NFP Financial Reporting: Financial Statements Project Tentative Project Plan

Transcription

1 NFP Financial Reporting: Financial Statements Project Tentative Project Plan Project Objective: As reported in the SDR for Board meeting of November 9, 2011 and on project web page: The standards-setting project will reexamine existing standards for financial statement presentation by not-for-profit entities, focusing on improving: 1. Net asset classification requirements 2. Information provided in financial statements and notes about liquidity, financial performance, and cash flows. Clarifying points about the project scope and intent: 1. To improve and build on (or refresh) the existing financial reporting model the complete set of financial statements. 2. Not an overhaul or new financial reporting model 3. Focus is on presentation and disclosure in financial statements and notes, including NFP specific disclosures that may not be focused solely on liquidity, financial performance, and cash flows. 4. To revisit classification within financial statements, particularly those related to: Restrictions imposed by donors, including whether to broaden to include restrictions imposed by statute, contract, or others. Revenues, expenses, gains and losses and whether to define and require those that are (or not) part of operations or a current period financial performance metric. 5. Not to revisit recognition and measurement of contributions or of other revenues and expenses. 6. FAS 117 (now Topic ) and Concepts Statements 4 and 6 provide the framework for the Board s consideration. Although the objectives and elements of financial statements and related concepts contained in CON 4 & 6 underpin and shape thinking for financial statement presentation and the existing financial reporting model, those concepts do not dictate standards for financial statement display and disclosure. (Based on what is learned and results from the standards project, the Board may, but not necessarily, need to amend CON 4, CON 6, or both.) Input from NAC discussions held on March 1 and 2, 2012 The Committee discussed and provided feedback on the FASB staff s progress, plans, and contemplated approaches and milestones for the recently added NFP projects: (a) a standardsetting project on financial statements and (b) a research project on other financial communications. During that discussion, suggestions for consideration emerged, including: 1 In addition, the project will also consider the more prescriptive presentation requirements of Topic 954 that apply to not-for-profit, business-like health care entities and guidance of other standard setters (for example, GASB, Canadians, and Australians).

2 a. Prior to substantive deliberations, FASB members, FASB's project resource groups, and FASB's constituency might benefit from an educational background session. That session could focus on the reasoning behind critical Board decisions reached at the time the current financial reporting model was developed, including the decision to include the donorrestricted net asset classification scheme and the decision not to require an operating metric in that scheme. It also could focus on what NAC members think about how the current model might be improved. The FASB chair suggested that a brief podcast on the two NFP projects might also be beneficial to constituents, which has been posted to the FASB website. b. Members generally agreed with the approach of beginning the substantive considerations with the net asset classes and whether to retain the donor-restriction emphasis or broaden it to include statutory restrictions and perhaps contractual and other legally enforceable restrictions. However, members noted that considerations about net asset classes also relate to and will likely bear on considerations for improving information about liquidity, operations, and cash flows; thus, a strict sequential approach may not be effective. c. Members noted that efforts on the research project can begin, but some expressed caution about undertaking any significant testing of frameworks for reporting outside of financial statements before the Board has made sufficient progress on the standard-setting project. Overall Approach, Milestones and Timing Based on a plan to refresh, improve, and build on the existing model for presentation in financial statements of not-for-profit organizations (rather than an overhaul), the staff contemplates an approach that begins with Board deliberations directed at developing an Exposure Draft of a proposed ASU to amend existing presentation standards. Following the exposure period, we contemplate a second phase of redeliberations that lead to a final ASU. The timeline (reference to page or Appendix A) contemplates the issuance of the Exposure Draft during the second quarter of 2013 and the final ASU during the second half of Each of the two phases would include many opportunities for ongoing outreach activities. They would include: a. Periodic requests for input from our project resource group on the more problematic issues for which Board members seek advice. NAC member Bill Titeria will serve as the NAC liaison/observer to the project resource group. b. Twice-yearly updates and discussions with the Not-for-Profit Advisory Committee and ad hoc requests as needed c. Ad hoc requests for input from members (170) of the NFP resource group that supports NAC d. Board liaison meetings with industry groups (e.g., HFMA, NACUBO, and perhaps others) and staff meetings with AICPA Expert Panels for Healthcare Entities and for Not-for-Profit Organizations, and with others 2

3 e. Board and staff speaking opportunities for major constituency groups, including the AICPA annual NFP and HC conferences, several State Society NFP Conferences, NACUBO, HFMA, and others. During the first phase, the staff plan contemplates beginning with an educational Board meeting scheduled to begin at 10:00 am on May 16 th. A notification of that meeting will also be sent to members of NAC and its standing resource group members, as well as other interested constituent groups. We will encourage project resource group members to listen to the live webcast or to the archived recording and plan to follow that with two 90-minute conference calls with project resource group members. They are scheduled to begin at 11:00 am and 2:00 pm on May 29 th and each of our two Board advisors will participate in a call. There are two educational objectives for the May 16 th Board meeting and project resource group calls. The first is to increase understandings of current Board members and resource group members about the reasons underlying key decisions reached by the then existing FASB members that underlie the definitions and classification concepts of CON 6 and the presentation requirements of FAS 117. The second is to give Board members and resource group members an opportunity to question and challenge the thinking of that time and to share thoughts about reasonable alternatives and opportunities for making improvements that might help shape the project plans. Those first two steps would be followed by a Board meeting (tentatively June 6 th ) to discuss and update the project plans, particularly the issues identified for deliberations. Our tentative plan contemplates beginning the deliberations with a focus on the net asset classifications scheme and its relationship to information for assessing both liquidity and financial performance. Those initial deliberations will focus on both the statement of financial position and the statement of changes in net assets (activities statement). This first discussion topic for Board deliberations is likely to take more than one meeting and we think Board members might desire outreach to be conducted contemporaneous with its deliberations. Appendix A provides further details about the many specific issues that the staff contemplates for that discussion as well as for the issues contemplated for the remaining discussion topics, which are: Cash Flow Statement Other Potential Statements or Required Schedules Various Implementation Questions Improvements to NFP Note Disclosures Consequential Amendments Transition and Effective Date Appendix A identifies numerous issues for each of the discussion topics that deal with the substantive presentation issues. However, this plan should be viewed as a working plan that will 3

4 require updating as the Board reaches decisions. That is, decisions reached on some of the earlier issues may resolve some later issues but some decisions may raise new issues for considerations. NFP Financial Statements project Discussion Topics 1 Educational Background and Plans a. Brief review of diverse fund accounting practices pre-dating FAS 117 b. Review major issues addressed by Board in developing of FAS 116/117, with focus on concepts and reasons underlying decisions related to: i. Net asset classification scheme ii. Allowing rather than requiring an operating metric iii. Requiring all expenses within unrestricted net assets and uncoupling the notion of matching (or deferring) gifts with period of expenditure rather than receipt iv. Requiring expenses by function but either on face or in notes to financial statements but not all NFPs to provide a statement of functional expenses (matrix by function and nature) v. Requiring information about liquidity of assets and maturing of liabilities by (a) sequencing on face of statements, (b) classifying as current and noncurrent, or (c) through disclosure in notes, including restrictions on the use of particular asset; but not requiring assets and liabilities to be arrayed by net asset classes vi. Encouraging rather than requiring direct method of reporting operating cash flows c. Review post-117 steps by industry groups to provide presentation guidance i. AICPA Health Care A&A guide as Codified specific presentation guidance for a performance indicator for NFP, business-like health care entities ii. NACUBO efforts to promote and define an industry-wide operating measure iii. Presentation issues raised by AICPA s HC and NPO Expert Panels that did not go to EITF to be addressed in this project. d. Review thinking of NAC members, particularly its Subgroups 1 and 3 in developing recommendations for improving on current reporting model, including aiming for one financial reporting model, with a degree of dynamic presentation (the ability to emphasize or deemphasize certain components for certain subsectors), rather than one model for more business-like ( Type A ) NFPs and a second model for less businesslike ( Type B ) NFPs. (See Question 1 and related Exhibits of Attachment 2-1 for September 2011 NAC meeting, which begins on page 10 of the linked file.) e. Encourage project resource group members to listen to meeting live archived (consider opportunity for live of questions or to take questions from telephone participants) f. Board discussion, questions, and suggestions for improving the next steps in the staff s tentative project plan (consider holding off on suggestions Meeting Dates ES only 5/16 4

5 until the meeting following discussions with project resource group) 2 Project Resource Group Conference call(s) to (a) review background and plans similar to educational Board meeting, (b) discuss questions and concerns of resource group members as well as those of Board members, and (c) seek suggestions. Include the project s Board advisors in this call(s). 3 Updated Project Plan and Objectives a. Discuss updates resulting from suggestions of: i. Project Resource Group ii. Board advisors iii. Others b. Seek input and Board affirmation on the project objectives and buy-in for the plan, as modified. Note: The modules that follow reflect the staff s tentative plan, which will be modified based on input resulting from Discussion Topics (modules) 1, 2 and 3. 4 Donor-Restricted Net Asset Classification (and implications for fiduciary duty, liquidity, financial performance, cash flows) a. Discuss donor-restricted classifications and degree (or lack) of relevance to fiduciary duty, and implications for reporting information about liquidity, financial performance, and cash flows i. Do fiduciary duties related to donor-imposed restrictions on the use of donated assets require special distinctions and, if yes, on the face of financial statements, in notes, or both? ii. To what extent is information about donor-restrictions necessary and sufficient or compatible and complementary with information needed for assessing: (a) liquidity and financial flexibility, including resources available for debt service, (b) resources available for current or nearterm operations, (c) cost of services and/or how resources were allocated to current period program services, or (d) other assessments? iii. Can the liquidity, financial performance and cash flow information needs best be met by (a) the existing three donor-restricted net asset classification scheme, (b) an alternative donor-restricted classification scheme, (c) a broader class of restrictions, for example, encompassing statutory limits, debt covenants and other contractual restrictions (d) improved disclosures on the face of a statement of financial position or in notes about limits on the use of assets and maturities of liabilities regardless of the source of those limits, or (e) in still other ways? iv. Do any of the alternatives related to reporting net assets and changes in net assets also provide opportunities to improve on reporting financial performance on the face of an activity statement or a two-statement approach to reporting changes in net assets? (See Subgroup 1 Questions 2 and 5 and related Exhibits of Attachment 2-1 for September 2011 NAC meeting, which begins on page 10 of the linked file and Subgroup 3 Attachment 2-3, which begins on page 44 of that linked file.) More focused discussion of alternatives to follow. v. Is it possible to define a notion of financial performance for not-for- 5/29 2 Calls (AM and PM) BM 6/6 TBD 5

6 profit entities that is anything less that the change in net assets for the period? That is, can we develop a notion of operations or current operations that is seemingly sought by those that prepare and use financial statements of NFPs but for which consensus has been elusive? vi. Might other classes of net assets be better at aligning donor (and other restrictions) with to be developed notion of operations? For example, if the notion of resources available for use in current period operations were used to distinguish current operations from nonoperating activities might it be better to have a time-restricted class of net assets rather than the current temporarily and permanently restricted class of net assets? That class would distinguish donated (and other) assets specified for particular uses that are available (but not necessarily used) in the current period from those that are donated but not currently available for example, term endowments and permanent endowments, long-term unconditional promises to give, and gifts to acquire or construct long-lived assets for future use? b. Before proceeding seek to learn whether Board members wish to explore or reject any particular notions of operations and whether they seek further input on any of the above issues from: i. Members of the project resource group ii. Members of NAC or broader NFP resource group iii. Others Outreach activities, if needed or desired 4 Continue--Donor-Restricted Net Asset Classification (and implications for fiduciary duty, liquidity, financial performance, cash flows) c. Focus on NAC proposed improvements to versus retention of current three class scheme (AICPA Expert Panel Issue): i. Net asset classification scheme, which include NAC suggestions for: Donor restricted and Other with further required disaggregation (See Subgroup 1--Question 5 and related Exhibits of Attachment 2-1 for September 2011 NAC meeting, which begins on page 10 of the linked file.) Unrestricted and Donor-Restricted with specified required subgroups (See Subgroup 3 Attachment 2-3 that for September 2011 NAC meeting, which begins on page 44 of the linked file) as follows: Unrestricted Restricted Spendable Spendable Designated Limited Nonspendable Nonspendable ii. Liquidity information provided on face of statement of financial position, in notes, or both. (See recommendations of Subgroup 3, beginning on page 44 of linked file.) iii. Financial performance information provided through a single or twostatement approach to presenting all transactions and other events and 6

7 circumstances that result in changes in net assets for the period. (See Questions 2 and 3 and related Exhibits of Attachment 2-1 for Sept NAC meeting, which begins on page 10 of the linked file. iv. Retention of current three classes with operating/nonoperating distinction, if possible, within the unrestricted class of net assets (e.g., NACUBO operating measure). Also consider related issues for donations of long-lived assets raised by AICPA HC Expert Panel and related depreciation expense. d. Can the Board develop a single well-defined notion of operations (current operations, available for current operations, used in current operations) that would increase comparability, understandability, and utility of information and gain acceptance, rather than encouraging the use of one of a select few permitted notions of operations? i. Consider implications of any definition and terminology for cash flow statement, as well as for the required performance indicator for NFP, business-like healthcare entities. ii. Consider implications for recognition of expirations of donorrestrictions based on first-dollars spent approach e. Seek to learn whether Board members wish to seek further input on any tentative decisions reached on the above issues, at this time, from: i. Members of the project resource group ii. Members of NAC or broader NFP resource group iii. Others Outreach activities, if needed or desired 5 Cash Flow Statement a. To achieve better linkage across financial statements, does a required notion of operations for an activity statement (including one of a few alternative notions of operations) necessitate one or more amendments to the definitions of cash flows from operating activities, investing activities and financing activities? (See Question 4 and related Exhibits of Attachment 2-1 for September 2011 NAC meeting, which begins on page 10 of the linked file.) b. How, if at all, should the current indirect-method of reporting of cash flows from operations be improved for all or certain NFPs. c. If a direct method of reporting was to be required for NFPs, would that include business-like healthcare entities that seemingly desire industry comparability with for-profit healthcare entities that, in practice, seldom use the direct-method of reporting? 6 Other Potential Statements or Required Schedules a. Statement of Functional Expenses i. Should reporting of expenses by functions continue to be required for all entities (AICPA Expert Panel Issue) ii. Should reporting of expenses by natural classification continue to be encouraged for most NFPs but required for voluntary health and welfare organizations? 7

8 iii. If reporting by both function and nature is required for all or some entities, should that be a required basic financial statement, as currently required for VH&W organizations, or as a schedule in notes or perhaps as supplemental information? Consider implications if activity statement or schedules are used to provide further face of statement analysis of both revenues and expenses by functions, programs, or business-like segments rather than leaving that possibility for the research project on other financial communications. iv. Should investment expenses be displayed on the statement of functional expense (AICPA Expert Panel Issue) b. Profit and Loss Analysis i. See Question 3 and related Exhibits of Attachment 2-1 for September 2011 NAC meeting, which begins on page 10 of the linked file. ii. Consider work of Subgroup 2 and related requirements of GASB. 7 Various Implementation Questions a. Update plan to address implementation questions that are likely to arise in applying any new required definition(s) on the face of any particular financial statement or in notes to financial statements b. Review issues brought by AICPA Expert Panels to determine which have been resolved and address those that remain. 8 Improvements to NFP Note Disclosures a. Update plan to address revisions to current note disclosures no longer necessary or desired or otherwise needing improvement b. Affirm new disclosures determined to be necessary but not necessarily required on the face of a particular financial statement. c. Consider disclosing components of investment expense (AICPA Expert Panel Issue) 9 Consequential Amendments a. Standards b. Concepts Statements 10 Transition and Effective Date Outreach Activities Discussion with NAC September 2012 Workshops, roundtables, or conference calls with project Resource Group Conference calls or meetings with key industry groups Drafting of Exposure Draft Comment Period and additional outreach a. Plan on no less than 120-day comment period b. Plan on workshops with some volunteers that test the Exposure Draft 8

9 NFP Financial Reporting Projects: Timelines as of May 5, 2012 The below is a timeline for both the standards project on financial statements (A) and the research project on other financial communications (B) both of which were added to FASB s agenda on November 9, Subsequent to that we have formed project resource groups for each project and Melissa Maroney has assumed the project manager responsibilities for the research project. Ron Bossio is serving as interim-project manager for the standards project. Efforts to identify a practice/industry fellow to lead that project are ongoing. The timelines are based on certain assumptions, particularly about: A. Staffing for the standards project, optimism about the Board s ability to reach tentative decisions, and the expectation that this project will benefit from progress on other FASB projects (particularly the projects for liquidity and interest rate risk disclosures and disclosure framework). B. Board agrees to issue an ITC. Project th Qtr 1 st Qtr 2 nd Qtr 3 rd Qtr 4 th Qtr 1 st Qtr 2 nd Qtr 3 rd Qtr 4 th Qtr 1 st Qtr 2 nd Qtr 3 rd & 4 th Qtr A B Added to agenda and commenced efforts to identify potential resource group members Complete selection of project resource groups, project planning, including discussions with NAC Education Session 5/16 RG conf. calls end of May Project Planning/ Research RFI to RG BMs for initial deliberations with ongoing outreach activities with project resource group NAC mtg. Research/ Drafting of ITC Informal outreach to RG/ NAC BM/ Balloting & issue ITC NAC mtg. RG workshops Comment period Drafting, balloting & issue ED proposed ASU Deliberations on adding project to standard setting agenda 120-day Comment BMs for redeliberations period with roundtables NAC mtg NAC mtg Workshops. BMs for standard setting project Drafting, balloting & issue ED of proposed ASU NAC mtg NAC mtg NAC mtg Shaded cells indicate a tentative timeline if the Board were to add a project to the standard setting agenda. Finish BMs, begin drafting Comment period (including field testing, roundtables, etc.) Final ASU BMs for redeliberations Final ASU (most likely would extend to 1H2015)