underwater endowment funds, together with the aggregated original gift amount or the amount that is required to be maintained by donor or by law, would provide creditors, donors, and other users with information useful in assessing an NFP's liquidity and potential constraints on its ability to provide services without imposing undue costs. We believe this disclosure is part and parcel to combining restricted net assets on the face of the balance sheet aggregating underwater endowment funds within net assets. Question 4: Do you agree that providing information in notes to financial statements about financial assets and liabilities and limits on the use of those assets is an effective way to clearly communicate information useful in assessing an NFP's liquidity and how it manages liquidity without imposing undue costs? If not, why, and what alternative{s) would you suggest? {See paragraphs BC27- BC31.) We disagree that providing additional information in notes to financial statements about financial assets and liabilities and limits on the use of those assets is an effective way to communicate information useful in assessing an NFP's liquidity and how it manages liquidity 2

3 without imposing undue costs. We believe that continuing to report a classified balance sheet would provide adequate disclosure on other assets and liabilities coupled with current disclosures required for certain financial assets, such as investments. Liquidity regarding debt and leases are also adequately disclosed under the current guidance. Question 5: Most business-oriented health care NFPs are required to present a classified balance sheet. Continuing care retirement communities and other NFPs may choose to sequence their assets and liabilities according to their nearness to cash as an alternative to using a classified balance sheet. As a result of the proposed requirement to provide enhanced disclosures of information useful in assessing liquidity, would there no longer be a need to hold business-oriented health care NFPs to the more stringent standard for their balance sheets? If not, why? We believe there is a need to require most business-oriented health care NFPs to classify their balance sheets. Business oriented NFPs compete for investment dollars with For-Profit businesses. Requiring the presentation of this information to be different between For Profits and NFPs, investors will require some type of reconciliation to compare to For-Profits. Historically, we've found skepticism and doubt when trying to reconcile away from audited financial statements, which in turn creates a perception of increased risk/lower value in the minds of investors. Statement of Activities. Including Financial Performance Question 6: Do you agree that requiring intermediate measures of operations would provide users of NFP financial statements with more relevant and comparable information for purposes of (a) assessing whether the activities of a period have drawn upon, or have contributed to, past or future periods and (b) understanding the relationship of resources used in operations of a period to resource inflows available to fund those operations? Do you also agree that classifying and aggregating information in that way would not require major system changes? If not, why? (See paragraphs BC38-BC47.) We agree that requiring intermediate measures of operations would provide users of NFP financial statements with more relevant and comparable information. Business oriented NFPs need to have more directly comparable Statements of Activities to their For-Profit peer group though. We agree that classifying and aggregating information in that way would not require major system changes as NFPs are required to report much of this information to the IRS on form 990 currently; however, classifying and aggregating in the proposed fashion further separates the statement presentation from their For-Profit peers. Question 7: Do you agree that intermediate measures of operations should include only those (a) resource inflows and outflows that are from or directed at carrying out an NFP's purpose for existence and (b) resources that are available for current-period operating activities before and 3

4 after the effects of internal governing board appropriations, designations, and similar actions? If not, why? (See paragraphs BC48-BC7 4.) We disagree that intermediate measures of operations should include only those (a) resource inflows and outflows that are from or directed at carrying out an NFP's purpose for existence and (b) resources that are available for current-period operating activities before and after the effects of internal governing board appropriations, designations, and similar actions. Business oriented NFPs will be further separated from their For-Profit peers under this approach. Question 8: Do you agree that all internal transfers (governing board appropriations, designations, and similar actions that make resources unavailable or available for operations of the current period) should be reflected on the statement of activities immediately after an intermediate measure of operations before transfers and immediately before an intermediate measure of operations after transfers? If not all internal transfers, on what basis would you distinguish between those transfers that should and should not be reflected and how would you make that distinction operable? Do you also agree that reflecting those internal decisions (or lack of them) on the face of the statement rather than in notes will help an NFP communicate how its operations are managed without adding undue complexities? Why or why not? (See paragraphs BC46-BC47 and BC67-BC74.) We disagree that all internal transfers (governing board appropriations, designations, and similar actions that make resources unavailable or available for operations of the current period) should be reflected on the statement of operations immediately after an intermediate measure of operations before transfers and immediately before an intermediate measure of operations after transfers. This would be another departure from industry standard for business oriented NFPs as compared to their For-Profrt peers. Further, internal transfers are/can be presented under Supplemental Information in audited GMP financial statements. While we agree that reflecting those internal decisions (or lack of them) on the face of the statement rather than in notes will help an NFP communicate how its operations are managed without adding undue complexities, we disagree that this is usable or understandable information to the financial statement reader for business oriented NFPs. Question 9: Do you agree that to promote comparability, the Board should eliminate one of the two optional methods for reporting expirations of donor restrictions on gifts of cash or other assets to be used to acquire or construct long-lived assets? Do you also agree that requiring the expiration of those donor restrictions on the basis of the placed-in-service approach rather than the current option to present a release from restriction over the useful life of the acquired longlived asset is most consistent with the underlying notions of the intermediate measures of operations? If not, why? (See paragraph BC66.) 4

5 As a business oriented Health Care Organization we are subject to one method of reporting. However, we believe all gifts/donations/grants should have consistent treatment once all restrictions have been satisfied, e.g., donations of/for long lived assets would be reported as operating income once placed in service. There is a disconnect currently wherein depreciation for these assets is a component of operating income, but the revenue generated to purchase the asset is not. We agree that requiring the expiration of those donor restrictions on the basis of the placedin-service approach rather than the current option to present a release from restriction over the useful life of the acquired long-lived asset is most consistent with the underlying notions of the intermediate measures of operations. Once the restrictions of the donation have been met, we believe the amount should be reported as a component of operating income, analogous to the grant reporting model. Question 10: Do you agree that gifts of, or for, property, plant, and equipment (long-lived assets) should be considered operating revenue and support when received (or when placed in service in the case of a gift to acquire a long-lived asset)? Do you also agree that because the long-lived asset is not immediately fully available to be utilized in the current period, an NFP should be required to present a transfer from operating activities to other activities for the amount of the gifted asset or portion of the asset funded by restricted gifts? If not, why? (See paragraphs BC72-BC74.) We agree that gifts of, or for, property, plant, and equipment (long-lived assets) should be considered operating revenue and support when received (or when placed in service in the case of a gift to acquire a long-lived asset). Once the condition of purchase is met we believe the restriction donation is similar to any other donation/grant received. We disagree that because the long-lived asset is not immediately fully available to be utilized in the current period, an NFP should be required to present a transfer from operating activities to other activities for the amount of the gifted asset or portion of the asset funded by restricted gifts. We believe that a current period donation is a current period operating activity once the condition of the donation has been met. The use of the asset over a period of time does not change the nature of a donation. Currently an organization can receive two separate donations and use the proceeds to purchase two long-lived assets. If one donation is restricted as to purpose and one is not, once the condition on the restricted donation is met, we have two essentially identical transactions that are accounted for differently. Question 11 : Do you agree that the addition of required intermediate measures of operations for all NFPs would make unnecessary the need for NFP business-oriented health care entities to also present their currently required performance indicator? Why or why not? (See paragraph BC99.) 5

6 We disagree that the addition of required intermediate measures of operations for all NFPs would make unnecessary the need for NFP business-oriented health care entities to also present their currently required performance indicator. This change would further separate business oriented NFPs from their For-Profit counterparts. Question 12: Do you think the flexibility currently allowed by GAAP to present a statement of activities as either a single statement or two articulating statements and to use either a singlecolumn or a multicolumn format should be retained or narrowed? If narrowed, why and in what ways? We think that the flexibility currently allowed by GAAP to present a statement of activities as either a single statement or two articulating statements and to use either a single-column or a multicolumn format should be retained. We think it is important for business oriented NFPs Statements of Activities to be comparable to their For-Profit peers. Multicolumn formats will unnecessarily clutter a business oriented NFPs statements and potentially confuse the reader and make them inconsistent with their For-Profit peers. Question 13: Do you agree that reporting operating expenses by both their function and nature together with an analysis of all expenses (other than netted investment expenses) provides relevant and useful information In assessing how an NFP uses its resources and, thus, should be required? Why or why not? (See paragraphs BC87-BC93.) We disagree that reporting operating expenses by both their function and nature together with an analysis of all expenses (other than netted investment expenses) provides relevant and useful information in assessing how an NFP uses its resources and, thus, should be required. We believe business oriented NFPs should report more consistently with their For Profit peers. Additionally, this information is available to readers of the financial statements from the required IRS form 990 filings. We believe this reporting method would be redundant. Question 14: Do you agree that requiring investment income to be reported net of external and direct internal investment expenses will increase comparability and avoid imposing undue costs to obtain information about all investment fees (for example, embedded fees of hedge funds, mutual funds, and funds of funds)? If not, why? (See paragraph BC1 00.) We disagree that requiring investment income to be reported net of external and direct internal investment expenses will increase comparability and avoid imposing undue costs to obtain information about all investment fees. However, we believe that the outside direct netting of investment fees policy election should be required. Our organization has third party advisors for our investment portfolio. The internal cost of administrating the investments and managing the managers and advisors is not material and the cost of compliance would be wasteful of resources with no potential benefit to the reader of the financial statements. 6

7 Question 15: Do you agree that the disclosure of the amount of all investment expenses is unnecessary but that disclosure of internal salaries and benefits that are netted against investment return is of sufficient relevance, not too costly to obtain, and thus should be required? Why or why not? (See paragraph BC1 01.) We do agree that the disclosure of the amount of all investment expenses is unnecessary. We believe fees paid to outside advisors and managers should be required to be netted against investment returns and is consistent with returns reported on Mutual funds and EFTs. We further believe that netting salaries and benefits against investment return is generally not material or of sufficient relevance and is too costly to obtain with very little value added to for the reader of the financial statements, and thus should not be required. Many NFPs hire outside managers and advisors and the amount of salary and benefits expended to administer the investment program is not material enough to warrant the administrative burden required to track it. Question 16: Do you agree that interest expense, whether incurred on short-term or long-term borrowing, and fees and related expenses incurred for access to lines of credit and similar cash management and treasury activities are not directed at carrying out an NFP's purposes and, thus, should not be classified as operating activities? If not, why? (See paragraphs BC59- BC60.) We agree that interest expense, whether incurred on short-term or long-term borrowing, and fees and related expenses incurred for access to lines of credit and similar cash management and treasury activities are not directed at carrying out an NFP's purposes and, thus, should not be classified as operating activities. There are several ways to finance an organization's initiatives. Unless the NFP is a financial services company, such as a credit union, interest expense does not pertain to the core function of the business. Comparing an NFP that borrows to fund capital expansion to one that uses its cash for expansion will not have a comparable operating income. Surely the organization that has spent cash has reduced its investment income as a result of its decision, yet the reduced income does not show up in the operating income performance indicator. Also, interest classified as an operating activity provides a disparity when comparing business oriented NFPs to For-Profit peers, where interest expense is not in the operating income performance indicator (See Tenet Healthcare financial statements, a for profit public healthcare company) Question 17: Do you agree with the following implementation guidance: a. Equity transfers between NFPs that are under common control and are eliminated in a parent entity's consolidated financial statements and equity transactions between financially interrelated entities should be presented within operating activities unless they are not available for currentperiod use in carrying out the purpose for the reporting entity's existence? If not, why? (See paragraph BC62(a).) b. Immediate writeoffs of goodwill generally should be presented within operating activities? If not, why? (See paragraph BC62(b).) c. Immediate writeoffs of acquisitions of noncapitalized items for a permanent collection should be presented within the 7

8 operating activity section if acquired with net assets without donor restrictions? If not, why? (See paragraph BC62(c).) We disagree that equity transfers between NFPs that are under common control and are eliminated in a parent entity's consolidated financial statements and equity transactions between financially interrelated entities should be presented within operating activities unless they are not available for current-period use in carrying out the purpose for the reporting entity's existence. Business oriented NFPs, particularly Healthcare organizations continue to centralize for efficiency and cost reduction and as such do daily intercompany equity transactions. It would add little value to record "housekeeping tasks" as equity transfers in the operating statement within the details of consolidation. We disagree that immediate writeoffs of goodwill generally should be presented within operating activities. We believe goodwill is largely an accounting adjustment to balance a transaction in a highly subjective estimation process. We think that goodwill writeoffs should either, a) fall outside the operating performance indicator or b) be made into a gross up of the hard assets to be amortized over time. We believe unpredictable goodwill adjustments skew operating performance and are confusing to the reader of the financial statements. We do not take a position on the proposal that immediate writeoffs of acquisitions of noncapitalized items for a permanent collection should be presented within the operating activity section if acquired with net assets without donor restrictions. Statement of Cash Flows, Including Financial Perfonnance Question 18: Do you agree that the direct method of presenting operating cash flows is more understandable and useful than the indirect method? Do you also agree that the expected benefits of presenting operating cash flows In that way would justify the one-time and ongoing costs that may be incurred to implement that method of reporting? If not, please explain why and suggest an alternative that might increase the benefits or reduce any operational concerns or costs. (See paragraphs BC75-BC80.) We disagree that the direct method of presenting operating cash flows is more understandable and useful than the indirect method. The indirect method is currently used by many organizations. In fact, we're not aware of one public reporting entity that uses the direct method. Accordingly, readers of financial statements could be confused by the direct method since they would not be familiar with it and would see it along with the indirect method still allowed in For-Profit Industries. This would be another example of where business oriented NFPs would not be comparable to their For-Profit peers. We disagree that the expected benefits of presenting operating cash flows in that way would justify the one-time and ongoing costs that may be incurred to implement that method of reporting. Systems and processes within organizations are not set up to report under the direct method. We believe that any cost and administrative burden incurred to build a direct 8

9 method process would be excessive because it would be replacing a method that more than competently explains changes in cash position. We believe requiring a change as an overarching initiative affecting all reporting entities would create consistency for readers of financial statements. Alternatively, maintaining the choice of methods will effectively accomplish the same result as the vast majority of reporting entities will choose the indirect method. Question 19: Does the indirect method's reconciliation of cash flows from operations to the total change in net assets provide any particular type of necessary information that would be lost if, as proposed, that method is no longer required? If so, please identify the potentially omitted information and explain why it is useful and whether it should be provided through disclosure rather than requiring use of the indirect method. If you suggest that requiring the indirect method is necessary, would you require that the amount for cash flows from operations be reconciled to the amount of the (a) change in net assets, (b) change in net assets without donor restrictions, or (c) proposed intermediate measure of operations before or after transfers? Why? (See paragraphs BC75-BC80.) We believe that the indirect method's reconciliation of cash flows from operations to the total change in net assets provides necessary information that would be lost if, as proposed, that method is no longer required. The reconciliation provides information on accrual changes and non-operating events that may not be disclosed under the proposal. We also believe the reconciliation should be to change in net assets to capture all the organization's activities on the statement. Question 20: Do you agree that although operating activities is defined differently for the statement of cash flows than for the statement of activities, more closely aligning line items presented in the statement of cash flows with the proposed operating classification for the statement of activities will increase understandability even though that reporting would be somewhat different from current requirements for business entities? If you believe that operating items in the two financial statements would not be sufficiently aligned, please indicate how their alignment might be further improved. (See paragraphs BC81-BC86.) We disagree that although operating activities is defined differently for the statement of cash flows than for the statement of activities, more closely aligning line items presented in the statement of cash flows with the proposed operating classification for the statement of activities will increase understandability even though that reporting would be somewhat different from current requirements for business entities. We're not certain how, at least for business oriented NFPs, creating statements that are different from other business entities would increase understandability. It would seem to us that having consistency in financial statements would improve understandability. Effective Date 9

10 Question 21: Are there any particular proposed amendments in this Update that would require a longer period to implement than other amendments? If so, please explain. We believe a change to the direct method of cash flow reporting would require a remapping of our chart of accounts to accomplish. We also believe the board should consider other projects affecting NFPs, such as revenue recognition and lease accounting, should be considered when choosing an effective date. Question 22: Are there reasons for any particular size or type of NFP to need a longer time frame to implement the proposed amendments in this Update? If so, please explain. NFPs with smaller resources, both financial and staffing, will likely take more time to implement. This would be a challenge to determine as there are small NFPs with many resources and many large NFPs with resources in short supply. We would be pleased to discuss our comments with the Board members or the FASB staff at your convenience. Very truly yours, '--tf1~{k,~ Mary Ann Shacklett, CPA, MBA Senior Vice President of Finance and CFO Community Foundation of Northwest Indiana, Inc. A~P- Gregg Ferlin, CPA Vice President of Finance Community Foundation of Northwest Indiana, Inc. 10