Subject: Comment letter on FASB Not-For-Profit (NFP) Exposure Draft

Transcription

1 August 20, 2015 Technical Director File Reference No Financial Accounting Standards Board Subject: Comment letter on FASB Not-For-Profit (NFP) Exposure Draft About is a family of credit unions and charitable not-for-profit organizations that together provide financing, technical support, consumer financial services and advocacy for those left out of the economic mainstream, with total combined assets of $1.75 billion. Since 's founding in 1980, the organization has reached out particularly to female, low-income, low-wealth, rural and minority communities across North Carolina, California, Washington, D.C., Chicago, Illinois, and many other communities. We help borrowers nationwide build wealth by providing fair and responsible loans to businesses, consumers and prospective homebuyers. We strengthen under-served communities by financing nonprofits, child care centers, community health facilities, public charter schools, and residential and commercial real estate projects. We provide responsible financial services through our network of credit union branches. Over time we have demonstrated that low-income borrowers pose no greater credit risk than other borrowers. Our borrowers have proven their determination to repay their loans, build their businesses, improve their communities, and build wealth through home ownership and home equity. includes three financial entities two credit unions and a community development loan fund, each of which has between $ million in assets. All three are designated as a Community Development Financial Institution ( CDFI ) by the United States Treasury Department. Our not-for-profit community development loan fund Ventures Fund is the largest not-for-profit CDFI loan fund in the nation. Given that status and the fact that we also operate two insured credit unions,

2 Page 2 has a unique perspective on the challenges that charitable CDFIs face when measured in comparison to insured depository CDFIs. About The CDFI Industry and CDFI Corporate Structures The U.S. Treasury Department operates a program, the CDFI Fund, which certifies organizations as CDFIs and provides grants and loans to support the CDFI industry. As of June 30, 2015, there are 958 CDFIs that are certified by the CDFI Fund. CDFIs generally obtain GAAP-compliant audits that follow FASB standards to receive funding from the CDFI Fund and other investors. CDFIs are mission-driven, financial intermediaries that finance affordable housing, small business, community facilities, and individuals in the areas that need it most, and deliver real changes for people and communities. CDFIs are committed to performance and being permanent institutions which provide capital and other services to transform lives in low-income, low-wealth, and other disadvantaged communities. The CDFI industry represents different institution types. The four primary types of CDFIs are community development loan funds, community development credit unions, community development banks, and community development venture capital funds. While all CDFIs are private mission-driven organizations, they are formed with different corporate structures and different institution types to deliver different products to best serve their communities, with not-for-profit community development loan funds almost all of which are 501(c)(3)-designated charities representing the greatest number of CDFIs. The industry includes both for-profit and nonprofit institutions. Banks are structured as for-profits, and credit unions are structured as non-profit cooperatives; loan funds are primarily non-profits, but a small percentage are for-profits; and venture capital funds are primarily structured as for-profit entities. Also, many CDFIs (particularly non-profit loan funds) have for-profit subsidiaries to facilitate obtaining capital from different sources. For example, the U.S. Treasury s New Markets Tax Credit program requires that organizations form for-profit entities to utilize that program. Nonprofit CDFIs adhere to both FASB guidance that applies to non-profits, as well as guidance related to financial institutions. This guidance supports a level of consistency and transparency in financial reporting across the CDFI industry.

3 Page 3 Comments on Proposal We support many of the proposed changes. In particular, we agree that reducing the number of classes of net assets from three to two is a significant improvement for notfor-profit reporting entities and financial statement users, as follows: 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. We support the idea to reduce the number of donor imposed restrictions. In fact, we would further suggest giving entities the option of using a single column to show performance and describing any restrictions on funds narratively, perhaps in the section on liquidity management. We have found most of our readers find confusion among the different restrictions placed on funds and how that relates to revenue recognition and cash management. Having a single column statement of financial position and explaining any restrictions on funds narratively makes more sense for the CDFI industry. While we also support other sections of the draft, for brevity, the following comments are directed at portions of the exposure draft we do not support and why we don t support them. Our primary concern in our comments is based on our experience that not-for-profits should have the substance of their work health care, financial institution, educational institution, etc be the primary driver of their accounting principles, rather than their legal form. For non-profit CDFIs, the comparability must be to CDFI credit unions, CDFI banks and CDFI venture capital funds because these institutions compete for the same public and private grant and debt funding. 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? No, we do not agree. Many CDFI loan funds use operating income defined as earned revenue less operating expenses as a performance measure that is comparable to profits and net income of our bank and credit union peers, respectively. These CDFIs, including Ventures Fund, show net assets released from restriction below operating income because a release from restriction is a reclassification of previouslyrecognized income, not new income. We believe this presentation is appropriate because including net assets released from restriction in an operating income subtotal would

4 Page 4 overstate operating income and confuse readers who compare our financial statements to for-profit peers. For example, assume that Ventures Fund receive a $100,000 grant to be expended over two years. There are no grantor restrictions on the grant that preclude revenue recognition in year one. However because of the two-year timeframe, we show $50,000 as temporarily restricted net assets ( net assets with donor restriction under the proposal) at the end of year one. Today, Ventures Fund reports all $100,000 as revenue with half of it temporarily restricted. Under the FASB proposal, $50,000 would be reported as operating income in each year. A for-profit entity simply shows $100,000 as operating revenue in year one. Thus, the financial statements between a non-profit CDFI and a for-profit peer lose comparability. All three of our certified CDFIs receive grants from the U.S. Treasury Department s CDFI Fund. In the proposed scenario, any time restriction would alter how those grants flow through to Ventures Fund s performance measure operating income compared to our two CDFI credit unions. Question 8: Do you agree that all internal transfers (governing board appropriations, designations, and similar actions that make resources unavailable or available for operations of the current period) should be reflected on the statement of activities immediately after an intermediate measure of operations before transfers and immediately before an intermediate measure of operations after transfers? If not all internal transfers, on what basis would you distinguish between those transfers that should and should not be reflected and how would you make that distinction operable? Do you also agree that reflecting those internal decisions (or lack of them) on the face of the statement rather than in notes will help an NFP communicate how its operations are managed without adding undue complexities? Why or why not? As noted in our response to Question 7, we do not see how providing for internal transfers which are essentially releases of restrictions by a board of directors on the statement of operations, provides for additional clarity to financial statement users. Instead, we believe the additional data creates undue complexity on the face of the financial statements and are better described in the notes.

5 Page 5 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? We do not agree with the proposal, which would create another difference between CDFIs that use not-for-profit and for-profit accounting. Interest expense and other borrowing related costs should be classified as operating expenses without having to parse whether those activities are clearly directed at carrying out an NFP s purposes. Ventures Fund routinely borrows, both for short-term cash flow adequacy and to fund our loans to programmatic borrowers. The interest income earned on our programmatic loans is classified as operating revenue, and thus, our interest expenses should be an operating expense, similar to compensation and benefits or rent. 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. While acknowledging the direct method may provide more understandable information, we do not believe the benefits outweigh the costs. Most CDFI financial statement readers simply do not use the cash flow statement, especially not for investing or decision making activities. We send our financial statements to approximately 100 different readers, including most of the nation s ten largest banks, major foundations and government agencies. At most, we receive one or two comments or questions each year about items in the statement of cash flow. Given the significant staffing resources it takes to prepare a direct method cash flow statement including possibly restructuring a chart of accounts, the benefits simply do not outweigh the costs for us and most CDFIs. We also disagree with the recommendation that cash flows from the purchase, contribution and sale of long-lived assets should be treated as operating cash flows, rather than investing cash flows, for all not-for-profit entities. This classification may make sense for hospitals and universities where fixed assets are significant and solely for operational use. For CDFIs that primarily own financial assets, classifying long-lived asset purchases and sales as operating instead of investing does not make sense and most importantly, makes our statements less comparable to other financial institutions. As noted previously, we should have the same option that our for-profit and credit union peers (and affiliates) have for presenting our statement of cash flow, such that the small number of questions we get does not balloon due to the lack of comparability. Dictating a specific form of cash flow statement preparation to a sub-set of the universe of entities seems to take the FASB from establishing a generally-accepted principle to a specifically-designed standard.

6 Page 6 Summary Overall we support most of the proposed changes and commend the FASB for recognizing a need to provide updated guidance. To better meet the needs of CDFIs, many of whom operate, compete with, and are compared to for-profit companies, we d suggest the following as one potential path that allows you to retain the core of the proposed standard for most not-for-profits, while giving flexibility to those that have significant comparability issues: 1) A carve out in the proposal for entities, including CDFIs, that have significant comparability issues with for-profit reporting entities to use either non-profit accounting presentation or for-profit presentation, similar to how credit unions are technically not-for-profit entities but follow financial institution GAAP. Doing so would allow us to prepare financial statements to better match the needs of our readers and most importantly, make our financial statements comparable with other loan funds and financial institutions. To help CDFIs decide which accounting presentation to follow, we believe it would be helpful for the FASB to provide guidance that first starts with business purpose of a reporting entity and assessing the end users of the financials, how they use financial information, and what presentation is relevant and helpful for them. Having this framework written in GAAP would help ensure financial information is decision useful, relevant, and comparable to competitors, particularly for non-public companies. 2) Delaying implementation to specifically seek feedback from not-for-profit entities whose peers are for-profit entities. Our comments are from the perspective of the CDFI industry. However, we acknowledge that there are other industries that have similar problems. It seems as if the current non-profit GAAP is directed at the healthcare industry, foundations, endowments, and universities but there are far more non-profit entities outside of those industries and the GAAP they follow should be reflected of their industry needs. Thank you for the opportunity to comment. Contact Information Please direct any comments on this letter to the following individuals: Randy Chambers, Chief Financial Officer, randy.chambers@self-help.org, Marcus Bowen, Controller, marcus.bowen@self-help.org, John Shanley, VP Accounting and Finance, john.shanley@self-help.org,