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

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1 August 20, 2015 Ms. Susan M. Cosper Technical Director Financial Accounting Standards Board 401 Merritt 7 P.O. Box 5116 Norwalk, CT File Reference No Dear Ms. Cosper: Thank you for the opportunity to comment on the Financial Accounting Standards Board s Proposed Account Standards Update Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities. I write to provide comments on behalf of Aeris (formerly known as CARS), an objective, nonprofit ratings institution that creates accountability, standardization, and transparency to help investors understand the risks, mitigants, and social/economic impact of community development financial institution (CDFI) loan funds. CDFI loan funds are mission-driven financial institutions (primarily nonprofits) that make targeted loans and investments to benefit underserved markets in the U.S. There are more than 500 CDFI loan funds in the United States with more than $10 billion in on-balance-sheet assets under management. During the course of its 11 year history, Aeris has issued 574 ratings opinions on 97 loan funds, which collectively manage approximately 60% of all CDFI loan fund on-balance-sheet assets. Aeris also aggregates highly accurate and timely GAAP-compliant financial and impact performance data on CDFIs. The nation s top philanthropic investors rely on Aeris due diligence and data to make informed CDFI investment decisions. Examples include foundations (e.g., the Ford Foundation, the John D. and Catherine T. MacArthur Foundation), financial institutions (e.g., Wells Fargo, Morgan Stanley, U.S. Bank), nonprofits (e.g., Calvert Foundation, NeighborWorks America), and others. From the investor perspective that we represent, Aeris believes the proposed changes help to clarify some critical issues with the presentation and consistency of nonprofit financials, but we have some concerns about the proposal as it is relates to financial statements in the CDFI industry, and appreciate the

2 opportunity to share our views. CDFIs that are structured as nonprofits must adhere to both FASB guidance and guidance related to financial institutions. We are especially concerned about the proposal s singular focus on the nonprofit sector and the potential consistency and comparability issues that may arise as a result. We believe some of the proposed changes increase the differences between not-forprofit financial reporting and for-profit financial reporting and therefore are counter-productive to improving comparability, understandability, and usefulness, as well as reducing complexities. CDFIs that are structured as nonprofit entities have fundamentally the same business model as CDFIs that are structured as for-profits, and we believe it is important to provide maximum flexibility to ensure the financial statements in the industry are comparable. We believe this issue is relevant for other nonprofit organizations that have business models that may mirror the for-profit sector. About 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 must generally provide a GAAP-compliant audit that follows FASB standards to receive funding from the CDFI Fund and other investors. CDFIs are private, mission-driven, financial intermediaries that finance affordable housing, small business, community facilities, and individuals in the areas that need it most, and deliver positive 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 comprises different institution types. The four primary types of CDFIs are community development banks, community development credit unions, community development venture capital funds, and community development loan funds. Loan funds make up the largest portion of the CDFI industry, and are the CDFI type on which Aeris focuses. 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. The industry includes both for-profit and nonprofit institutions. Banks are structured as for-profits, and credit unions are structured as nonprofit cooperatives; loan funds are primarily nonprofits, but a small percentage are for-profits; and venture capital funds are primarily structured as for-profit entities. Also, many CDFIs (particularly nonprofit 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 nonprofits, as well as guidance related to financial institutions. This guidance supports a level of consistency and transparency in financial reporting across the CDFI industry. 2

3 About Performance Counts Aeris is a participant in an industry-led collaborative effort called Performance Counts, which seeks to develop CDFI industry standards and best practices around financial statements and financial management, and serves as an industry forum for sharing information, documents, and ideas on these topics. Aeris and Performance Counts share the goals with FASB of presenting clear, consistent, and accurate financial statements. Investors, funders, and other key stakeholders in the industry rely on the accuracy and consistency of financial statements to make credit, funding, and other programmatic decisions. Because it is critical that the CDFI industry and its supporters be able to rely on the financial information that CDFIs provide, we urge FASB to consider the following comments and recommendations on its recent proposal. We have used the "Questions for Respondents" contained in the exposure draft as a general guide for organizing our comments. We have responded to the questions that are most pertinent to the CDFI industry. In general, Aeris recommendations are in line with those of the Performance Counts group, with the exception of Question 4: Aeris is strongly in favor of a classified statement of financial position (current vs. noncurrent) as a more straight-forward alternative for financial statement users in understanding an organization's 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. Aeris agrees with the proposed change to two classes of net assets and also supports the proposed terminology: with donor restrictions and without donor restrictions, as it is more practical and relevant compared to the current classifications. Aeris also believes that the proposed disclosures about the nature of donor-imposed restrictions in the notes will help ensure that necessary information is not lost by combining the temporarily and permanently restricted classes of net assets into one category on the face of the financial statements. 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? Aeris agrees 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 about liquidity. Such disclosures are critical to allow users of the financial statements to understand how 3

4 donor imposed restrictions may affect liquidity. Aeris feels the guidance should include minimum mandatory quantitative disclosure requirements that would allow for consistency in the presentation of financial statements. Aeris feels that this would make the financial statements more useful to users and help manage the costs of providing such information. Aeris is concerned about any proposed required qualitative disclosures about liquidity. This information is often very subjective and could create confusion and therefore may not be appropriate for the notes to the financial statements, which are subject to audit. These types of disclosures seem more appropriate in a management discussion of the financial statements. Aeris feels that presenting a classified statement of financial position (current vs. noncurrent) would be more straight-forward to financial statement users in understanding an organization's liquidity. 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? Although we agree conceptually that reporting an intermediate measure of operations would enable users of NFP financial statements to better understand the entity's operations, we have a number of concerns with such a requirement. Not-for-profit entities are diverse in nature and users of not-for-profit entity financial statements vary greatly. Significant differences exist in operating activities between different not-for-profit entities. A not-for-profit entity should have the discretion to present the results of its operations in a manner that best suits the needs of its primary stakeholders within the industry in which it operates. A standardized operating measure applicable to all nonprofits would not necessarily provide useful information for the majority of stakeholders that use not-for-profit financial statements for resource allocation decisions. 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? While Aeris feels an intermediate measure of operations based on activities that are from or directed at carrying out an organization s mission is reasonable, the proposed presentation seems confusing and overly complicated. We believe that not-for-profits should be able to have flexibility in determining the definition of their operations, similar to for-profit entities, and therefore what activities should be included or excluded from an intermediate measure of operations. 4

5 In addition, Aeris does not completely understand the rationale of taking into account the limits/designations imposed by the governing board of an NFP. Resources that are appropriated or designated by the governing body and do not have external limitations have the potential for use in the current period and therefore should be included. We are concerned that this could be abused and result in the manipulation of the intermediate measure. 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? Aeris does not support the presentation of internal transfers on the statement of activities. The group feels that presenting this information on the face of the financial statements would not provide adequate context and again is overly complicated and would be confusing to readers. In addition, we are concerned about the lack of comparability of this presentation in relation to for-profit business entities and specifically those operating in the CDFI industry. 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? Aeris believes the flexibility currently allowed by GAAP should be retained. This provides organizations the ability to present the statement of activities in a more meaningful manner within each industry. 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? Aeris agrees that reporting operating expenses by both their function and nature should be required since it does provide relevant and useful information to financial statement users. 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? 5

6 Aeris agrees with the proposed requirement that investment income 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. 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? Aeris agrees the disclosure of the amount of all investment expenses is unnecessary, but does not agree that disclosure of the amount of internal salaries and benefits that are netted against investment return should be required in all instances. Disclosure of this information should be encouraged where practicable, taking into account various factors including availability, cost, materiality, and significance of the activity to the organization s operations. 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? Aeris does not agree. The proposed treatment further widens the gap between not-for-profit and forprofit accounting. These items should be classified as operating activities. Borrowing on a short-or longterm basis is employed to facilitate operations and support the mission of the NFP. The cost of borrowing is as much a direct cost in carrying out the NFP s purpose as are bank account charges and office supplies. More importantly, interest income earned on loans made by CDFIs would be classified as operating activity since the loans are made for programmatic purposes. The proposed presentation would greatly distort a CDFI s operating measure. 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. Aeris feels that the statement of cash flows is often not well understood or considered very useful by financial statement users, regardless of which presentation method is used. The group is concerned that if the direct method is required, organizations will have to revise their chart of accounts resulting in increased time and cost. Additionally, the group is concerned about the lack of financial statement comparability to for-profit entities operating in the CDFI industry, since for-profit entities currently have the option of presenting the statement of cash flows using either method. Many CDFIs (particularly nonprofit loan funds) have for-profit subsidiaries that are included in their consolidated financial statements. Conversion of these financial statements to the direct method to accommodate the 6

7 consolidation would increase time and cost on an ongoing basis, and decrease comparability with other CDFIs and CDFI affiliates and subsidiaries. Accordingly, Aeris believes that not-for-profits, like for-profits, should have the flexibility of using the direct or indirect method for the cash flow statement. 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? The indirect method provides an effective cross-check against the accuracy of the cash flows from operating activities, which in turn renders greater credibility to the amounts reported as cash flows from investing activities and financing activities. The indirect method enhances the integrity of the financial statements as one can tie the numbers across the statement of financial position and the statement of activities. This type of integrity check is best preserved via the indirect method of cash flows as opposed to additional note disclosures. Aeris would recommend that cash flows from operations be reconciled to the amount of the change in net assets. This option provides for an "overall" reconciliation of cash flows from operations to total change in net assets (as opposed to an intermediate measure) and would provide a straight-forward reconciliation more easily understood by financial statement users. 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. Aeris agrees that 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 of the financial statements. We do not believe, however, that these reporting changes should be limited to the NFP sector. Many for-profit entities also operate in the CDFI industry and the group is concerned about the comparability of financial information for financial statement users. To the maximum extent possible, we support a common reporting framework for both for-profit and not-for-profit enterprises. 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. 7

8 The intermediate reporting levels and reporting of transfers may require system changes that would necessitate longer implementation time. The proposed retrospective application of this update will require more time for preparers to restate prior year financial statements. For areas such as the direct method of cash flows and the functional classification of expenses, organizations will have to analyze and reorganize data, which will increase the time/effort in accumulating financial information for comparative year presentations. 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. Allowing additional time for larger NFP organizations to implement would be necessary, especially when more than one line of business or more than one legal entity is included in the reporting entity. Accounting systems will need to be modified in order to accommodate tracking certain new items across many different legal entities. We urge the Board to allow sufficient time for nonprofit organizations to adopt the proposed amendments. We feel that it could take some CDFIs a substantial amount of time to implement the changes outlined in the exposure draft due to limits on the scale and resources available to execute these changes. Aeris believes that the exposure draft is sufficiently complex that many nonprofit organizations will need significant time to retrain accounting staffs and would require significant system design and programming changes. We recommend that the effective date be established as no earlier than the first fiscal year that begins two years after the final issuance date of the ASU. Please direct any questions or comments on our position to Karen Seabury, Aeris Director of Ratings (kseabury@aerisinsight.com or (805) ). We would also appreciate the opportunity to discuss the CDFI industry and our comments with the appropriate people within FASB. Sincerely, Karen Seabury Director of Ratings Aeris 8