Nonprofit Accounting and Auditing Update

Transcription

1 Nonprofit Accounting and Auditing Update 2016 Today s Presenters Trent Foster, CPA Engagement Partner Weaver s Education & Nonprofit Leader Dallas Dugger, CPA Audit Manager Nonprofit Practice 1

2 NFP Accounting Update Learning Objectives Upon completion of this section you will be able to: Identify current accounting standards that effect NFPs and what new or updated standards are on the horizon Understand the status of the Financial Statement Project Part 1 Nonprofit Accounting Standards 4 2

3 Recently Issued Standards (ASUs) Fair Value Measurement (Topic 820) Debt Issuance Costs Extraordinary Items (Subtopic ) Going Concern (Topic 205) Consolidation (Topic 810) Revenue Recognition (Topic 606) Leases (Topic 842) 5 Fair Value Measurement (Topic 820) 3

4 Recently Issued Standards Fair Value Measurement (Topic 820) ASU , Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) FASB eliminates requirement to categorize certain investments in the fair value hierarchy. 7 Recently Issued Standards In May 2015, the FASB issued ASU which exempts investments measured using the net asset value (NAV) practical expedient in ASC 820, Fair Value Measurement, from categorization within the fair value hierarchy and related disclosures. Instead, entities are required to separately disclose the information required under ASC 820 for assets measured using the NAV practical expedient. Entities are also required to show the carrying amount of investments measured using the NAV practical expedient as a reconciling item between the total amount of investments categorized within the fair value hierarchy and total investments measured at fair value on the face of the financial statements (specifically, the balance sheet). Fair Value Measurement (Topic 820) 8 4

5 Recently Issued Standards Effective Dates: The guidance requires retrospective application and is effective for public entities for fiscal years starting after December 15, 2015 The amendments will be effective for all other entities for fiscal years starting after December 15, 2016 December YE = 12/31/16-12/31/17 Summer YE =(May-Aug) Summer 17 - Summer 18 Early application is allowed Fair Value Measurement (Topic 820) 9 Recently Issued Standards Entities should apply the amendments retrospectively to all periods offered Using the amendments retrospectively requires an investment in which fair value is assessed through the NAV per share practical expedient be eliminated from the fair value hierarchy in all periods presented in financial statements. Fair Value Measurement (Topic 820) 10 5

6 Recently Issued Standards Fair Value Measurement (Topic 820) 11 Recently Issued Standards Fair Value Measurement (Topic 820) Current Guidance Level 1 Level 2 Level 3 Total Financial assets: Investments: Mutual funds $ 1,644,237 $ - $ - $ 1,644,237 Corporate stocks and bonds 535,979 26, ,483 Government bonds - 92,997-92,997 Municipal obligations - 84,407-84,407 Money market funds - 718, ,203 Unit investment trusts - 196, ,858 Real estate - 24,248-24,248 Investments carried at NAV - 3,019,401-3,019,401 Alternative Investments , ,364 Total investments $ 2,180,216 $ 4,162,618 $ 988,364 $ 7,331,198 Implemented ASU Level 1 Level 2 Level 3 Total Financial assets: Investments: Mutual funds $ 1,644,237 $ - $ - $ 1,644,237 Corporate stocks and bonds 535,979 26, ,483 Government bonds - 92,997-92,997 Municipal obligations - 84,407-84,407 Money market funds - 718, ,203 Unit investment trusts - 196, ,858 Real estate - 24,248-24,248 2,180,216 1,143,217-3,323,433 Fair Investments Value Measurement carried at NAV (Topic 820) 4,007,765 Total investments $ 2,180,216 $ 1,143,217 $ - $ 12 7,331,198 6

7 Recently Issued Standards Removing those investments from the fair value hierarchy not only eliminates the diversity in practice resulting from the way in which investments measured at NAV per share (or its equivalent) with future redemption dates are classified, but also ensures that all investments categorized in the fair value hierarchy are classified using a consistent approach. Investments that calculate NAV per share (or its equivalent), but for which the practical expedient is not applied will continue to be included in the fair value hierarchy. Fair Value Measurement (Topic 820) 13 Debt Issuance Costs 7

8 Recently Issued Standards ASU , 03, Interest Imputation of Interest (Subtopic ) Simplifying the Presentation of Debt Issuance Costs In April 2015, the FASB issued ASU to simplify the presentation of debt issuance costs related to a recognized debt liability. Going forward, such amounts will be presented as a direct reduction from the carrying value of the debt liability, consistent with debt discounts. The recognition guidance for debt issuance costs is not affected by this ASU. Debt Issuance Costs 15 Recently Issued Standards Effective Dates for ALL Entities: The guidance requires retrospective application and is effective for fiscal years beginning after December 15, 2015 Must be applied beginning calendar year 2016 or fiscal year 2017 Although not required, early adoption is permitted Debt Issuance Costs 16 8

9 Recently Issued Standards Why was ASU issued? To simplify requirements: having different balance sheet presentation requirements for debt issuance costs and debt discount and premium creates unnecessary complexity What is the impact of ASU ? Requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Debt Issuance Costs 17 Recently Issued Standards Recognition and measurement guidance unchanged The new guidance is limited to simplifying the presentation of debt issuance costs. The recognition and measurement guidance for debt issuance costs is not affected. Therefore, these costs will continue to be amortized as interest expense using the effective interest method. Debt Issuance Costs 18 9

10 Recently Issued Standards EXAMPLE: On December 31, 201X, an entity issues a noninterest bearing debt security due in two years, with a face amount of $1,250,000, to an investor for $1,152,030. On the same date, the entity incurs and pays issuance costs of $50,000 to parties other than the investor. Debt Issuance Costs 19 Recently Issued Standards Presentation of debt issuance costs on December 31, 201X, under the existing standard, and under the new standard are as follows: Existing Standard New Standard Debt issuance costs (asset) $50,000 $0 Noninterest bearing note $1,250,000 $1,250,000 Less unamortized discount based on imputed interest rate of 5% $97,970 $97,970 Less unamortized debt issuance costs N/A $50,000 Note payable, net $1,152,030 $1,102,030 Debt Issuance Costs 20 10

11 Extraordinary Items (Subtopic ) Recently Issued Standards Extraordinary Items (Subtopic ) Eliminated concept of extraordinary items What you need to know: FASB issued final guidance that simplifies income statement presentation by eliminating extraordinary items Because an event or transaction rarely meets the criteria to be classified as an extraordinary item, we believe the ASU will not have a significant effect on financial reporting 22 11

12 Recently Issued Standards In January of 2015, the FASB issued ASU which eliminates the need for entities to evaluate whether transactions or events are both unusual in nature and infrequently occurring. Entities will continue to evaluate whether items are unusual in nature or infrequent in their occurrence for presentation and disclosure purposes Early adoption is permitted Extraordinary Items (Subtopic ) 23 Recently Issued Standards Effective Dates and Transition: This ASU is effective in annual periods, beginning after 15 December Early adoption is permitted; however, adoption must occur at the beginning of an annual period. An entity can elect to apply the guidance prospectively or retrospectively. Entities that elect prospective application are required to disclose both the nature and amount of an item included in income from continuing operations after adoption that relates to an adjustment of an item previously classified and presented as an extraordinary item before adoption. If retroactively, must provide a change in accounting principles disclosures as required under ASC 250, Accounting Changes and Error Corrections Extraordinary Items (Subtopic ) 24 12

13 Going Concern (Topic 205) Recently Issued Standards ASU Going Concern (Topic 205) Summary of Provisions Moves this assessment from the auditing standards to the accounting standards management has responsibility to perform this now Single threshold model (similar in principle to current accounting standard) Disclosures required when there is substantial doubt, or when substantial doubt has been alleviated primarily by 26 management plans Going Concern (Topic 205) 13

14 Recently Issued Standards ASU Going Concern (Topic 205) Summary of Provisions, continued Substantial doubt exists when it is probable that an entity will not meet it's obligations for a period of one year from the financial statement issuance date (The evaluation should examine both qualitative and quantitative information about relevant conditions and events. This information includes the organization s current financial condition, conditional and unconditional obligations due or anticipated within one year, and the funds necessary to maintain operations.) Applies to both public and nonpublic entities Effective for annual periods ending after December 15, 2016 (calendar year 2016 and fiscal year 2017). Going Concern (Topic 205) Early adoption permitted 27 Recently Issued Standards The amendments require management to assess an entity's ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards Provides a definition of the term substantial doubt Requires an evaluation every reporting period Provides principles for considering the mitigating effect of management's plans, Requires certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans, Requires an express statement and other disclosures when substantial doubt is not alleviated Requires an assessment for a period of one year after the date that the financial statements issued (or available to be issued) Going Concern (Topic 205) 28 14

15 Consolidation (Topic 810) Recently Issued Standards ASU Consolidation What you need to know: Reporting entities involved with limited partnerships or similar entities will have to re-evaluate these entities for consolidation In some cases, consolidation conclusions will change. In other cases, a reporting entity will need to provide additional disclosures if an entity that currently isn t considered a variable interest entity (VIE) is considered a VIE under the new guidance. Under the new guidance, a general partner will not consolidate a partnership or similar entity under the voting model 30 15

16 Recently Issued Standards Implications for NFPs Consolidation (Topic 810) 31 Recently Issued Standards Effective Dates: For public business entities, effective for fiscal years, beginning after December 15, 2015 Calendar year 2016 and fiscal year 2017 The amendments will be effective for all other entities for fiscal years starting after December 15, 2016, Calendar year 2017 and fiscal year 2018 Early adoption is permitted Consolidation (Topic 810) 32 16

17 Revenue Recognition (Topic 606) Recently Issued Standards Revenue Recognition (ASU , ) Objective: to create a single principles-based revenue standard for US GAAP & IFRS The revenue standard aims to improve accounting for contracts with customers by: Providing a robust framework for addressing revenue issues as they arise Increasing comparability across industries and capital markets Requiring better disclosure 34 17

18 Recently Issued Standards This applies to: All contracts with customers, except Lease contracts Insurance contracts Financial instruments Guarantees Non-monetary exchanges in the same line of business to facilitate sales to customers Contracts not with customers are excluded: Contributions Investment Income Revenue Recognition (Topic 606) 35 Recently Issued Standards Revenue Recognition (Topic 606) 36 18

19 Recently Issued Standards ASU established these effective dates: Public entities: annual reporting periods beginning after 12/15/2017 (calendar year 2018 or fiscal year 2019) Nonpublic entities: one year later (annual reporting periods beginning after 12/15/2018) (calendar year 2019 or fiscal year 2020) Early application option no earlier than original public company effective date (annual reporting periods beginning after 12/15/2017) Revenue Recognition (Topic 606) 37 Leases (Topic 842) 19

20 Recently Issued Standards Leases (ASU ) What you need to know: The Financial Accounting Standards Board (FASB) has issued its long-awaited update revising the proper treatment of leases under U.S. Generally Accepted Accounting Principles (GAAP). Accounting Standards Update (ASU) No , Leases (Topic 842), will affect companies that lease: real estate vehicles construction and manufacturing equipment other assets 39 Recently Issued Standards Background: According to the FASB, most lease obligations today aren t recognized on the balance sheet, and transactions often are structured to achieve off-balance-sheet treatment. A 2005 U.S. Securities and Exchange Commission (SEC) report estimated that SEC registrant companies held approximately $1.25 trillion in off-balance-sheet lease obligations. As a result of these obligations being left off balance sheets, users of financial statements can t easily compare companies that own their productive assets with those that lease their productive assets. Leases (Topic 842) 40 20

21 Recently Issued Standards These changes result from a joint project of the FASB and IASB to increase transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information. Key components of the new model include: Lessee accounting model U.S. GAAP would take a dual approach (Type A and Type B), somewhat similar to current capital and operating leases, respectively. However, right of use assets and liabilities would be recognized for both Type A and Type B leases. IFRS would take a single approach (Type A). Some exceptions are anticipated for short term leases (less than 12 months). Leases (Topic 842) 41 Recently Issued Standards Key components of the new model also include: Lessor accounting model Lessor would determine Type A or Type B approach based on whether substantially all of the risks and rewards of the asset transfer Under U.S. GAAP, lessor would not recognize any selling profit or revenue at the inception of a Type A lease that does not transfer control of the underlying asset to the lessee Portfolio Lessees and lessors would be allowed to apply guidance at a portfolio level Lease term Consider options to extend or not to terminate, as well as options to purchase in determination of lease term when it is reasonably assured that the lessee will exercise the option(s) Leases (Topic 842) 42 21

22 Recently Issued Standards Effective dates: Public business effective date is fiscal years beginning after December 15, 2018 (calendar year 2019, fiscal year 2020) For all other entities, one year later calendar year 2020, fiscal year 2021 Early application of the ASU is permitted Leases (Topic 842) 43 Recently Issued Standards A lease is a contract (or part of a contract) that conveys the right to control the use of an identified asset (the underlying asset) for a period of time in exchange for consideration. Leases (Topic 842) 44 22

23 Recently Issued Standards All leases (more than 12 months) are recognized on the lessee s balance sheet Leases (Topic 842) 45 Recently Issued Standards Lessee Accounting Leases (Topic 842) 46 23

24 Recently Issued Standards Lessor Accounting Leases (Topic 842) 47 Recently Issued Standards Act Now Because of this standard s long gestation period, many companies have taken a wait-and-see approach to tackling the lease accounting changes. However, now that the new standard has been released, businesses would be wise to begin their preparations immediately, particularly if they have extensive lease portfolios. Leases (Topic 842) 48 24

25 Part 2 Understanding the NFP Financial Statement Project 49 NFP Financial Statements Project What is it? Update, not overhaul, the current NFP reporting model Largest overhaul of NFP financial statements in over 20 years Includes no changes to measurement and only impacts disclosures and presentation All three financial statements received an overhaul 50 25

26 Presentation of Financial Statements of Not-for-Profit Entities ASU The proposed amendments would change several of the requirements for financial statements. Net asset classification Liquidity information Statement of cash flows presentation Statement of activities presentation 51 Presentation of Financial Statements of Not-for-Profit Entities ASU Certain amendments would add new requirements or replace existing requirements, and others would remove existing requirements or provide greater flexibility in complying with the requirements. ASU was issued in August 2016 and is over 270 pages Received over 250 letters 52 26

27 Presentation of Financial Statements of Not-for-Profit Entities ASU 53 NFP Financial Statements Project Who Responded Respondent Type Preparer 135 Auditors 90 Users 12 Individuals and others 23 Academics

28 NFP Financial Statements Project Respondents by Industry Health and Welfare Foundations Higher Education Health Care Other NFPs 55 NFP Financial Statements Project Goals: Improve net asset classification Improve information in financial statements and notes about: Financial performance Cash Flow Liquidity Better enable NFPs to tell their financial story 56 28

29 NFP Financial Statements Project Better serve the needs of financial statement users FASB is looking to create clarity and uniformity in reporting across the financial statements of various NFPs and make them more comparable Provide donors and lenders with liquidity information so they could better assess the financial health of the NFPs they are interested in supporting 57 NFP Financial Statements Project OVERALL COMMON THEMES Support for Board s overall objective to update current model Desire by many to maintain as much consistency as possible between NFPs and For Profit reporting requirements Comparability within industries (NFPs and similar For Profit entities) may be more important than comparability between dissimilar NFPs, especially for more business like NFPs Most users come from For Profit background 58 29

30 NFP Financial Statements Project TIMELINE Last updated on April 22, 2016 Would be effective for financial statements for fiscal years beginning after December 15, 2017 therefore Calendar YE 18 and Fiscal YE 19. The Board also decided to permit early adoption subject to the designated transition method. 59 NFP Financial Statements Project TIMELINE Example of Early Adoption Choose to early adopt in FY 2017 Apply all provisions to FY 17 If you choose to present comparative FS for FY 16, apply all provisions to FY 16 and 17, except you can choose not to present: Analysis of expense by nature and function Disclosures around liquidity of resources 60 30

31 NFP Financial Statements Project 61 NFP Financial Statements Project Original Exposure Draft included: Direct method cash flows (indirect would be optional), with certain realignments Expenses: nature-by-function (choice of location), with related disclosure Reporting of underwater endowments, with enhanced disclosure New required disclosures: Board designations Information useful for assessing liquidity 62 31

32 63 NFP Financial Statements Project Changes to Net Asset Classification Under the current financial reporting model, not-forprofit financial statements present net assets in three categories: Unrestricted net assets Temporarily restricted net assets Permanently restricted net assets 64 32

33 NFP Financial Statements Project Changes to Net Asset Classification Issues The line between temporarily and permanently restricted net assets has become blurred Changes brought forth by UPMIFA and State/Federal regulations have added complexity 65 NFP Financial Statements Project Changes to Net Asset Classification Solution Nonprofits will be required to: Present on the face of the statement of financial position amounts for two classes of net assets net assets with donor restrictions net assets without donor restrictions rather than for the currently required three classes. The three existing net asset classes (permanently restricted, temporarily restricted, and unrestricted) would be replaced with two net asset classes (net assets with donor restrictions and net assets without donor restrictions) 66 33

34 NFP Financial Statements Project Changes to Net Asset Classification 67 NFP Financial Statements Project Changes to Net Asset Classification Solution The exposure draft continues to require footnote disclosures that elaborate on the nature and amounts of donor-imposed restrictions on net assets. It also requires similar disclosures about designations of net assets by the organization s governing board, which can also significantly impact operations

35 NFP Financial Statements Project Feedback Received Net Asset Classification Overall support for combining two classes of net assets Suggest changes provide simplicity, may increase user understandability Those who disagree: Argue permanent restrictions are fundamentally different from temporary restrictions, should remain on face of statement Express concern that: users may not read notes, important distinctions may become lost/blurred in notes 69 NFP Financial Statements Project Changes to Net Asset Classification: Underwater Endowment Funds Issue Accounting for underwater endowments is confusing to the users of the financial statements. Currently, the amount required to be retained permanently is presented as permanently restricted net assets, and the shortfall of the fair market value below this amount is presented as a reduction of unrestricted net assets 70 35

36 NFP Financial Statements Project Underwater Endowments 71 NFP Financial Statements Project Feedback Received Underwater Endowments Overall support for classifying the underwater amounts of endowment funds within net assets with donor restrictions rather than net assets without donor restrictions. Overall support for disclosure of NFP s policy on spending from underwater endowment funds together with aggregate gross amounts for such funds (FV versus amount required to be maintained)

37 NFP Financial Statements Project Changes to Net Asset Classification: Assets Placed-in-service Issue: Currently organizations have the option to release net assets over the useful life of the acquired asset or when placed in service. Expiration of Capital Restrictions Gifts of cash restricted for acquisition or construction of PP&E NFPs would be required to use the placed-in-service approach (no more implied time restrictions) 73 NFP Financial Statements Project Feedback Received Net Asset Classification Overall support to require reporting of expirations of donor restrictions on gifts of cash or other assets used to acquire/ construct PP&E using placed-in-service approach. Most who disagree acknowledge placed-in-service approach is more widely used, but would prefer that both placed-inservice and implied time restriction approaches remain as options 74 37

38 NFP Financial Statements Project Changes to the Statement of Functional Expenses All NFPs would be required to report expenses by both their nature and function. Currently, only voluntary health and welfare organizations have such a requirement. The proposal would allow flexibility to present expenses by function and by nature on the face of the statement of activities, as a separate statement, or within the notes. New/more detailed footnote disclosures: Going to be required to disclose in detail the methodologies that the Organization uses to allocate its costs between program services and supporting services. 75 NFP Financial Statements Project Reporting of Expenses 76 38

39 NFP Financial Statements Project Feedback Received Reporting of Expenses Overall support for all NFPs to report analysis of operating expenses by both function and nature in single location (generally in notes) Suggest it aids in user understanding and comparability across industries Some who disagree: Express concern that cost of requiring such analysis for all NFPs would exceed benefits, especially for NFPs that are small or receive little in contributions/ public support Many such respondents do agree that expenses by nature should be required in addition to (or instead of) expenses by function for all NFPs, but disagree about requiring analysis for all NFPs Express concern with lack of consistency between Form 990 and proposed GAAP analysis Prefer that reporting of expenses by both function and nature remain optional 77 NFP Financial Statements Project Investment Returns 78 39

40 NFP Financial Statements Project Feedback Received Investment Returns Overall agreement that disclosure of all investment expenses is unnecessary but disagreement that disclosure of internal salaries and benefits netted against investment return should be required. Some who disagree prefer all investment expenses disclosed for transparency Most, however, agree that disclosure of all investment expenses is unnecessary, including internal salaries and benefits Disclosing salaries and benefits could result in identification of salaries of specific employees Internal salaries likely immaterial for many NFPs Wouldn t give complete picture of salaries and benefits anyway, because of other missing amounts (e.g., salaries and benefits capitalized in inventory) 79 NFP Financial Statements Project Liquidity The Board decided that an entity should define the time horizon it uses to manage its liquidity (for example, 30, 60, or 90 days) and disclose the following information: 1. Quantitative information about: a) The total amount of financial assets b) Amounts that are not available to meet cash needs within the time horizon because of (1) external limits and (2) internal actions of a governing board c) The total amount of financial liabilities that are due within that time horizon 2. Qualitative information about how the entity manages its liquidity. For example, an entity might disclose: a) Its strategy for addressing entity-wide risks that may affect liquidity, including its use of lines of credit b) Its policy for establishing liquidity reserves c) Its basis for determining the time horizon used for managing liquidity 80 40

41 NFP Financial Statements Project Feedback Received Liquidity Mixed feedback for proposed disclosures of information about liquidity. More support for qualitative disclosures than quantitative disclosures. Some who disagree express concern that: Time horizon concept is vague and question how to choose one time horizon when multiple horizons and revenue streams exist. Information will be outdated by time financial statements are issued. Business entities not required to provide information proposed for NFPs. Extensive disclosures reduce usefulness, and many users don t read notes. Disclosures too subjective, would result in inconsistent approaches among NFPs, reducing comparability. Expected incremental benefits may not be greater than perceived cost of additional disclosures. 81 NFP Financial Statements Project Feedback Received Liquidity Common Suggested Alternatives: Require classified balance sheet Require separate presentation on balance sheet of assets whose use is limited The Board directed the staff to explore an approach that would require, like the proposal, qualitative information about how the NFP manages its liquidity and liquidity risks, but provide alternative ways of presenting quantitative information. This approach would emphasize information about assets that are liquid and available at the balance sheet date

42 NFP Financial Statements Project Changes to the Statement of Cash Flow Issue To some readers of the financial statements, the statement of cash flows remains a mystery. 83 NFP Financial Statements Project Cash Flow Statement Solution Require Direct Method for operating cash flows Require reconciliation to indirect method Should indirect method still be required for certain NFPs? 84 42

43 NFP Financial Statements Project Feedback Received Cash Flow Statement Mixed feedback for requiring direct method of presenting operating cash flows Most acknowledge that direct method is more understandable than indirect method Most workshop participants and several respondents that have adopted direct method support requiring it and no longer requiring indirect method They generally indicate that benefits exceed incremental implementation costs as well as ongoing costs 85 NFP Financial Statements Project Feedback Received Cash Flow Statement However Most oppose requiring direct method at this time for differing reasons: Current requirements should not be changed until requirements change for business entities For now, NFPs should have option to present either direct or indirect method» Some of these respondents may not understand that indirect method is currently required for all entities even if not presented on face of cash flow statement Concern that incremental benefits of switching to direct method would not justify costs Neither method is clearly superior to other Users will continue to underutilize statement of cash flows regardless of method presented 86 43

44 NFP Financial Statements Project Feedback Received Cash Flow Statement Overall mixed feedback on whether to retain indirect method Many believe no necessary information would be lost if indirect method no longer required However, many of these respondents and others prefer to retain reconciliation of operating cash flow to total change in net assets The Board decided not to require NFPs to use the direct method of presenting operating cash flows, but instead to continue to allow them to use either the direct method or indirect method. Further, the Board decided to no longer require the indirect reconciliation if an NFP chooses to use the direct method. 87 NFP Financial Statements Project Cash Flow Statement: Outcome Allow free choice between the Direct Method and the Indirect method Indirect reconciliation no longer required for direct method 88 44

45 NFP Financial Statements Project Phase II Includes other proposed changes that are likely to require more time to resolve Operating Measures Cash Flow Realignment 89 NFP Financial Statements Project Operating Measures Enhanced disclosures about what is included in operations for those that utilize an operating measure Required disclosures would include those related to governing board designations, appropriations, and similar transfers 90 45

46 NFP Financial Statements Project Operating Measures 91 NFP Financial Statements Project Feedback Received Operating Measures Mixed feedback for required intermediate measures of operations Many agree with requiring intermediate measures of operations, but disagree with the measures proposed. Some specifically express a desire for either: Clarification of definition of mission and what should or should not be included in operations More flexibility for NFPs to determine their own definition for operations and what to include in operations Requiring single intermediate measure of operations instead of two measures 92 46

47 NFP Financial Statements Project Feedback Received Operating Measures Many who disagree note one or more of the following: Separating activity into operating and non-operating would not increase comparability because of significant differences in operating activities among different types of NFPs Management would have ability to manipulate classification of resources Two intermediate measures of operations would increase financial statement complexity NFP financial reporting should remain consistent with (flexible as) For-Profit financial reporting Some of these respondents have suggested pursuing a different type of intermediate measure, somewhat analogous to net income/ the health care performance indicator, for now 93 NFP Financial Statements Project Feedback Received Operating Measures Overall disagreement that interest expense and fees and related expenses incurred are not directed at carrying out NFP s purpose and, thus, should not be classified as operating activities. Auditors & academics have more mixed views, while most others disagree Many that agree suggest acquiring debt may help NFP carry out its mission, but NFP not in business of acquiring or disposing of debt. Thus, interest expense not an operating activity, but a financing activity. Many that disagree: Express concern that NFPs with lending/financing directly tied to mission would be precluded from classifying interest expense as operating Suggest interest expense is direct cost of doing business and belongs in operating Express concern that proposal would reduce comparability with forprofits Suggest classification should be determined by what assets are being financed by the borrowing (working capital versus bricks and mortar ) 94 47

48 NFP Financial Statements Project Presentation of Transfers Balances aims of comparability and flexibility. NFP would present: 1. Operating measure before transfers (reflects all current, legally available amounts generated/used during operations) 2. All internal transfers (decisions to designate otherwise available amounts as unavailable, or vice versa) in a discrete section, but before the operating measure after transfers. At a minimum, present aggregated line items of transfers from & transfers to operating activities Provide details in a note if not on the face 95 NFP Financial Statements Project Feedback Received Presentation of Transfers Overall disagreement concerning presentation of all internal transfers on the face of the Statement of Activities. Some concern that: It s inappropriate to include impact of internal events in operating results Management would have ability to manipulate classification of resources Transfers make Statement of Activities too complex Many suggest disclosure of transfers in notes to financial statements Some Suggested Alternatives: Report program service income and expenses in operating, and contributions and investing activity below operating, with roll-forward note disclosures about internal transfers Limit presentation of board decisions on face of statement to those related to designations for/ appropriations from endowment funds 96 48

49 NFP Financial Statements Project Gifts of PP&E 97 NFP Financial Statements Project Feedback Received Gifts of PP&E Overall disagreement with notion that gifts of PP&E or cash to acquire/ construct PP&E are operating revenues and support Many would prefer such gifts be recorded directly in nonoperating: Concern for added volatility to (first) intermediate measure of operations Capital-related gifts not operating activities Capital-related gifts not available for the current period, unless monetized Many disagree because they disagree with transfer model 98 49

50 NFP Financial Statements Project Cash Flow Statement Organization Re-categorize certain items to better align operating cash flows with the operating measures From Investing/Financing to Operating: Purchases of and proceeds on sale of longlived assets (e.g., PP&E; capitalized and noncapitalized collections) Cash gifts restricted for long-lived assets From Operating to Investing/Financing: Cash from interest and dividends Interest paid 99 NFP Financial Statements Project Cash Flow Statement Organization

51 NFP Financial Statements Project Feedback Received Cash Flow Statement Organization Overall disagreement with proposed alignment of line items presented in cash flow statement with proposed operating classification for activities statement to increase understandability Especially regarding PP&E-related cash inflows/ outflows Most who disagree prefer current requirements to remain same until requirements change for business entities Inconsistency between NFP and for-profit reporting would create confusion for users who also operate in for-profit environment 101 Thank You! 51