Statement of Financial Position and Liquidity

Transcription

1 August 20, 2015 Via e mail to director@fasb.org 401 Merritt 7 PO Box 5116 Norwalk, CT Re: File Reference No , Proposed Accounting Standards Update (ASU), Not for Profit Entities (Topic 958) and Health Care Entities (Topic 954) Presentation of Financial Statements of Not for Profit Entities We are pleased to submit our comments on the s (FASB) proposal to improve not for profit (NFP) financial reporting. Please find our responses below to the specific questions asked in the exposure draft proposing changes to the FASB Accounting Standards Codification (ASC) applicable to NFPs. We have also provided additional comments related to other observations in the exposure draft. 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.) Response: Yes, we agree that the additional disclosure requirements should compensate for the combination of net asset classes to ensure information would not be lost. 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.) Response: Yes, we agree that combining all endowment fund balances, including underwater endowments, within net assets with donor restrictions simplifies the presentation of endowments for NFPs. ACCOUNTANTS & CONSULTANTS

2 Page 2 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.) Response: Yes, we agree that the additional disclosures do not impose an undue cost to NFPs and they provide information that would otherwise be lost to stakeholders with the new requirement for all endowment balances to be presented as net assets with donor restrictions. 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.) Response: Yes, we agree that this would be an effective approach that would not impose undue costs. Allowing NFPs the flexibility to self define the time horizon they use to manage liquidity is also a good decision, as there are too many types of NFPs out there with varying operating models. We would also ask for additional guidance or clarification around the effect of financial assets and liabilities associated with gifts for long lived assets on liquidity disclosures. The proposed ASU leaves only one option of releasing restrictions associated with gifts for long lived assets that is based on a placed in service date. Since these assets will be restricted until an asset is placed in service, the associated financial assets and financial liabilities related to these restrictions during the period of the capital campaign and construction should be excluded from the tabular disclosures of liquidity. Removing the financial assets, like cash, would come naturally to most people as not being available during the self defined time horizon. But some organizations may include in the financial liabilities the accounts payable associated with construction costs, since the invoices are usually due within a short time period. Including these financial liabilities would understate net financial assets available within the self defined time horizon. 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? Response: We agree that the additional disclosure requirements should allow all NFPs to present an unclassified balance sheet, but that an optional presentation should still be allowed.

3 Page 3 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.) Response: We agree that an intermediate measure of operations will provide users of NFP financial statements with more relevant and comparable information and that it should not require major systems changes. 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 after the effects of internal governing board appropriations, designations, and similar actions? If not, why? (See paragraphs BC48 BC74.) Response: We agree with the need to establish parameters around how NFPs define their measure of operations. The resources that are available for current period operating activities criterion may pose some challenges for certain situations. Below are a couple of examples: Grant Making Foundations Many grant making foundations view their investment income activities as core to their operations. If they are not a spend down foundation, they are focused on generating sufficient investment returns to pay out current and future grants. There are no donor restrictions limiting the period of use of the investment income. However, many have internal policies that limit investment income to certain board approved percentages or the amounts budgeted. Foundations that want to consider investment income as operating activities may need more guidance. Cemeteries A cemetery may recognize income today for a pre need sale. That income may be viewed as available for current period operating activities or it may also be viewed as not available until the customer becomes at need. 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?

4 Page 4 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.) Response: We agree that providing this detail for all internal transfers on the face of the statement of activities provides more useful information to users of financial statements and that the location after the intermediate measure of operations is appropriate, so that users of financial statements can understand operating results before any internal board or other actions. 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 long lived asset is most consistent with the underlying notions of the intermediate measures of operations? If not, why? (See paragraph BC66.) Response: We agree that a single method for releasing restrictions relating to gifts for long lived assets will promote comparability between NFPs and that many of the NFPs we work with are currently utilizing the option to release restrictions once placed in service. However, removing the option to release restrictions over an asset s useful life may create a problem for certain NFPs with their creditors. For example, an NFP that has chosen this option and has a debt service coverage ratio covenant that is based on the change in unrestricted net assets may find that they are adversely impacted by this proposed change, even though their operations did not significantly change. The FASB should consider whether retaining the flexibility of multiple options is more beneficial than the need for comparability, since some NFPs are more concerned about liquidity (i.e. utilizing the placed in service approach) and others about current period activities (i.e. utilizing the useful life approach). Additionally, there will need to be coordination with the American Institute of Certified Public Accountants (AICPA), as there is guidance in paragraph of their Not for Profit Audit and Accounting Guide that implies it is ok to release restrictions associated with gifts for long lived assets as the asset is being constructed, not just placed in service. Another consideration for additional guidance is that some NFPs may expend funds from gifts for longlived assets associated with paying for costs for the related capital campaign or for certain predevelopment activities that may not get capitalized. It would be our understanding that these sorts of costs would be allowed to be released from restrictions before the associated asset was placed in service, if these costs are still in line with the donor s intent.

5 Page 5 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.) Response: We can understand how certain gifts of long lived assets might be considered operating activities if they are put into use directly into programmatic activities. For example, a gift of a vehicle that will be used in a program to deliver meals to the elderly makes sense to consider as an operating activity. However, in cases of gifts for the acquisition or construction of long lived assets, they should not be considered operating activities that ultimately get reclassified to nonoperating activities. The proposed financial statement presentation for gifts of, or for, long lived assets is very cumbersome and would likely pose an undue burden on financial statement preparers. Additionally, showing the movement of these gifts between restricted contributions, then through releases of restrictions, then as a transfer out of operations, and lastly as a transfer into nonoperating activities does not add value to the financial statement reader. These gifts should just be initially recognized as nonoperating activities, along with the associated releases. We do not believe the benefit of the more detailed presentation and reclassification of these gifts outweighs the cost to implement. It would make more sense to consider these gifts as operating activities if the option for releasing restrictions over the useful life of the asset was still retained, since there would be a matching of operating revenues and expenses (i.e. depreciation) in the Without Donor Restrictions category every year. 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.) Response: Yes, we see the new requirements to include a measure of operations for all NFPs as a replacement for the performance indicator related to NFP business oriented health care entities. 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 single column or a multicolumn format should be retained or narrowed? If narrowed, why and in what ways? Response: We agree that flexibility should be allowed, as there is great diversity in the types of NFPs and the nature of their activities. The single statement approach may be more appropriate for NFPs that have many programs and a strong reliance on contribution income, while two articulating statements may be more appropriate for NFPs that are not as reliant on contribution income and want the presentation of the first page of the statement of activities to be more in line with business entities.

6 Page 6 Additionally, we appreciate the incorporation of illustrative financial statements for different types of NFPs. We do have comments regarding Example 1A at ASC A that provides an illustrative statement of activities for a private foundation. We understand that the illustrative statements are nonprescriptive and that NFPs still have flexibility with their presentation of this statement. However, the illustration assumes that investment income is a nonoperating activity for a private foundation. Some private foundations that are not spend down foundations or have programmatic investments may view their investment activities as a core operation that generates sufficient returns to pay out grants. The illustration may be challenging for private foundations with this point of view. 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.) Response: We agree with this requirement and that it is applied equitably across all NFPs. Additionally, the presentation of bad debts from unpaid pledges is often inconsistent. It might end up being reported as 1) operating expenses, 2) a separate line item of loss outside of operating expenses, or 3) netted with contribution income. Clarity should be provided on the reporting of bad debts and whether consistency in presentation is warranted. 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 BC100.) Response: Yes, we agree that netting investment expenses will increase comparability. 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 BC101.) Response: We agree with the requirement to disclose internal salaries and benefits that are netted against investment returns. 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.)

7 Page 7 Response: We agree that these expenses are not core to the operations of NFPs, but they are necessary for many organizations. When present, these expenses are included in operational budgets and funds often need to be raised to cover these costs. Management s internal reporting used to run the NFPs business would deviate from the external financial statements and potentially cause additional confusion or misunderstanding of financial results and health. We therefore do not agree that these costs should be excluded from operating activities. 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 current period 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 operating activity section if acquired with net assets without donor restrictions? If not, why? (See paragraph BC62(c).) Response: We agree with the proposed implementation. Statement of Cash Flows, Including Financial Performance 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.) Response: The direct method is viewed by many as more understandable and potentially useful to financial statement readers, and we understand the FASB s reasoning for proposing this method. However, many NFPs are not looking forward to the significant change, as well as the work required to implement it. The direct method would also be diverging from the guidance applicable to every other industry that can use the indirect method. If there is a possibility that the cash flow method may change for all entities, deferring the implementation for NFPs until a standard is established for everyone may be prudent.

8 Page 8 If moving forward now with the direct method for NFPs is the right decision, a possible delay in implementation may be a good solution to allow NFPs to digest the other guidance in the proposed standard first and then tackle the direct method (see our response to Question 21). Additionally, consideration should be given as to whether donor restricted endowment appropriations should be included as operating activities in the statement of cash flows, with an offset in investing or financing activities. Endowment appropriations are often a significant source of cash in the operating budget for many NFPs. 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.) Response: We agree with removing the requirement for a reconciliation using the indirect method, as the majority of stakeholders do not pay much attention to the reconciling items. However, creditors will often use some of the noncash disclosures (i.e. depreciation, amortization, and other noncash items) in their financial covenants, such as the debt service coverage ratio. Consideration should be given as to whether creditors will be able to obtain this information elsewhere from the financial statements or footnote disclosures. 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.)

9 Page 9 Response: We agree that a closer alignment of operating activities in the statements of activities and cash flows is the right approach, despite some differences. We do have a couple of comments regarding the presentation of certain items, as indicated below: Gifts of or For Long Lived Assets Our response to Question 10 discusses how gifts of or for long lived assets should be considered nonoperating instead of operating. Therefore, we prefer the classification of these contributions to remain as financing activities, if they are determined to be nonoperating activities in the statement of activities. If the objective of making the significant changes to the statement of cash flows is to provide more meaningful information to stakeholders, then moving these gifts out of operations would provide for more consistent and meaningful information about the true day to day operations of an NFP. Operating results on the statement of cash flows would be skewed throughout the multi year duration of a capital campaign, since much of the cash inflows may occur first and then all of the cash outflows to constructs assets happening later. Private Foundations As described in our response to Question 12, many private foundations consider their investment function to be core to their operations. Consideration should be given to allowing the cash flows associated with investments to be considered an operating activity, similar to how investment companies present these cash flows. Effective Date 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. Response: The Statement of Cash Flows is often one the hardest parts of the financial statements for NFPs to prepare. The direct method and related changes would require a significant initial effort to implement the changes and will be an additional burden. Extra consideration should be given on the timing of implementation, in light of all of the other changes that will be required. 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. Response: No. Carving out separate effective dates for certain size or type of NFPs would likely add to the confusion and lead to errors in implementation.

10 Page 10 Other Comments Allocating Salaries for Direct Conduct or Direct Supervision: We appreciate the FASB s efforts to further define the proper allocations of costs. We note that organizations that receive federal funding will be following the new Uniform Guidance and rules around direct and indirect costs. Direct costs are often reflected as program expenses for these organizations and the new Uniform Guidance Section (c) allows for administrative and clerical services to be directly charged to an award if: (1) Administrative or clerical services are integral to a project or activity; (2) Individuals involved can be specifically identified with the project or activity; (3) Such costs are explicitly included in the budget or have the prior written approval of the Federal awarding agency; and (4) The costs are not also recovered as indirect costs. How will the new guidance in ASC A take this into account when defining direct conduct or direct supervision and providing illustrations of cost allocations? For example, portions of the CEO and CFO salaries are often reflected in program expenses. Case D in the illustrations at seems to suggest that GAAP and grant accounting are just going to be different and NFPs should just accept those differences. This will be a difficult reality for many NFPs to accept and explain to management and their Board of Directors. We want to thank the FASB for taking on this project to improve the NFP financial reporting model. We appreciate the significant effort and time put in to soliciting feedback, getting the word out, and educating the community about the proposed changes. Very truly yours, Daniel Figueredo, CPA, CGMA Shareholder On behalf of Burr Pilger Mayer, Inc.