August 20, Technical Director Financial Accounting Standards Board 401 Merritt 7 P.O. Box 5116 Norwalk, CT

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1 August 20, 2015 Technical Director Financial Accounting Standards Board 401 Merritt 7 P.O. Box 5116 Norwalk, CT File Reference No.: Re: Proposed ASU Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities Dear Technical Director: We are pleased to comment on the Financial Accounting Standards Board s (FASB or Board) Proposed Accounting Standards Update, Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities (Exposure Draft). BKD, LLP is a national CPA and advisory firm with 34 offices in the U.S. BKD and its subsidiaries offer not-for-profit (NFP) clients a variety of services in accounting, audit and other assurance, tax, risk management, technology and forensic and valuation services. Our NFP clients include business-oriented, e.g., health care, higher education and membership organizations, and contribution-based, e.g., social service organizations and foundations, entities. We appreciate the Board s efforts to reexamine existing standards for financial statement presentation by NFP entities, improve the current net asset classification requirements and the information presented in financial statements and related notes. We are appreciative of the Board s request for comments on specific issues and questions and for suggestions of additional areas where NFP financial reporting could be improved. We are supportive of the Board s efforts to address: (1) complexities about the use of the currently required three classes of net assets, (2) inconsistencies in the reporting (or lack of reporting) of intermediate measures of operations in the statement of activities, (3) inconsistencies in the type of information provided about expenses of the period and (4) opportunities to enhance the utility of the statement of cash flows. While we generally support the basis for the proposed amendments in the Exposure Draft, believing them to be consistent with FASB s objective to improve areas of financial reporting, we do have a few recommendations for the Board s consideration. Our recommendations are

2 Technical Director Financial Accounting Standards Board Page 2 August 20, 2015 primarily with respect to providing congruency with FASB s objectives for business entities, including current agenda items and to retain the consistency that health care entities currently have under their business model approach. We believe delaying certain proposed changes so they can be considered concurrently with similar changes for business entities will enhance comparability and facilitate improved understandability of NFP financial statements for investors, lenders, creditors, donors and other financial statement users. Lastly, we believe our recommendations are based on a cost-benefit analysis to preparers and users. We have provided our recommendations in Attachment 1. Cordially, BKD, LLP Attachment By director@fasb.org

3 Attachment 1 1. Statement of Financial Position and Liquidity a. Changes in Classes of Net Assets from Three to Two We are supportive of the Board s proposal to present on the face of the statement of financial position amounts for two classes of net assets at the end of the period, rather than for the currently required three classes. We agree that reporting amounts for net assets with donor restrictions and net assets without donor restrictions, as well as the currently required amount for total net assets, will reduce complexity in financial reporting and increase the understandability of the information provided on the statement of financial position. Likewise, we are supportive of the Board s proposal for not-for-profits (NFPs) to present on the face of the statement of activities the amount of the change in each of the two classes of net assets rather than that of the currently required three classes. We believe disclosures about the nature of donor-imposed restrictions 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. b. Underwater Endowment Funds We are supportive of the Board s proposal to change the classification of underwater amounts of donor-restricted endowment funds to net assets with donor restrictions. We agree that this approach, combined with the proposed requirement for NFPs to disclose the aggregate amount by which the funds are underwater, the original gift amount (or amount required to be maintained by the donor or law) and any governing board policy or decisions to spend, or not spend, from such funds, provides users with the enhanced liquidity information. 2. Statement of Activities, Including Financial Performance a. Measures of Operating Activities We appreciate the Board s efforts to promote consistent practices among NFPs and improve financial statement users ability to assess an NFP s financial performance. Our response acknowledges the shortfall in existing U.S. generally accepted accounting principles (GAAP) that neither defines nor requires or precludes the reporting of intermediate measure of operations for all NFPs. We understand that requiring all NFPs to present a more standardized intermediate measure of operations would be helpful in communicating the financial performance of NFPs in ways that are more comparable and thus more understandable to creditors, donors and other stakeholders. However, we believe certain aspects of the proposal reduce an NFP financial statement user s ability to compare NFPs to public business entities and private companies.

4 We believe NFPs are generally classified as either business oriented, e.g., health care, higher education and membership organizations, or contribution based e.g., social service organizations and foundations. Business-oriented health care NFPs currently report results of operations in a manner comparable to their for-profit counterparts revenues over expenses. The Board s proposal would reduce comparability between these and other for-profit and NFP organizations. We believe that requiring health care NFPs, in particular, to change from a well-understood net income equivalent measure used since 1972 when the first Hospital Audit Guide was first issued to a new measure not previously used in the U.S. would be detrimental for financial statement users and an undue burden for preparers. Furthermore, the Patient Protection and Affordable Care Act has enabled health care organizations to consider how they can provide an integrated delivery of care model to their patients. In many instances health care entities utilize partnerships, joint ventures and other collaborative arrangements with for-profit organizations. We believe the new reporting model may impede the progress that has been made in transparency of financial information between NFPs and for-profit entities that collaborate to deliver high-quality health care services under a more economical cost structure. Additionally, the proposed operating measure may make the financial statements of certain types of NFP organizations, such as private foundations, grant making organizations, etc., less effective for users. We recommend the Board consider postponing its definition of the operating measure and consider a more holistic view of a financial performance one that enhances comparability amongst all entities regardless of structure (public business entities, private companies and NFPs). We understand incremental differences will remain but believe this approach will provide greater benefit to financial statement users, lenders, donors, boards, etc., as they assess financial performance. In that regard, we would support an amendment where all NFPs are required to have an operating measure similar to the performance indicator currently used by NFP Health Care Organizations (NFP HCOs) often referred to as excess revenues over expenses. The performance indicator for NFP HCOs and the exclusion of certain income and expenses is functionally equivalent to other comprehensive income reporting for for-profit entities. We believe a measurement of excess revenues over expenses does not diminish, but instead enhances, the reporting of an NFP s results of operations versus the proposed operating metric. For example, the existing performance indicator for NFP HCOs excludes items such as gains or losses, prior service costs or credits and transition assets or obligations recognized in accordance with FASB ASC 715, Compensation Retirement Benefits, and unrealized gains and losses on investments other than trading securities as well as NFP entity-specific transactions such as contributions of or for long-lived assets. Excluding these items from the performance measure allows financial statement users to understand the difference between inflows and outflows used for current operations and resources that will be used in future periods. -2-

5 b. Transfers We do not agree that 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 as part of an operating performance measurement. We believe the proposed reclassifications of internal transfers between operating and nonoperating activities would increase financial reporting complexity and cause confusion. We believe the focus of the statement of activities should be on transactions with third parties versus internal designations. We also believe that NFPs could potentially manipulate the operating measures through internal transfers, therefore, losing the benefits of the presentation of the transfers. c. Gifts to Acquire or Construct Long-Lived Assets We do not 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 cash gift to acquire a long-lived asset). We do not believe that, if the long-lived asset is not immediately and fully available to be utilized in the current period, an NFP should be required to present this transaction as a transfer from operating activities to nonoperating. We believe this approach does not improve existing standards for financial statement presentation by NFPs. If included in operations, the change may cause significant and confusing variations in operating margins from year-to-year as well as other metric variations used to evaluate core operating activities including debt covenant requirements. For example, periods including significant capital campaigns would cause comparability difficulties. We recommend the Board consider presenting such gifts below the operating indicator, i.e., below the excess of revenues over expense presentation we are proposing in Item 2.a. 3. Statement of Cash Flows, Including Financial Performance a. Direct Method of Presenting Operating Cash Flows Although we agree the direct method of presenting operating cash flows is often more understandable and useful than the indirect method, we do not 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. Many NFP organizations have multiple affiliates with different accounting systems which would make the gathering of direct cash flow information cumbersome and costly to obtain. We believe requiring NFPs to present operating cash flows under the direct method would reduce comparability of NFPs with private companies and public business entities in the same industries unless and until for-profit entities are also required to utilize the direct method of presentation. We recommend that NFPs retain the option to utilize the indirect method of presentation of cash flows if the organization determines that it is more useful to the users of their financial statements. We believe allowing the option to present the indirect cash flow will enhance comparability across industry lines and allow the NFP to decide which cash flow reporting method is most cost efficient to report and the more beneficial to the users of their financial statements. -3-

6 b. Operating Activities We agree that the Board s proposal to reclassify certain items in the cash flow statement to better align them with the Exposure Draft s proposed notion of operating activities reported in the statement of activities would increase understandability within that entity s financial statements. However, we do not agree that this change will assist users in assessing financial performance and liquidity, until operating activities are defined the same for the NFP statement of cash flows as the statement of activities. Additionally, as discussed in 2.a., we recommend the Board consider a holistic approach when proposing changes to the NFP s statement of activities and statement of cash flows, with the objective of increasing comparability with for-profit entities in the same industries. For example, we do not believe activity pertaining to long-lived assets, including restricted contributions to acquire long-lived assets and proceeds from sales of long-lived assets, are operating activities. 4. Liquidity Disclosures We agree with the Board that providing liquidity information to users of NFP financial statements is important. We do not agree with the extent of the proposed liquidity disclosures. Specifically, we believe disclosures about internal designations would result in subjective estimates regarding future possibilities which are not within the conceptual framework of historical GAAP-based financial statements. In addition, the disclosures as proposed would be difficult to audit under generally accepted auditing standards (GAAS). We question the usefulness of the liquidity disclosures regarding the self-defined time horizon in enhancing a financial statement user s decision making. NFP financial statements generally are issued days after year-end, making incremental donor restriction information less useful to the financial statement user, yet imposing additional costs to the NFP. We believe the proposed disclosures are unduly complex and will not enhance consistency across NFP organizations. A classified statement of financial position would provide users a more consistent, comparable and generally understood method to report liquidity information in NFP financial statements. -4-