NOT-FOR-PROFIT ADVISORY COMMITTEE MEETING FASB Offices; Norwalk, Connecticut

Transcription

1 NOT-FOR-PROFIT ADVISORY COMMITTEE MEETING FASB Offices; Norwalk, Connecticut September 9 and 10, 2013 Agenda (as of August 29) * Meeting Chair: Jeff Mechanick, FASB Assistant Director Monday, September 9, 2013, Day 1 10:00 10:10 am (10 minutes) Introductory Remarks and Meeting Objectives Introductions Objectives for this NAC meeting 10:10 10:50 am (40 minutes) Topic 1: Future Outlook: Priorities for the FASB (Russ Golden) Including Q&A 10:50 am 12:05 pm (75 minutes) Topic 2: FASB Projects for Report-Outs & Brief Discussion Disclosure Framework (status and field tests) Revenue Recognition (final standard, transition activities) Financial Instruments (status and next steps) Insurance (scope) Pensions (preagenda research) 12:05 12:50 pm LUNCH (45 minutes) 12:50 3:30 pm (160 minutes) Topic 3: Update and Discussion on NFP Financial Reporting Projects Updates on both projects Discussion on select matters, including: operating measures, net asset classes, statement format, and liquidity 3:30 3:45 pm BREAK (15 minutes) * Times are approximate. Agenda September 9 and 10, 2013 NAC Meeting, p. 1

2 3:45 4:30 pm (45 minutes) Topic 4: Discussion on FASB Leases Project 4:30 5:30 pm (60 minutes) Topic 5: Recent Trends, Concerns, and Observations Including use of XBRL within the NFP Sector 5:30 pm ADJOURNMENT Agenda September 9 and 10, 2013 NAC Meeting, p. 2

3 NOT-FOR-PROFIT ADVISORY COMMITTEE MEETING FASB Offices; Norwalk, Connecticut September 9 and 10, 2013 Agenda (as of August 12) * Meeting Chair: Jeff Mechanick, FASB Assistant Director Tuesday, September 10, 2013, Day 2 9:30 11:00 am (90 minutes) Topic 6: Private Company Activities & NFPs Including discussion of applicability/appropriateness of PCC Issues 13-01a (Intangibles), 13-01b (Goodwill), and (Swaps) for NFPs 11:00 11:45 am (45 minutes) Topic 7: Discussion on FASB Going Concern Disclosures Project 11:45 am 12:00 pm (15 minutes) Other Matters/Wrap-Up 12:00 pm ADJOURNMENT * Times are approximate. Agenda September 9 and 10, 2013 NAC Meeting, p. 3

4 June 27, 2013 In Focus Proposed Accounting Standards Update Insurance Contracts (Topic 834) It s Not Just for Insurance Companies! Banks, Guarantors, Service Providers and Others Take Note Introduction The FASB on June 27, 2013 issued a proposed Accounting Standards Update to address accounting for insurance contracts. While the proposed Update focuses on insurance contracts, it applies to more than just insurance companies. To determine whether contracts you issue are considered insurance contracts, and whether you might be affected by the FASB s proposal, please continue reading. If this Standard Is Not Just for Insurance Companies, Who Else Will Be Affected by It? The proposed guidance would apply to all issuers of insurance contracts as those contracts are defined in the proposed Update, regardless of the type of company/institution/fund issuing those contracts (unless those contracts are specifically excluded from the scope of the proposed Update). In other words, the type of contract, not the type of issuer, determines who would be required to apply the guidance. Consequently, guarantors, service providers, and other noninsurance companies who issue product warranties, financial guarantees, performance bonds, or other contracts as defined in the proposed guidance may be covered under the new standard. This represents a change from existing U.S. GAAP, which currently only applies to insurance companies. Why Is the FASB Issuing this Proposed Update? In October 2008, the FASB and the IASB undertook a project to develop common and improved guidance that establishes the principles that a company or other organization would apply in the recognition, measurement, presentation, and disclosure of insurance contracts issued and reinsurance contracts held in its financial statements. The main objective in developing the proposed Update is to increase the decision usefulness of the information about an insurer s insurance liabilities, including the nature, amount, timing, and uncertainty of cash flows related to those liabilities, and the related effect on the statement of comprehensive income. Another objective is to provide comparability, regardless of the type of issuer of the insurance contract. This FASB In Focus will address the types of contracts to which the proposed Accounting Standards Update will apply and the impact on issuers of those contracts that were not previously included within the scope of insurance accounting (ASC Topic 944). How Are Non-Insurance Companies or Organizations Affected by the Amendments in this Proposed Update? The guidance in this proposed Update would apply to all companies that issue insurance contracts as defined in the proposed Update, including those that are not insurance companies, unless those contracts are specifically excluded from the scope. This is a significant change as existing guidance for insurance contracts only applies if the issuer of the insurance contract is an insurance company and does not apply to contracts issued by noninsurance companies that contain identical or similar economic characteristics.

5 Page 2 FASB In Focus What is the Definition of Insurance in the Proposed Update? Premium The guidance in the proposed Update defines an insurance contract as: A contract under which one party (the issuing company) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder. The proposed Update would require contracts that transfer significant insurance risk to be accounted for in a similar manner, regardless of the type of company issuing the contract. Insurance risk is defined in the proposed Update as uncertainty arising from underwriting risk (risk arising from uncertainties Policyholder Significant Insurance Risk Company Compensation if an event adversely affects a policyholder about the amount of net cash flows from premiums, commissions, claims and claim settlement expenses paid under a contract) as opposed to financial risk (the risk of a possible future change in one or more of a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable). Because the characteristics of many types of guarantees, contingencies, financial instruments and service contracts meet the definition of an insurance contract, issuers of these types of contracts would be considered insurers and would have to measure and account for these contracts in accordance with the proposed Update. Companies should consider the definition and the presence or the absence of significant insurance risk to determine whether a contract meets the definition of an insurance contract. (The proposed Update includes implementation guidance that provides considerations a company should evaluate regarding significant insurance risk.) Companies should perform this analysis based on the specific facts and circumstances and/or the contractual features to make this determination. Which Contracts Would Now Fall in the Scope of this Proposed Update? Depending on the specific contract features and to the extent the contract is not excluded from the scope of the proposed Update, examples of contracts that may fall within the scope of the

6 Page 3 FASB In Focus proposed Update on insurance contracts, but are not currently accounted for using insurance guidance are included in the Contracts within the Scope graphic above. What Are the Scope Exclusions in this Proposed Update? If a contract meets the definition of an insurance contract, a company would apply the guidance in the proposed Update, except for contracts that are specifically excluded. A list of the types of contracts specifically excluded from the guidance can be found in the Scope Exclusions graphic on the bottom right hand corner of this page. (A complete and more detailed list of scope exclusions can be found in the proposed Update). Many of the contracts excluded from the scope of the proposed Update would continue to be subject to existing requirements or proposals in other projects. Other scope exclusions are based on the Board s belief that changing the existing accounting would impose costs and disruption with no significant benefit. How Would the Board s Proposals Improve Financial Reporting? They would enhance comparability by requiring contracts that transfer significant insurance risk to be accounted for in a similar manner, regardless of the type of company or organization issuing the contracts. If a noninsurance company, institution, or fund becomes party to an arrangement with economically similar attributes, risk transfer, and cash flows as those of an insurance contract, the arrangement would be accounted for as an insurance contract. This proposed change would enhance comparability of contracts that contain identical or similar economic characteristics, making it easier for users to analyze financial information and make meaningful comparisons. They would include within the measurement of the liabilities all costs of fulfilling the obligations to the contract holder based on updated assumptions that reflect all available information and time value. The measurement in the proposed Update considers various possible outcomes on an expected basis and requires discounting to reflect the time value of money. Under existing U.S. GAAP, non-insurance companies generally measure the contract obligation (or update the measurement if the obligation is recognized at contract

7 Page 4 FASB In Focus inception) only after it has been incurred and the company can reasonably estimate the amount. In addition, once recognized, the obligation is typically undiscounted. The proposed guidance would result in more relevant and timely information about these obligations communicated to users of financial statements. How Does this Proposal Fit into the Goal of Convergence? The proposed guidance would improve convergence of U.S. GAAP and IFRS (based on the 2013 IASB revised Exposure Draft, Insurance Contracts) because both proposals require that the guidance on accounting for insurance contracts would be applied to all contracts that meet the definition of an insurance contract. However, there are differences in the scope, with the FASB s proposed model providing more scope exclusions than the IASB s. In addition, there are some differences in the proposed models. The Board notes that although there are some differences with the IASB s proposed model, both models have similar fundamentals; for example, both would use current and market consistent estimates. What Are the Next Steps in the Process? Stakeholders are encouraged to review and provide feedback on the proposed Update by October 25, (The document is available at For more details about what is being proposed, please review the companion FASB In Focus on the proposed Update on Insurance Contracts. The FASB will consider the comments received on this proposal as well as the comments received by the IASB on its proposal, which was issued on June 20, For more information about the project, please visit the FASB s website at FASB In Focus has been prepared as a summary of the proposed Accounting Standards Update. The views expressed in this document do not necessarily reflect the views of the FASB. Official positions of the FASB are arrived at only after extensive due process and deliberation. 401 Merritt 7, PO Box 5116 Norwalk, Connecticut T: F:

8 ATTACHMENT #3 UPDATE AND DISCUSSION ON NFP FINANCIAL REPORTING PROJECTS Not-for-Profit Advisory Committee September 9 and 10, 2013 This topic is to elicit feedback of Not-for-Profit Advisory Committee (NAC) members on the following matters related to FASB Not-for-Profit Projects. 3-1 Update on Current NFP Projects (pages 2 3) 3-2 Net Asset Classification and Related Disclosure (pages 4-7) 3-3 Financial Statement Formatting for Activities (pages 8-9) 3-4 Liquidity (pages 10-18) 3-5 Cash Flow Statement and Implementation Matters (pages 19-23) Discussion questions on the last three topics are included on pages 9, 12-13, and Note: These materials are provided to facilitate understanding of the issues to be addressed at the September 9-10, 2013 Not-for-Profit Advisory Committee meeting. These materials are presented for discussion purposes only; they are not intended to reflect the views of the FASB or its staff. Official positions of the FASB are determined only after extensive due process and deliberations.

9 Topic 3-1: Update on Current NFP Projects Not-for-Profit Financial Reporting: Financial Statements On May 29, 2013 the Board: a) tentatively defined an intermediate operating measure on the basis of two key dimensions: a mission dimension based on whether resources are from or directed at carrying out a NFP s purpose for existence an availability dimension based on whether resources are available for current period activities, and reflecting both external limitations and internal actions of a NFP s governing board b) considered three alternatives for presenting an intermediate measure in a NFP s statement of activities and tentatively decided to support an alternative that would present all legally available mission related revenues before reductions for amounts designated by the governing board for use in future periods, rather than only the net of those amounts. That presentation also would include amounts of previously unavailable resources that the governing board made available for use in the current period c) asked the staff to consider how net asset classes may be aligned with the tentative definition of the intermediate operating measure as well as other alternatives for presenting net assets. The Board has not yet decided whether to require the presentation of the intermediate measure of operations by all NFPs, including business-oriented healthcare providers that currently are required to provide a performance indicator that is a similar but not identical measure. During June the staff held two conference calls with members of Not-for-Profit Financial Reporting: Financial Statements Project Resource Group (PRG) and others. The purpose of the calls was to seek feedback on possible ways to improve the classification of net assets for NFPs. The staff and PRG members discussed four alternative net asset classification schemes. Those alternatives and the staff recommendations are discussed in Topic 3-2. The staff also developed a set of example financial statements with key notes that reflect the staff s recommendations on net asset classifications. The illustrative examples include four formatting alternatives for the statement of activities and changes in net assets. They also were used for further drill-down discussions with four Page 2

10 of the PRG members and are included with the NAC discussion materials for Topic 3-3. On September 4 th, the staff will present its recommendations for net asset classifications to the Board (Topic 3-2). At the NAC meeting, the staff will provide a summary of the decisions reached. Although the Board also may be discussing the formatting alternatives during the September 4 th meeting, the staff will not be seeking Board decisions on those alternatives at that time. Based on the current technical plan, we expect to issue the Exposure Draft of the proposed Accounting Standards Update for the Not-for-Profit Financial Reporting: Financial Statements project during the first half of Not-for-Profit Financial Reporting: Other Financial Communications On May 2, 2013 the Board discussed the results of the research performed to date on existing other financial communication frameworks and financial communications in the not-for-profit sector today. The preliminary findings through outreach with the project resource group members were discussed at the February 28 th NAC meeting. The Board decided to issue a Discussion Paper to solicit input from the not-forprofit sector. The feedback would be used in assisting the Board when making a decision of whether to add a standard-setting project to its agenda. The Board decided that the issuance date of the Discussion Paper should coincide with the issuance date of the Exposure Draft on the Not-for-Profit Financial Reporting: Financial Statements project. The Board thinks that this would bring more attention to the Paper as well as provide a better basis for stakeholders to provide input. Page 3

11 Topic 3-2: Net Asset Classification and Related Disclosure Following the May 29 th Board meeting the FASB staff conducted further outreach to help test and refine the thinking on net asset classifications. The staff and PRG members discussed four alternative net asset classifications: a) Classification Alternative 1 would retain the currently required three net asset classes, but to allow for more clarity and understandability it would change the commonly used name of unrestricted net assets to Net Assets without Donor Restrictions, Other Net Assets, or another suitable label. b) Classification Alternative 2 would combine the two donor-restricted classes of net assets into a single class for donor-restricted net assets and allow the use of subsets of net assets to allow for greater distinctions about time, purpose, and perpetuity restrictions, which would be disclosed in the notes or possibly on the face of the financial statements. c) Classification Alternative 3 would use two classes of net assets with multiple subclasses that focus on illustrating the availability and use of the components of both net assets classes. Appropriate subclass labels, such as available for use or non-spendable, would be used to achieve the objective. d) Classification Alternative 4 would use other classification schemes, including using an operating/non-operating distinction that might be aligned with the intermediate measure of operations. This alternative would focus on how the resources are being used. The first three alternatives are variations that would be based on the presence or absence of donor-imposed restrictions as a primary distinction with subclasses used to make other distinctions. The staff also considered expanding the distinctions to include legal and contractual restrictions. The fourth alternative would be based on how resources are to be used with subclasses based on the presence or absence of donor-imposed restrictions. In general, PRG members seemed to: a) Suggest better labeling (terminology) to avoid misunderstanding about the term unrestricted net assets as used in present practice. Suggestions include net assets without donor restrictions and other net assets. b) Desire retaining the primacy of the distinction between resources restricted by donors and those that are not restricted, rather than focusing foremost on how resources are being used. Page 4

12 c) Prefer simplifying the face of financial statements by limiting the required three classes of net assets to only two: donor-restricted and other (without donor restrictions). d) Prefer using disclosures in notes to financial statements to provide details about the nature of donor restrictions on and board-designations of net assets at the end of the period, but not require a roll-forward reconciliation of the changes in each of the provided subclasses of the two primary classes of net assets. On September 4 th the staff plans to recommend that the Board: a) Replace the existing requirements to present totals for each of three classes of net assets on the face of a statement of financial position and for changes in each of those classes on the face of a statement of activities with similar requirements for each of the two classes of net assets that convey net assets with donor-imposed restrictions and without donorimposed restrictions b) Retain the current requirement to provide information about the nature and amounts of different types of donor-imposed restrictions but modify the requirement to (1) remove the hard-line distinction between temporary and permanent restrictions and (2) focus instead on describing differences in the nature with a focus on both how and when the resources (net assets) can be used. c) Require disclosure of information about designated amounts and their purposes if any portion of net assets without donor-imposed restrictions has been board-designated or otherwise authorized for particular uses The higher aggregation of information for donor-restricted net assets and changes (as noted in recommendation a) above) could simplify the financial statements, especially the statement of changes in net assets. That simplification also could result in more understandable information. However, that also could result in the loss of information from the face of financial statements about the temporary and permanent nature of net asset restrictions at the end of the period and about contributions received during the period. Some stakeholders argue that recent changes in State laws (UPMIFA) have blurred the hard-line between permanent and temporary distinctions on institutional endowment funds and continuing to require that distinction could result in misunderstandings if not misrepresentations. To avoid the loss of important information (as noted in recommendation b) above), the staff further recommended providing information about the Page 5

13 composition of net assets at the end of period through notes to financial statements. Exhibit B includes illustrative examples of two alternative note disclosures that were discussed with PRG members. Exhibit B includes the following two alternative presentations of note disclosures regarding the composition of net assets: a) Disclosure Alternative 1: Composition of Net Assets at the End of Period b) Disclosure Alternative 2: Composition of Net Assets with Activities For the Period (roll-forward). The following describes each alternative and pros and cons identified by the staff: a) Disclosure Alternative 1 provides the composition of net assets in a single column for each presented net asset class: with donor-imposed restriction and without donor-imposed restriction. This alternative facilitates multi-year comparisons. It also is the most direct and concise presentation that effectively communicates the end-of-period composition of each net asset class. However, some might argue that the note disclosure may not present all of the information about activities within net asset classes. b) Disclosure Alternative 2 provides two different presentations. The upper portion communicates end-of-period compositions that are disaggregated by operating, investing, and financing activities. The lower portion (roll-forward) provides more robust and detailed information about activities that change each of the components within net asset classes. That includes some transfers among components of a class of net assets that are not otherwise transparent. However, some might argue that the roll-forwards are too granular and complex for most readers of the financial statements. The staff will be recommending Disclosure Alternative 1. The staff thinks that Disclosure Alternative 2 also provides useful information it but is not convinced that its more robust roll-forward of the activity is necessary. Moreover, that information may add confusion rather than clarity, which some PRG members noted as a concern. If so that would diminish the benefits of the information and may not justify the cost to provide such details. In conjunction with net asset classifications and presentations, the staff explored whether it is possible to convey information about liquidity through net assets. However, the staff remains convinced that striving to convey Page 6

14 liquidity through net assets is not feasible because net assets are merely a residual (Assets Liabilities = Net Assets) and liquidity by definition relates to the nearness to cash of assets and liabilities. Therefore, the staff believes that although the net asset classification scheme and liquidity may have an interrelationship, it is not feasible to demonstrate the liquidity through net assets. On September 4 th, the Board will discuss the issues regarding net asset classifications and disclosure, and the staff recommendations addressing those issues. Any decisions reached and open issues will be reported at the NAC meeting. Certainly, we will also take any questions NAC members may have about the decisions reached and elicit views on any remaining open issues. Page 7

15 Topic 3-3: Financial Statement Formatting for Activities On September 4 th Board meeting, the staff will be asking the Board to discuss alternative financial statement formats for presenting the activities that change net assets of the period. The staff does not, however, plan to seek a tentative decision for the formatting alternatives during that meeting. At the NAC meeting, we will seek discussion of potential advantages and disadvantages of financial statement format and disclosure alternatives. Exhibit C includes the following four alternatives for presenting a statement of activities and changes in net assets: a) Presentation Alternative 1: One-Statement, Multiple Column Approach b) Presentation Alternative 2: One-Statement, Single Column Approach c) Presentation Alternative 3: Two-Statement Approach; Changes starting with net operating metric d) Presentation Alternative 4: Two-Statement Approach; Changes starting with gross operating metric The following describes each alternative and the pros and cons identified by the staff: a) Presentation Alternative 1 is a single statement, multiple column approach that provides a holistic view of all activities of the period. An advantage of this presentation is that it shows total revenue and support, which the charity-type organizations seem to prefer. However, some might argue that the statement contains too much information on one page, does not sufficiently emphasize current operating activities, and impedes multi-year comparisons. b) Presentation Alternative 2 is a single statement, single column approach that facilitates multi-year comparisons. Similar to Presentation Alternative 1, however, some might argue that the statement contains too much information on one page. To address this issue, the statement could be broken out into two statements in order to emphasize net operating excess/(deficit) in the statement of operations. The horizontal line represents a potential page break. c) Presentation Alternative 3 is a two-statement approach that provides a separate statement to present current operating activities with a net operating excess/(deficit) as its bottom line. This alternative emphasizes the operating metric by separating current operations from other changes and transfers. Based on our outreach, healthcare and Page 8

16 college/university-type organizations seem to prefer a two-statement approach with emphasis on the operating metric. A disadvantage is that the presentation of releases from restrictions and other transfers to/from operations is not as clear as in the single-statement approach. d) Presentation Alternative 4 is another two-statement approach and is a variation of Presentation Alternative 3. The difference is that its statement of changes in net assets starts with gross operating excess/(deficit). This alternative attempts to improve the disadvantage of Presentation Alternative 3 by presenting the transfers between net asset classes in the same statement. A drawback of this alternative is that the transfers in the statement of operations are repeated in the statement of changes in net assets, which some might perceive as undue redundancy. In discussions with PRG, some members, particularly those from charitabletype organizations, indicated that a two-statement approach could work but expressed the following concerns: a) The constituents might perceive the net operating excess/ (deficit) as an equivalent concept of net income for the for-profit entities. Care in labeling the operating metric and significant educational efforts would be necessary to ensure that users do not equate that metric with net income of a for-profit business entity in which positive and negative amounts are necessarily viewed as good or bad. b) The charitable entity might not get credit for all contributions raised if restricted gifts were not presented on the statement of current operations, especially if that statement receives undue emphasis. Providing all activities in a single statement will facilitate better understanding for those who do not have financial analysis expertise. The set of example financial statements also includes an end-of-period statement of financial position and a work-in-process skeleton for a statement of cash flows. Certain cash flow statement issues that the staff plans to further explore are discussed in Topic 3-5. Exhibit A includes a sample statement of cash flow and statement of financial position to help facilitate that discussion. Questions for Discussion on Topic 3-3 Question 1: Are NAC members aware of other important pros and cons? Question 2: Can the concerns raised by charity-type organizations related to requiring the two-statement approach be addressed with educational efforts or in other ways? Page 9

17 Topic 3-4: Liquidity Introduction In this topic, the staff will be reviewing with the Not-for-Profit Advisory Committee (NAC) its thinking about U.S. generally accepted accounting principles related to providing information about liquidity and will seek NAC s discussion about the adequacy of current GAAP and ways it might be improved. The staff will be asking the NAC members for their observations about the application of GAAP in practice and ways in which practice might be improved. During its September 2011 meeting, as part of a set of recommendations that helped lead to the addition of the Not-for-Profit Financial Reporting: Financial Statements (NFPFS) project to the FASB s agenda, the NAC suggested that significant improvement in how a NFPs report their liquidity might useful to the users/readers of those financial statements. As you are aware, one of the main objectives of the NFP financial reporting project is to improve the current net asset classification scheme, in conjunction with improving how liquidity is portrayed in an NFP s statement of financial position and related notes. To that end, the staff has heard from some users/readers of NFP financial statements that net assets should provide information about liquidity. Regarding this desire, the staff now believes that it is impractical to achieve an improvement in communicating liquidity through net assets in the NFP s financial statements and the net asset related notes. The staff s reasoning is that net assets are merely a residual (Assets Liabilities = Net Assets) and liquidity by definition relates to the nearness to cash of assets and maturity of liabilities (see definition below). Therefore, the staff believes that although the current net asset classification scheme and liquidity may have some interrelationship, it is not feasible to demonstrate liquidity through net assets on face of the financial statements or the related notes on net assets alone. Based on research performed, staff has learned that creditors, credit rating agencies, grantors, donors and others would like to know how much cash and/or liquid assets (such as short-term investments) an NFP holds that can be easily converted to cash for immediate or near-term use. That is, to pay for current or future programmatic activity, debt services, and other activities of a NFP. Currently, U.S. GAAP provides certain requirements for NFPs to follow in reporting liquidity (see below) in their financial statements and the notes to Page 10

18 those financial statements. However, there is a high degree of flexibility in how a NFP may meet those reporting requirements. Defining Liquidity Liquidity is a multifaceted concept that encompasses many different meanings, 1 so in order to determine how liquidity should be communicated by an NFP in their financial statements, let s first consider how it is defined. Often when users and readers of NFP financial statements use the term liquidity they are referring to liquidity risk or financial flexibility. For the purposes of our discussion, the Codification defines liquidity and the related concepts of financial flexibility as follows: Liquidity is defined in the Codification Master Glossary as an asset s or liability s nearness to cash. Donor-imposed restrictions may influence the liquidity or cash flow patterns of certain assets. Financial Flexibility is defined in the Codification Master Glossary as an entity s ability to take effective actions to alter amounts and timing of cash flows so it can respond to unexpected needs and opportunities. Liquidity Risk is not defined in the Codification but it was defined in a recent project on disclosures about liquidity risk and interest rate risk. This project defined liquidity risk as the risk that an entity will encounter difficulty in fulfilling obligations associated with financial liabilities that are settled by delivering cash or another financial asset. Current Requirements under U.S. GAAP In performing it research, the staff notes that there is currently guidance on liquidity for the NFP sector in Topics 958, Not-for-Profit Entities, and Topic 1 Investopedia defines liquidity as 1. The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets. 2. The ability to convert an asset to cash quickly. Also known as "marketability." It adds that there is no specific liquidity formula; however, liquidity is often calculated by using liquidity ratios. NASDAQ in their glossary of financial terms defines liquidity as the ease and quickness with which assets can be converted to cash. Black s Law Dictionary defines liquidity as 1. The ability to meet immediate, short-term obligations with cash, and the ability to liquidate assets quickly enough to do so. 2. In Accounting, this is the ability to meet current liabilities with current assets. 3. In Investing, this is the ability to sell off an investment portfolio with little or no loss in value for cash quickly. Page 11

19 954, Health Care Entities (see Appendix A, which follows the discussion questions on this topic). The liquidity guidance for NFPs is somewhat more extensive than general U.S. GAAP, especially when one also considers information generally to be provided in the notes. The guidance for NFPs (Topic 958) requires that a NFP report assets and liabilities in reasonably homogeneous groups and sequence or classify them in ways that provide relevant information about their interrelationships, liquidity, and financial flexibility. Some might interpret this requirement to mean that an entity might only need to sequence its assets according to its nearness to cash and liabilities based on the timing of its maturities. This could be correct for some small, less-complex NFPs. However, for more complex NFPs with endowments and sinking funds, for example, it could be misleading to classify the endowment with the NFP s unrestricted investments and to combine the sinking fund cash with the NFP s unrestricted cash and cash equivalents. The reason for this misrepresentation is that the users/readers could get a different picture of the NFP s liquidity if items were grouped together solely by the nature of the asset (cash, investment, etc.) or liability even if further details are provided in the notes. In order for the users/reader to understand the NFP s liquidity, they must be able to understand the restrictions whether donor, contractual, or legal on the NFP s use of particular assets. The industry guidance for NFP business-like health care entities (Topic 954) is more prescriptive, requiring the use of a classified balance sheet and the breaking out, on the face of the balance sheet, of assets limited as to use. See Exhibit D for examples of statements of financial position for both heath care and other NFPs. Questions for Discussion on Topic 3-4 The staff has developed the following questions listed below for discussion on the current requirements for liquidity in the Codification. Question 3: Based on the requirements in the Codification for the NFP sector, do you believe that there are any deficiencies in the current required liquidity disclosures? a. If so, what might be the deficiencies? Page 12

20 b. If so, how might we improve the current standards (i.e., information on the face of statements, footnotes, and/or requirements by management to layout liquidity risk and/or liquidity plan)? Question 4: Do you believe that the current practices are meeting the requirements related to liquidity disclosures? If not, do you have suggestions for how practice might be improved? Page 13

21 Appendix A (for Topic 3-4: Liquidity) Current Codification As part of the research conducted on liquidity, the staff notes that the Codification currently has the following requirements related to the presentation and disclosures about liquidity for NFP and health care entities: Topic 958, Not-for-Profit Entities The usefulness of information provided by financial statements of NFPs can be vastly improved if certain basic information is classified in comparable ways. All NFPs shall do all of the following: a. Report assets and liabilities in reasonably homogeneous groups and sequence or classify them in ways that provide relevant information about their interrelationships, liquidity, and financial flexibility. b. Classify and report net assets in three groups permanently restricted, temporarily restricted, and unrestricted based on the existence or absence of donor-imposed restrictions and the nature of those restrictions. Information about the nature and amount of restrictions imposed by donors on the use of contributed assets, including their potential effects on specific assets and on liabilities or classes of net assets, is helpful in assessing the financial flexibility of an NFP. c. Aggregate items of revenues, expenses, gains, and losses into reasonably homogeneous groups and classify and report them as increases or decreases in permanently restricted, temporarily restricted, or unrestricted net assets. d. Classify and report cash receipts and cash payments as resulting from investing, financing, or operating activities The primary purpose of a statement of financial position is to provide relevant information about an NFP's assets, liabilities, and net assets and about their relationships to each other at a moment in time. The information provided in a statement of financial position, used with related disclosures and information in other financial statements, helps donors, members, creditors, and others to assess the following: a. The NFP's ability to continue to provide services b. The NFP's liquidity, financial flexibility, ability to meet obligations, and needs for external financing. Page 14

22 A statement of financial position, including accompanying notes to financial statements, provides relevant information about liquidity, financial flexibility, and the interrelationship of an NFP's assets and liabilities. That information generally is provided by aggregating assets and liabilities that possess similar characteristics into reasonably homogeneous groups that include the effects of donor-imposed restrictions as well as other contractual restrictions Information about liquidity shall be provided by any of the following: a. Sequencing assets according to their nearness of conversion to cash and sequencing liabilities according to the nearness of their maturity and resulting use of cash b. Classifying assets and liabilities as current and noncurrent, as defined by Subtopic (required by paragraph for statements of financial position prepared by not-for-profit, business-oriented health care entities) c. Disclosing in notes to financial statements relevant information about the liquidity or maturity of assets and liabilities, including restrictions on the use of particular assets A not-for-profit entity (NFP) shall disclose in notes to financial statements relevant information about the liquidity or maturity of assets and liabilities, including restrictions on the use of particular items, unless that information is provided on the face of the statement of financial position (see paragraph ) [i]. Specific disclosure requirements to meet that objective include the requirements in this Subtopic An NFP shall disclose all of the following, if present, in the notes to financial statements: a. Unusual circumstances, such as special borrowing arrangements, requirements imposed by resource providers that cash be held in separate accounts, and known significant liquidity problems b. The fact that the NFP has not maintained appropriate amounts of cash and cash equivalents to comply with donor-imposed restrictions (see paragraph ) [ii] Page 15

23 c. Information about significant limits resulting from contractual agreements with suppliers, creditors, and others, including the existence of loan covenants Section discusses the following items that are required to be included in the notes to financial statements if they are not provided on the face of the statement of financial position: a. A description of the kind of asset whose use is limited (see paragraph ) [iii] b. Information about the nature and amount of limitations on the use of cash and cash equivalents (see paragraph [a]) [iv] c. Contractual limitations on the use of particular assets (see paragraph [b]) d. Information about the nature and amounts of different types of permanent restrictions (see paragraph ) [v] e. Information about the nature and amounts of different types of temporary restrictions (see paragraph ) [vi]. Topic 954 Health Care Entities Health care entities, including not-for-profit, business-oriented health care entities, shall classify assets and liabilities as current and noncurrent as discussed in Section However, rather than presenting a classified balance sheet, a continuing care retirement community instead may sequence assets according to their nearness of conversion to cash and may sequence liabilities according to the nearness of the maturity and resulting use of cash Unrestricted net assets of not-for-profit, business-oriented health care entities include assets whose use is contractually limited, such as the following: a. Proceeds of debt issues and funds of the not-for-profit, business-oriented health care entity deposited with a trustee and limited to use in accordance with the requirements of an indenture or a similar agreement. b. Other assets limited to use for identified purposes through an agreement between the not-for-profit, business-oriented health care entity and an outside party other than a donor or grantor. Examples include assets set Page 16

24 aside under debt agreements, assets set aside under self-insurance (riskretention) funding arrangements, and assets set aside to meet statutory reserve requirements (such as those required under state law for many health maintenance organizations). (See paragraph ) Internally designated funds shall be reported separately from externally designated funds either on the face of the balance sheet or in the notes to the financial statements Cash and claims to cash that meet any of the following conditions shall be reported separately and shall be excluded from current assets: a. They are restricted as to withdrawal or use for other than current operations. b. They are designated for expenditure in the acquisition or construction of noncurrent assets. c. They are required to be segregated for the liquidation of long-term debts. d. They are limited to use for long-term purposes by a donor-imposed restriction For fiduciary purposes, separate checking or savings accounts may be maintained for restricted donations. However, unless required by paragraph , such accounts are not reported on a line separate from other cash and cash equivalents because donor restrictions generally relate to limitations on the use of net assets rather than on the use of specific assets. A columnar presentation that highlights the three classes of net assets (that is, permanently restricted, temporarily restricted, and unrestricted) is not precluded if the totals for the reporting entity as a whole are displayed. [i] Information about liquidity shall be provided by any of the following: a. Sequencing assets according to their nearness of conversion to cash and sequencing liabilities according to the nearness of their maturity and resulting use of cash b. Classifying assets and liabilities as current and noncurrent, as defined by Subtopic (required by paragraph for statements of financial position prepared by not-for-profit, business-oriented health care entities) c. Disclosing in notes to financial statements relevant information about the liquidity or maturity of assets and liabilities, including restrictions on the use of particular assets. Page 17

25 [ii] If the noncompliance results from a not-for-profit entity's (NFP's) failure to maintain an appropriate composition of assets in amounts needed to comply with all donor restrictions, the amounts and circumstances shall be disclosed. [iii] Assets may be restricted by donors. For example, land could be restricted to use as a public park. Generally, however, restrictions apply to net assets, not to specific assets. Assets need not be disaggregated on the basis of the presence of donor-imposed restrictions on their use; for example, cash available for unrestricted current use need not be reported separately from cash received with donor-imposed restrictions that is also available for current use. However, cash or other assets received with a donor-imposed restriction that limits their use to long-term purposes shall not be classified with cash or other assets that are unrestricted and available for current use. The kind of asset whose use is limited shall be described in the notes to the financial statements if its nature is not clear from the description on the face of the statement of financial position. [iv] If not disclosed in the notes to financial statements, the following information shall be displayed on the face of the statement of financial position: a. Relevant information about the nature and amount of limitations on the use of cash and cash equivalents (such as cash held on deposit as a compensating balance) b. Contractual limitations on the use of particular assets. [v] The amounts for each of three classes of net assets permanently restricted, temporarily restricted, and unrestricted are based on the existence or absence of donor-imposed restrictions. Information about the nature and amounts of different types of permanent restrictions or temporary restrictions shall be provided either by reporting their amounts on the face of the statement or by including relevant details in notes to financial statements. Separate line items may be reported within permanently restricted net assets or in notes to financial statements to distinguish between permanent restrictions for both of the following holdings: a. Assets, such as land or works of art, donated with stipulations that they be used for a specified purpose, be preserved, and not be sold b. Assets donated with stipulations that they be invested to provide a permanent source of income. These result from gifts and bequests that create permanent endowment funds. [vi] Similarly, separate line items may be reported within temporarily restricted net assets or in notes to financial statements to distinguish between the following temporary restrictions: a. Support of particular operating activities b. Investment for a specified term c. Use in a specified future period d. Acquisition of long-lived assets. Page 18

26 Topic 3-5: Cash Flow Statement and Implementation Matters The purpose of this segment of Topic 3 is to elicit NAC s discussion of certain cash flow statement issues that the staff plans to discuss with project resource group members before bringing them to the Board for decisions. This Topic focuses primarily on how the cash flow statement classification scheme will best relate to the intermediate measure of operations and net asset classifications presented in the statement(s) that presents operating activities and other changes in net assets for the period. Overview The Board s initial project plan contemplates addressing three board issues, each of which is likely to raise more detailed implementation questions. a. To achieve better linkage across financial statements, does a required notion of operations for an activity statement [e.g., the tentatively defined intermediate measure of current operations] necessitate one or more amendments to the definitions of cash flows from operating activities, investing activities and financing activities? b. How, if at all, should the current indirect-method of reporting of cash flows from operations be improved for all or certain not-for-profit organizations? c. If a direct method of reporting were 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? Presently, cash inflows and outflows are presented in a statement of cash flows and are classified in one of three categories: Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities. Page 19

27 The last two categories are defined terms 2 and cash flows from operating activities category is defined as a residual all other cash flows. Defining operating activities as a residual for purposes of classifying cash flows differs from the approach used for the intermediate measure of operations, which is tentatively defined on the basis of two key dimensions: a. A mission dimension based on whether resources are from or directed at carrying out a NFP s purpose for existence b. An availability dimension based on whether resources are available for current period activities, and reflecting both external limitations and internal actions of a NFP s governing board. The first dimension is very broad and perhaps open to misinterpretation. That is, some might incorrectly view all resources as being from or directed at carrying out a NFP s purpose for existence. To provide some clarity, during its discussions with the Board, project resource group members and other stakeholders, the staff explained that nearly all entities engage in some investing activities and financing activities but, in the staff s view, those activities generally are not directed at carrying out the NFP s purpose for existence. In contrast, however, if an NFP s mission is to provide financial support to its beneficiaries (constituents), for example, through so-called program investments or subsidized low-interest or forgivable loans, those activities are viewed as an operating activity since it is directed at carrying out that NFP s purpose for existence. The staff is assuming that it is both desirable to leave room for NFPs to make this distinction and they can make it based on their mission. The staff also thinks that some form of implementation guidance (perhaps along the lines of this example) would be helpful to achieve reasonably consistent application in practice. 2 As used in a statement of cash flows, investing activities and financing activities are defined as: Financing activities include obtaining resources from owners and providing them with a return on, and a return of, their investment; receiving restricted resources that by donor stipulation must be used for long-term purposes; borrowing money and repaying amounts borrowed, or otherwise settling the obligation; and obtaining and paying for other resources obtained from creditors on long-term credit (Master Glossary, emphasis added). Page 20

28 The second dimension availability seems more straightforward. It keeps all cash and noncash donor-restricted gifts that are for use in future periods outside of the current period intermediate measure of operations. Those gifts are distinguished within the statement(s) that presents the operating activities and other changes in net assets. Currently donor-restricted cash gifts other than those for long-term purposes are reported in the statement of cash flows as cash flows from operating activities but they need not be distinguished from cash gifts without donor-restrictions. Donor-restricted cash gifts that must be used for long-term purposes, such as to establish a permanent endowment, acquire items for permanent collections, and acquire land and buildings for use, meet the definition of cash flows from financing activities and thus are distinguished from other cash gifts. Improving the Statement of Cash Flows Over the years the Board and staff have heard from stakeholders of business entities and NFPs that the statement of cash flows is not as useful as it might be. Some stakeholders suggest there is a need for better linkage between the individual line items or each of the classification categories used in the statement of cash flows and the lines items or classifications used in the income statement of business entities or statement of changes in net assets of not-forprofit organizations. Still other stakeholders have said that that reconciliation (referred to as the indirect method of reporting cash flows from operations) is confusing and not as informative as reporting cash flow using the direct method, which the Board encouraged but did not require. Exhibit E is illustrative cash flow statements from the Codification that illustrate the presentation of cash flows from operations category using (a) the encouraged direct method together with the required indirect reconciliation shown at the bottom of the statement and (b) only the required indirect method. Presently, the statement of cash flows is linked to the statement of financial position in that it reconciles all changes in cash and cash equivalents for the period to cash and cash equivalents at the beginning and end of period. For NFPs it is linked to the statement of activities or changes in net assets in that it reconciles the change in net assets for the period to cash flows from operating activities for the period. At the time the FASB imposed that requirement there Page 21

29 was no requirement for an intermediate measure of operations. The staff thinks that if the Board requires that measure it likely would be a better starting point for the indirect reconciliation to cash flows from operations. However, we think the Board and staff would benefit from NAC s discussion about the degree of importance of the statement of cash flows and of linkage to a statement of activity or change in net assets. Discussion Questions for Topic 3-5 Question 5: To what degree is the statement of cash flows useful to users of NFP financial statements? If it is not very useful, is that because it is in need of improvement or not relevant to donors and creditors of NFPs? Question 6: To what degree is it important to link the cash flow statement to the statement(s) that presents the operating activities and other changes in net assets? a. If important, is it best to continue that linkage through a reconciliation of a key metric in the statement(s) that presents the operating activities and other changes in net assets to cash flows from operating activities (commonly called the indirect method of reporting cash flows from operating activities)? b. If yes, should that reconciliation start with the key metric being change in net assets, as currently required, or the intermediate measure of operations (net or gross)? Starting with the intermediate measure of operations rather than change in net assets would avoid the need to back-out all donor-restricted gifts for long-term purposes that are not reported as part of cash flows from operations. However, the availability notion used for the intermediate measure of operations will cause the need for other reconciling items. For example, current period cash gifts are reported outside of the intermediate measure of current operations until the later period when the restriction is met; thus, would result in reconciling items for their timing differences. Nonetheless, although the reconciling items will change if the starting metric is changed some may view that change as an improvement. On the other hand, some stakeholders, particularly among charitable organizations, have expressed concern about placing Page 22

30 undue emphasis on the intermediate measure of operations. They suggest that might give users of the financial statement the impression that measure is a performance indicator equivalent to net income of a business enterprise. c. Do NAC members think other improvements would be necessary or helpful, such as: Revising the definitions of cash flows from operations, from investing activities, and from financing activities to better align/link their line items with related line items and classifications reported within (and outside) the intermediate measure of operations even if that creates definitions that differ from those used by business entities? Requiring the use of the direct method of reporting cash flows from operations and, if so, perhaps also aligning the cash outflow line items with expenses if reported by their nature. Page 23

31 Illustrative Examples of Statement of Financial Position (Work-In-Process) Exhibit A Example NFP Statement of Financial Position June 30, 201X 201X Assets Cash and cash equivalents $ 700 Accounts receivable, net 195 Pledge receivables 1,050 Investments 2,500 Beneficial interest in split-interest agreement 800 Prepaid expenses and other assets 25 Fixed assets, net 2, Y Total Assets $ 8,070 Liabilities and Net Assets Accounts payable $ 450 Accrued expenses 190 Notes payable 1,850 Interest rate swap 295 Total Liabilities 2,785 Net Assets Without Donor Restrictions 2,615 With Donor Restrictions 2,670 Total Net Assets 5,285 Total Liabilities and Net Assets $ 8,070 $ -

32 Illustrative Examples of Statement of Cash Flows (Work-In-Process) Exhibit A Example NFP Statement of Cash flows June 30, 201X Cash flows from operating activities: Cash received from service recipients Cash received from donors Cash collected on contributions receivable Interest and dividends received Miscellaneous receipts Interest paid Cash paid to employees and suppliers Grants paid Net cash provided from/ (used by) operating activities Cash flows from investing activities: Purchase of equipment (25) Proceeds from sale of investments Purchase of investments (1,500) Net cash provided from/(used by) investing activities (1,525) Cash flows from financing activities: Proceeds from contributions restricted for: Invetment in endowment 1,000 Investment in term endowment Investment in plant Investment subject to annuity agreements Other financing activities: Interest and dividends restricted for reinvestment Payments of annuity obligations Payments on notes payable Payments on long-term debt (30) Net cash provided from/(used by) financing activities 970 Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 700 Reconcliation of net operating excess/(deficit) to net cash used by operating activities: Net operating excess/(deficit) $ 600 Adjustments to reconcile net operating excess/(deficit) to net cash used by operating activities: Depreciation 5 Increase in accounts and interest receivables Decrease in prepaid expenses Increase in contributions receivable Increase in accounts payable Net cash used by operating activities -

33 Illustrative Examples of Note Disclosures on Composition of Net Assets Exhibit B - Disclosure Alternative 1 Composition of Net Assets at End of Period Note Disclosures June 30, 201X Note X: Composition of Net Assets and Use of Donor-Restricted Net Assets The following note discloses the compositions of net assets at June 30, 201X, and the use of donorrestricted net assets for the period ending in June 30, 201X. Net Assets 201X 201Y Without donor restrictions: Available for Use $ 785 Net investment in PP&E 655 Board Designation: Capital projects 50 Operating reserves 25 Quasi-Endowment 1,100 Total net assets without donor restrictions 2,615 With donor restrictions: Purpose restrictions: Program A $ 55 Program B 123 Program C - Time restrictions: Less than 12 months month and Beyond 617 Endowment Fund 1,550 Total net assets with donor restrictions 2,670 Net assets released from donor restrictions 201X 201Y Purpose restrictions accomplished: Program A $ 110 Program B 207 Program C Time restrictions expired 1,008 Total restrictions released 1,325

34 Composition of Net Assets with Activities for the period (roll-forward) Note Disclosures June 30, 201X Exhibit B - Disclosure Alternative 2 Note X: Composition of Net Assets The following footnote is to help communicate the composition of the net assets classes at June 30, 2013 and the change in net asset by subclass for each of the classes of net assets for the year ending June Without Donor Restrictions With Donor Restrictions Available for Use Net Investment in PP&E Board Designated Capital Projects Board Designated Operating Reserve Board Designated Endowment Total Purpose Restricted A Purpose Restricted B Time Restricted Less than 12 months Time Restricted 12 months and Beyond Endowment Fund Total Operating Investing ,100 1, Financing ,225 1,225 Total ,100 2, ,550 2, Without Donor Restrictions With Donor Restrictions Available for Use Net Investment in PPE Board Designated Capital Projects Board Designated Operating Reserve Board Designated Endowment Total Purpose Restricted A Purpose Restricted B Time Restricted Less than 12 months Time Restricted 12 months and Beyond Endowment Fund Total Beginning of the year , , ,100 Operations Restricted Contribution ,000 1,500 Bequest Transferred Transfers between sub-classes (100) - Appropriation (150) (150) (50) (50) Release from restriction (110) (207) (1,008) - - (1,325) Purchase of PP&E (25) Depreciation 5 (5) Interest and dividends Payment of debt service (30) Change in fair value of investments Change in fair value of beneficial interest in split interest agreements Change in retirement benefit (35) (35) Change in fair value of interest rate swap End of the year ,100 2, ,550 2,

35 Illustrative Examples of Statement of Operations and Changes in Net Assets Exhibit C - Presentation Alternative 1 One Statement, Multiple Column Approach Example NFP Statement of Current Operations and Changes in Net Assets For the year ended June 30, 201X Current Operations Without Donor Restrictions With Donor Restrictions Revenues and supports: Fees for services $ 495 $ 495 Bequests Other contributions 425 1,500 1,925 Interest and dividends 5 * Use of restricted support for current operations 1,325 (1,325) - Total revenues and supports 2, $ 3,175 Expenses: Program activities: Program A Program B 1, Program C - Total program expenses 1, ,800 Supporting activities: Management and General Fundraising Total supporting activities expenses Total expenses 1, ,950 Gross Excess/(Deficit) before transfers $ 1,225 Other changes: - Change in the fair value of investments Change in fair value of interest rate swap Change in retirement benefit - (35) ** (35) Change in beneficial interest in split-interest agreement Total Board Designated Transfers: Investment returns appropriated from quasi-endowment 150 (150) - Bequests transferred to quasi-endowment (500) Investment returns appropriated from donor-restricted endowment 50 (50) - Total transfers to/(from) Operations: (300) 350 (50) - Net Operating measure $ 600 Non Operating Total Total Excess/(Deficit) , Changes in Net Assets 1, ,685 Net assets at the beginning of the period 1,500 2,100 3,600 Net assets at the end of the period $ 2,615 $ 2,670 $ 5,285 * Interest income and/or expense related to cash management activities included ** Requires further discussion whether any components should be presented in current operations

36 Exhibit C - Presentation Alternative 2 One-Statement, Single Column Approach Example NFP Statement of Current Operations and Changes in Net Assets For the year ended June 30, 201X Current OperatingRevenue and Support: Fees for services $ 495 Bequests 600 Other contributions 425 Interest and dividends 5 * Use of restricted support for current operations 1,325 a Total Current Operating Revenue and Support 2,850 Operating Expenses: Program activities: Program A 600 Program B 1,200 Program C - Total program expenses 1,800 Supporting activities: Management and General Fundraising Total Supporting activities expenses 150 Total Operating Expenses 1,950 Gross Operating Excess/(Deficit) before transfers 900 Board transfers to/(from) Operations: Investment returns appropriated from quasi-endowment 150 c Bequests transferred to quasi-endowment (500) d Investment returns appropriated from donor-restricted endowment 50 e Total Board transfers to/(from) Operations: (300) Net Operating Excess/(Deficit) $ 600 Non-operating items Interest and dividends 50 Change in fair value of interest rate swap 50 Change in fair value of investments 100 Change in retirement benefit (35) ** Investment returns appropriated to current operations (150) c Bequests added to quasi-endowment 500 d Total non-operating items $ 515 Increase in net asset without donor restrictions $ 1,115 Change in net assets with donor restriction Contributions 1,500 Interest and dividends 100 Investment returns appropriated to current operations (50) e Change in the fair value of investments 300 Change in beneficial interest in split-interest agreement 45 Restrictions released for current operations (1,325) a Increase in net asset with donor restrictions 570 Increase in net assets $ 1,685 Net assets at the beginning of the period 3,600 Net assets at the end of the period $ 5,285 *Interest income and/or expense related to cash management activities included ** Requires further discussion whether any components should be presented in current operations

37 Exhibit C - Presentation Alternative 3 Two-Statement Approach; Changes starting with net operating metric Example NFP Statement of Current Operations For the year ended June 30, 201X Current Operating Revenue and Support: Fees for services $ 495 Bequests 600 Other contributions 425 Interest Income 5 * Use of restricted support for current operations 1,325 a Total Current Operating Revenue and Support 2,850 Operating Expenses: Program activities: Program A 600 Program B 1,200 Program C - Total program expenses 1,800 Supporting activities: Management and General Fundraising Total supporting activities expense 150 Total Operating Expenses 1,950 Gross Operating Excess/(Deficit) before transfers 900 Transfers to/(from) Operations: Investment returns appropriated from quasi-endowment Bequests transferred to quasi-endowment Investment returns appropriated from donor-restricted endowment 150 b (500) c 50 d Total Board transfers to/(from) Operations: (300) Net Operating Excess/(Deficit) $ 600 e * Interest expense related to cash management activities included

38 Exhibit C - Presentation Alternative 3 (continued) Two-Statement Approach; Changes starting with net operating metric Statement of Changes in Net Assets For the year ended June 30, 201X Without Donor Restrictions With Donor Restrictions Net Operating Excess/(Deficit) $ 600 e $ - Contributions - 1,500 Interest and dividends Investment returns appropriated to current operations - (50) d Change in the fair value of investments Change in fair value of interest rate swap 50 - Change in beneficial interest in split-interest agreement - 45 Change in retirement benefit (35) ** - Restrictions released for current operations - (1,325) a Transfers: Investment returns appropriated to current operations (150) b - Bequests added to quasi-endowment 500 c - Changes in Net Assets 1, Net assets at the beginning of the period 1,500 2,100 Net assets at the end of the period $ 2,615 $ 2,670 ** Requires further discussion whether any components should be presented in current operations

39 Exhibit C - Presentation Alternative 4 Two-Statement Approach; Changes starting with gross operating metric Example NFP Statement of Current Operations For the year ended June 30, 201X Current Operating Revenue and Support: Fees for services $ 495 Bequests 600 Other contributions 425 Interest Income 5 * Use of restricted support for current operations 1,325 a Total Current Operating Revenue and Support 2,850 Operating Expenses: Program activities: Program A 600 Program B 1,200 Program C - Total program expenses 1,800 Supporting activities: Management and General Fundraising Total supporting activities expense 150 Total Operating Expenses 1,950 Gross Operating Excess/(Deficit) before transfers 900 Transfers to/(from) Operations: Investment returns appropriated from quasi-endowment 150 b Bequests transferred to quasi-endowment (500) c Investment returns appropriated from donor-restricted endowment 50 Total Board transfers to/(from) Operations: (300) Net Operating Excess/(Deficit) $ 600 d * Interest expense related to cash management activities included

40 Exhibit C - Presentation Alternative 4 (continued) Two-Statement Approach; Changes starting with gross operating metric Example NFP Statement of Changes in Net Assets For the year ended June 30, 201X Without Donor Restrictions With Donor Restrictions Gross Operating Excess/(Deficit) before transfers $ 900 $ - Transfers: Investment returns appropriated from quasi-endowment 150 b - Bequests transferred to quasi-endowment (500) c - Restrictions released for current operations - (1,325) a Investment returns appropriated from donor-restricted endowment 50 (50) Total transfers: (300) (1,375) Net Operating Excess/(Deficit) 600 d - Other changes: Contributions - 1,500 Interest and dividends Change in the fair value of investments Change in fair value of interest rate swap 50 - Change in beneficial interest in split-interest agreement - 45 Change in retirement benefit (35) ** - Transfers to/from operations: Investment returns appropriated from quasi-endowment (150) b - Bequests transferred to quasi-endowment 500 c - Changes in Net Assets 1, Net assets at the beginning of the period 1,500 2,100 Net assets at the end of the period $ 2,615 $ 2,670 ** Requires further discussion whether any components should be presented in current operations

41

42

43

44

45 EXHIBIT E (for Topic 3-5) Statement of Cash Flows The following illustrates the requirements of Subtopic Statements of cash flows are illustrated using both the direct and indirect methods of reporting cash flow from operating activities The direct method is as follows.

46 The indirect method is as follows.

47 May 16, 2013 Proposed Accounting Standards Update on Leases On May 16, 2013, the Financial Accounting Standards Board (FASB), jointly with the International Accounting Standards Board (IASB), issued for public comment its proposal to increase transparency and comparability among public and private companies and not-for-profit organizations that lease assets by recognizing assets and liabilities that arise from lease transactions on a lessee s balance sheet. The Boards took into account stakeholder feedback on the 2010 Exposure Draft on leases and through deliberations and numerous stakeholder meetings, panel discussions, webcasts, and in-person seminars agreed upon an approach to address the concerns that many stakeholders have with current operating lease accounting. Proposed Accounting Standards Update, Leases (Topic 842) A revision of the 2010 Proposed FASB 1 Accounting Standards Update, Leases (Topic 840), creates a new approach to lease accounting that would require assets and liabilities arising from leases to be recognized in the statement of financial position. The proposed requirements would supersede IAS 17, Leases, (and related Interpretations) in International Financial Reporting Standards (IFRS) and the requirements in Topic 840, Leases, of the FASB Accounting Standards Codification. Stakeholders are asked to review and provide comments on the proposal by September 13, Leasing is an important activity for many organizations whether public or private companies, or not-forprofit organizations. It is a means of gaining access to assets, obtaining financing, and reducing an organization s exposure to the risks of asset ownership. Many organizations lease assets such as real estate, airplanes, trucks, ships, and construction and manufacturing equipment. Because of the prevalence of leasing, it is important for users of financial statements to have a complete and understandable picture of an organization s leasing activities. The existing accounting models for leases require lessees and lessors to classify their leases as either capital leases or operating leases and to account for those leases differently. Some leases are classified as capital leases (for example, a lease of equipment for nearly all of its useful life), whereby the lessee would recognize lease assets and liabilities on the balance sheet. Other leases are classified as operating leases (for example, a lease of office space for 10 years), whereby the lessee would not recognize lease assets or lease liabilities on the balance sheet. Those models have been criticized for failing to meet the needs of users of financial statements because they do not always provide a faithful representation of leasing transactions. When assets and liabilities for leases are not recognized on the balance sheet, most users of financial statements make adjustments to the financial statements (using disclosures and other available information) to estimate the effects of leases on a lessee s financial statements. As a result, there has been a widespread request from users of financial statements and other stakeholders to change the accounting guid-

48 ance so that lessees would be required to recognize assets and liabilities arising from leases. In addition, the U.S. Securities and Exchange Commission (the SEC) issued a report on off-balance sheet activities in 2005 that recommended that changes be made to the existing lease accounting requirements to ensure greater transparency in financial reporting. A number of academic studies have made similar recommendations. The FASB and the IASB issued the 2009 Discussion Paper and the 2010 Exposure Draft on leases which contained proposals to improve the financial reporting of lease contracts. After carefully considering feedback from stakeholders on the 2010 Exposure Draft and performing a significant amount of outreach with stakeholders, the FASB and the IASB are issuing a revised exposure draft. The core principle of the proposed requirements is that an organization should recognize assets and liabilities arising from a lease. This represents an improvement over existing leases standards, which do not require lease assets and lease liabilities to be recognized by many lessees. In accordance with that principle, a lessee would recognize assets and liabilities for leases with a maximum possible term of more than 12 months. A lessee would recognize a liability to make lease payments and a right-of-use asset representing its right to use the leased asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee would depend primarily on whether the lessee is expected to consume more than an insignificant portion of the economic benefits embedded in the underlying asset. For practical purposes, this assessment would often depend on the nature of the underlying asset. For most leases of assets other than property (for example, equipment, aircrafts, cars, trucks), a lessee would do the following: Recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments Recognize and present the interest on the lease liability separately from the amortization of the rightof-use asset. For most leases of property (for example, land and/or a building or a part of a building), a lessee would do the following: Recognize a right-of-use asset and a lease liability, initially measured at the present value of lease payments Recognize a single lease cost, combining the interest on the lease liability with the amortization of the right-of-use asset, on a straight-line basis. The Boards also proposed disclosures that should enable investors and other users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. The Boards made changes to the proposals since the 2010 Exposure Draft in response to feedback from stakeholders that should reduce the 2

49 cost and complexity of the proposed guidance. Examples of decisions the Boards made during redeliberations that should reduce cost and complexity include: Short-term leases: The Boards tentatively decided that a preparer can elect not to apply the proposals to short-term leases (leases with a maximum lease term of 12 months or less). Variable lease payments (for example, payments based on a percentage of sales from leased retail space): The Boards tentatively decided that variable lease payments not based on an index or rate (for example, lease payments based on percentage of sales) should not be included in the liability. Lease renewals/optional periods: The Boards tentatively decided to raise the threshold for including optional periods in the liability. Nonpublic organizations (FASB only): The Board tentatively decided that private companies and notfor-profit organizations can elect to use a risk-free rate to discount the lease liability, and they are not required to disclose a roll-forward of the lease liability. would be inconsistent with the proposed approach to lessee accounting and would result in additional complexity in financial reporting. In addition, the Boards decided that it would be beneficial to consider lessor accounting at the same time they are developing proposals on revenue recognition. Consequently, the revised Exposure Draft proposes changes to both lessee accounting and lessor accounting. Similar to the accounting for a lessee, the accounting for a lessor would also depend primarily on the degree of consumption of the leased asset. The criteria used by lessors to distinguish between the two types of leases are the same as the criteria used by lessees. For practical purposes, this assessment would often depend on the nature of the underlying asset. For most leases of assets other than property (for example, equipment, aircrafts, cars, trucks), a lessor would do the following: Derecognize the underlying asset and recognize a right to receive lease payments (the lease receivable) and a residual asset (representing the rights the lessor retains relating to the underlying asset) Recognize the unwinding of the discount on both the lease receivable and the residual asset as interest income over the lease term Recognize any profit relating to the lease at the commencement date Eliminate the special requirements for leveraged leases. Although many of the problems associated with existing leases standards relate to the accounting for operating leases in the financial statements of lessees, retaining the existing lease accounting models for lessors 3

50 For most leases of property (for example, land and/or a building or a part of a building), a lessor would apply an approach similar to existing operating lease accounting in which the lessor would do the following: Continue to recognize the underlying asset Recognize lease income over the lease term, typically on a straightline basis. The FASB and the IASB have developed a set of converged proposals for accounting for leases. The Boards believe their existing standards for leases need improvement and have worked in a coordinated fashion with their staff to develop a converged, improved solution. The revised exposure drafts for the FASB and IASB are nearly identical. The differences between the two proposals are primarily related to existing differences between U.S. generally accepted accounting principles (GAAP) and IFRS and decisions the FASB made related to nonpublic entities. U.S. GAAP would permit a policy election to use a risk-free rate to discount the liability. U.S. GAAP would permit an exemption from the liability balance reconciliation disclosure. The IASB will consider whether, and if so how, to incorporate this requirement into their IFRS for Small and Medium-sized Entities at a later date. The Boards will set the effective date for the proposed requirements when they consider interested parties feedback on this revised Exposure Draft. The Boards are aware that the proposals affect almost every reporting organization. Some of those organizations have many leases, and the proposed changes to accounting for leases are significant. The Boards will consider these and other relevant factors when setting the effective date. Stakeholders are encouraged to review and provide feedback on the proposed Update by September 13, The Boards are planning an extensive outreach effort (including roundtables, field work, webcasts, etc.) to solicit input from stakeholders and will consider the comments received on its proposal prior to finalizing the standard. Further information, including the revised Exposure Draft and press release, is available on the FASB website at FASB In Focus has been prepared as a summary of the Accounting Standards Update. Official positions of the FASB are arrived at only after extensive due process and deliberation Merritt 7, PO Box 5116 Norwalk, CT T: F:

51 ATTACHMENT #4 Revised Exposure Draft Leases NAC Presentation September 9, 2013 Lisa Muehlbauer, Project Research Associate Scott Muir, Practice Fellow Danielle Zeyher, Project Manager This presentation has been prepared to help stakeholders understand the current status of the leases project of the FASB and the IASB. The views expressed in this presentation are those of the presenters. Official positions of the FASB and the IASB are reached only after extensive due process and deliberations. 1

52 Why a Leases Project? Lessee - Most lease assets and liabilities are off-balance sheet - Limited information about operating leases Lessor - Lack of transparency about residual values - Consistency with lessee proposal and revenue recognition proposal $1.25 trillion of off-balance sheet operating lease commitments for SEC registrants * * Estimate according to the 2005 SEC report on off-balance sheet activities 2

53 How the Proposals are an Improvement 3

54 Proposed Right-of-Use Model A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration 4

55 Scope of Leases Proposals Lease contracts in the scope of proposals involve An identified asset The right to control the use during the lease term That is explicitly or implicitly specified With no substantive right to substitute the asset Decision-making authority over the use of the asset The right to receive substantially all benefits from the use of the asset 5

56 Dual Approach There is a wide spectrum of lease transactions with different economics Start of lease End of lease Most equipment/ vehicle leases (Type A) Asset consumption more than insignificant Most real estate leases (Type B) Asset consumption not more than insignificant 6

57 Lease Classification Test Leases of equipment/vehicles are Type A unless Leases of real estate are Type B unless Lease term is insignificant relative to total economic life of asset, or Present value of lease payments is insignificant relative to fair value of asset Lease term is major part of remaining economic life of asset, or Present value of lease payments is substantially all of fair value of asset 7

58 Lessee Accounting Overview Balance Sheet Income Statement Cash Flow Statement Type A Most leases of equipment/ vehicles Right-of-use asset Lease liability Amortization expense Interest expense Cash paid for principal and interest payments Type B Most leases of real estate Right-of-use asset Lease liability Single lease expense on a straight-line basis Cash paid for lease payments 8

59 Lessee Disclosures Qualitative Description of leases Terms of: - variable lease payments - extension/termination options - residual value guarantees Restrictions and covenants Information about leases not yet commenced Quantitative Maturity analysis of undiscounted cash flows for each of first 5 years plus total thereafter Reconciliation of lease liability 1 Expense relating to variable lease payments Reconciliation of right-ofuse asset by asset class (IASB only) Judgments & Risks Nature and extent of risks arising from leases Significant assumptions and judgments 1 FASB only: Nonpublic entity may elect not to disclose 9

60 Lessor Accounting Overview Balance Sheet Income Statement Cash Flow Statement Type A Most leases of equipment/ vehicles Lease receivable Residual asset Interest income and any profit on the lease Cash received for lease payments Type B Most leases of real estate Continue to recognize underlying asset Lease income, typically on a straight-line basis Cash received for lease payments 10

61 Lessor Disclosures Qualitative Description of leases Quantitative Reconciliations of lease receivable and residual asset Table of lease income Judgments & Risks Nature and extent of risks arising from leases Terms of: - variable lease payments - extension/termination options - purchase options Maturity analysis of undiscounted cash flows for each of first 5 years plus total thereafter Carrying amount of residual assets covered by residual value guarantees Significant assumptions and judgment Risk management for residual assets 11

62 Transition 12

63 Reducing Cost and Complexity in Response to Feedback on the 2010 ED Short-term leases Option to exclude leases with a maximum term of 12 months or less Variable lease payments Excluded if payments are not linked to an index or a rate Renewal options Excluded unless significant economic incentive to exercise the option FASB only: Nonpublic entity reliefs 13

64 Nonpublic Entity Reliefs Option to use a risk-free rate to discount the lease liability Nonpublic entity not required to disclose a reconciliation of the lease liability Effective date: TBD - Board is likely to consider a one year extension of the effective date for nonpublic 14

65 Outreach Efforts as of August 26, 2013 Users - Approximately 30 meetings with investors, analysts, and user groups around the world Approximately 200 people Includes buy-side equity, buy-side debt, sell-side, and accounting analysts Preparers - Approximately 25 meetings with lessees and lessors across the US and Europe Approximately 100 lessees and 40 lessors Regulators, auditors, and standards setters - 7 meetings with regulators, auditors, and other standards setters across the world Approximately 150 people Significant additional input expected from comment letters, roundtables, and fieldwork 15

66 Feedback What Users Generally Support Users agree that lease contracts create assets and liabilities Users also agree that lease assets and liabilities should be recognized on the balance sheet but some do not agree with the measurement Most, but not all, users think there are economic differences between leases of real estate and equipment - Users generally agree with how leases would be presented in the income statements of the industries they follow Most users of financial statements with significant equipment leases support recognition of interest and amortization Most, but not all, users of financial statements with significant real estate leases support a straight-line expense Nearly all users think that today s disclosures about operating leases are insufficient - Nearly all users currently make adjustments for leases based on limited information 16

67 Feedback What Users are Concerned About Most users want specific additional disclosures, including total annual lease expense Some users are concerned with disruption to trend analyses and possible changes to their models Some users adjust balance sheets for leases using a multiple of rent or lease expense for certain analyses because the assets are needed on an ongoing basis, regardless of contractual lease term - However, most think contractual lease commitments still provide useful information Some users prefer presentation of all cash flows related to lease expense in operating activities 17

68 Next Steps Revised ED- May 2013; Comment period ends- September 13, 2013 Outreach- May through October 2013 Redeliberationsbeginning Q Final standard and effective date- TBD 18

69 Questions or Comments? 19

70 ATTACHMENT #5 RECENT TRENDS, CONCERNS, AND OBSERVATIONS (XBRL) Not-for-Profit Advisory Committee September 9 and 10, 2013 FAF/FASB XBRL US GAAP Financial Reporting Taxonomy Role 1. In a 2010 Memorandum of Understanding with the SEC, the Financial Accounting Foundation (FAF) and the Financial Accounting Standards Board (FASB) assumed ongoing development and maintenance responsibilities for the US GAAP Financial Reporting Taxonomy (UGT), which was originally developed by XBRL US, Inc. under contract to the U.S. Securities and Exchange Commission (SEC). In 2009, the SEC issued rules requiring public companies and foreign private issuers that prepare their financial statements in accordance with US GAAP to phase in use of the UGT. Under these rules, companies will tag and submit their financial statements and related notes to the SEC using the UGT. 2. A key objective for moving the UGT development and maintenance responsibilities to the FAF and the FASB is to achieve greater integration with the FASB s standard setting, codification, and related processes. FASB cross-team efforts are furthering this outcome. 3. The FAF/FASB activities are focused on updating the taxonomy for changes in US GAAP, identifying common reporting practices in filer taxonomy extensions, and other technical enhancements. The Taxonomy team works closely with the staff of the SEC, the staff of the International Accounting Standards Board (IASB), XBRL US, Inc., investors, issuers, accounting firms, and other stakeholders to develop updates that are of the highest quality. About XBRL 4. XBRL, or extensible Business Reporting Language, is an XML standard for tagging business and financial reports to increase the transparency and accessibility of business information by using a uniform format. 5. The US GAAP Financial Reporting Taxonomy is a list of computer-readable tags in XBRL that allows companies to label precisely the thousands of pieces of financial data that are included in typical long-form financial statements and related footnote disclosures. The tags allow computers to automatically search for and Note: These materials are provided to facilitate understanding of the issues to be addressed at the September 9 and 10, 2013 Not-for-Profit Advisory Committee meeting. These materials are presented for discussion purposes only; they are not intended to reflect the views of the FASB or its staff. Official positions of the FASB are determined only after extensive due process and deliberations

71 assemble data so those data can be readily accessed and analyzed by investors, analysts, journalists, and the SEC staff. 6. The SEC Rule Interactive Data to Improve Financial Reporting requires domestic and foreign companies using US GAAP and, eventually, foreign private issuers using International Financial Reporting Standards (IFRS) to provide their financial statements in the XBRL format as an exhibit to their periodic and current reports and registration statements, as well as to transition reports needed to be filed as a result of a change in fiscal year. Filers required to comply are to be phased-in over 3 years, in 2 stages, beginning with a periodic report on Form 10-Q, Form 20-F or Form 40-F (as applicable) containing financial statements for a fiscal period ending on or after June 15, The first stage for a filer requires XBRL tagging for the filer s complete financial statements and any required financial statement schedules, although detail tagging of the footnotes and schedules are not required until the second year. In the second year, the filer must also include block tagging for each significant accounting policy and each table within each footnote. Additionally, within each footnote, each amount (i.e., monetary value, percentage, and number) must be separately tagged. This last requirement is commonly referred to as detail tagging. Use of XBRL in the NFP Sector 8. The following article was published in the Journal of Accountancy provides an overview of the Maryland Association of CPAs efforts in this area Page 2

72 ATTACHMENT #6 Private Company Activities & NFPs September 9 and 10, 2013 Not-For-Profit Advisory Committee Meeting The views expressed in this presentation are those of the FASB staff and are intended for discussion purposes only; it is not intended to reflect the views of the FASB. Official positions of the FASB are determined only after extensive due process and deliberations. 1

73 Agenda Issue No A, Accounting for Identifiable Intangible Assets in a Business Combination Issue No B, Accounting for Goodwill Subsequent to a Business Combination Issue No , Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps Definition of a Public Business Entity 2

74 Issues No A and No B - Background Feedback from private company constituents: Identifiable intangible assets and goodwill, including related amortization and impairment charges, respectively, often are disregarded by users. The relevance of separately recognized intangible assets diminishes in periods subsequent to a business combination because the amortized carrying amounts of the intangible assets no longer represent their fair values. Goodwill impairments often do not provide timely information about the performance of a private company. The initial valuation of identifiable intangible assets and subsequent impairment tests of goodwill are too costly and complex. 3

75 Issues No A and No B - Comparison of Current US GAAP to Proposal Current US GAAP Recognize intangibles separately from goodwill in a business combination if: - Contractual-legal OR - Separable Proposed Alternatives Recognize intangibles separately from goodwill in a business combination if: - Contractual with noncancelable terms OR - Legal Do not amortize goodwill Goodwill impairment test - By reporting unit - Two-step test Amortize goodwill Goodwill impairment test - At the entity level - One-step test 4

76 Issues No A and No B - What does this mean? Fewer intangible assets would be recognized. Examples of intangible assets that would no longer be recognized include: - Customer lists and donor lists - Customer relationships not evidenced by noncancelable contract terms - Unregistered trade secrets, processes, or recipes - Unpatented technology Goodwill balances initially would be higher (but would be lower over time as goodwill is amortized). 5

77 Issues No A and No B - Questions? Do you think that the alternatives would reduce overall costs and complexity for preparers and still provide relevant and decision-useful information to users of not-for-profit financial statements? How do intangible assets and the related amortization affect a user s analysis of not-forprofit financial statements? Do goodwill and goodwill impairment charges affect a user s analysis of not-for-profit entity financial statements? Are there any significant types of intangible assets currently recognized by not-for-profit entities (other than those listed on slide 5) that would not be recognized under the proposals? Do you think the Board should expand the scope of the proposed accounting alternatives to not-for-profit entities as currently proposed? If not, what changes do you believe the Board should consider? 6

78 Issue No Background Feedback from private company constituents: Preparers and users question relevance of current accounting guidance for receive-variable, pay-fixed interest rate swaps when substance of arrangement is to convert variable-rate debt to fixed-rate debt Preparers and users have voiced concerns about the volatility in the income statement from the changes in the fair value of an interest rate swap in absence of hedge accounting Preparers face difficulty qualifying for hedge accounting if outside assistance is not received 7

79 Issue No Proposal vs. Current US GAAP for Healthcare NFPs Financial statement impact of interest rate swap: Within the Performance Indicator No hedge accounting Volatility in interest expense as a result of changes in FV Current GAAP Hedge accounting Interest expense approximates that of fixed rate debt Combined instruments method Interest expense approximates that of fixed rate debt Proposal Simplified hedge accounting Interest expense approximates that of fixed rate debt Statement of Financial Position Asset or liability at fair value Asset or liability at fair value Only disclosure of settlement value Asset or liability at settlement value (or FV) Outside of the Performance Indicator No impact Includes changes in fair value of effective portion of hedge No impact Includes changes in settlement value (or FV) of the swap 8

80 Issue No Proposal vs. Current US GAAP for Other NFPs Financial statement impact of interest rate swap: Current GAAP No hedge accounting 1 Proposal Combined instruments method Statement of Activities Changes in Unrestricted Net Assets Volatility in interest expense as a result of changes in FV Interest expense approximates that of fixed rate debt Statement of Financial Position Asset or liability at fair value Only disclosure of settlement value (or FV) 1 Hedge accounting is not applicable to NFP organizations that aren t within the scope of Topic 954 as those organizations lack a Performance Indicator. This might change in the future if the Board were to require an Operating Metric for such NFPs. 9

81 Issue No Questions? Healthcare NFPs - Do you think the Board should expand the scope of the proposed accounting alternatives (combined instruments and/or simplified hedge) to such NFP entities as currently proposed? - If not, what changes do you believe the Board should consider to make the accounting alternatives appropriate for healthcare NFPs? Other NFPs - Do you think the Board should expand the scope of the proposed combined instruments alternative to NFPs as currently proposed? If not, what changes would you make? - In addition to or instead of the combined instruments alternative, do you think that these NFPs should be provided an alternative to record receive-variable, pay-fixed interest rate swaps at settlement value (rather than fair value)? Should criteria similar to those in the simplified hedge accounting alternative need to be met to record such swaps at settlement value? 10

82 Definition of a Public Business Entity Objectives Clarify organizations within the scope of private company decisionmaking framework Amend the master glossary to include one definition of a public business entity for use in U.S. GAAP. The Board also will evaluate whether a particular accounting or reporting alternative that is permitted to be applied by a public business entity should be extended to a public business entity, an NFP, or an employee benefit plan. 11

83 Public Business Entity Definition A business entity that meets any one of the following criteria: It is required by the U.S. SEC to file/furnish financial statements, or does file or furnish financial statements, with the U.S. SEC (including entities whose financial statements or financial information are required to be or are included in a filing). It is required by the Securities Exchange Act of 1934, as amended, or rules and regulations promulgated thereunder, to file/furnish financial statements with a regulatory agency. It is required to file/furnish financial statements with a regulatory agency for purposes of issuing securities to be traded in a public market. 12

84 Public Business Entity Definition A business entity that meets any one of the following criteria: It has (or is a conduit bond obligor for) unrestricted securities that are traded or can be traded on an exchange or an over-the-counter market. Its securities are unrestricted, and it is required to provide U.S. GAAP financial statements to be made publicly available on a periodic basis pursuant to a legal or regulatory requirement. This excludes a not-for-profit entity or an employee benefit plan within the scope of Topics 960 through 965 on plan accounting. 13

85 Definition of a Public Business Entity Proposed Approach for NFPs Current US GAAP Distinctions have typically been made on the basis of whether an NFP has public debt securities that it is obligated for (including conduit debt). Generally, most NFPs have received the same alternatives that have been available to nonpublic business enterprises. Proposed Approach No public versus nonpublic distinction between NFPs. The Board would consider factors such as user needs and NFP resources, on a standardby-standard basis, when determining whether all, none, or only some NFPs will be eligible to apply alternatives within U.S. GAAP. 14

86 Definition of a Public Business Entity Next steps Issuance of an Accounting Standards Update in August 2013 Would not affect existing requirements. Comment period ending September 20,