August 19, Technical Director Financial Accounting Standards Board 401 Merritt 7 P.O. Box 5116 Norwalk, CT

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1 August 19, 2015 Technical Director 401 Merritt 7 P.O. Box 5116 Norwalk, CT FILE REFERENCE NO Proposed Accounting Standards Update - Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statement of Not-for-Profit Entities Sikich LLP (Sikich) would like to thank the (FASB) for allowing the opportunity to comment on the proposed Accounting Standards Update of Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statement of Not-for-Profit Entities. After thoughtful consideration and collaboration Sikich submits the following comments for the FASB s consideration. Sikich is pleased with the FASB and the Not-for-Profit Advisory Committee s (NAC) desire and focus on improving the information provided to donors, creditors, and other users of the financial statements. Additionally, like the FASB and NAC, Sikich has found the existing standards surrounding financial reporting to be sound, but worthy of review and moderate improvement. As such, Sikich formulated our comments in direct response to the main provisions of the proposed Accounting Standard Update (ASU). 1. Present on the face of the statement of financial position amounts of two classes of net assets (with donor restriction and without donor restriction) rather than three (unrestricted, temporarily restricted, and permanently restricted). Present on the face of the statement of activities the amount of the change in each of the two classes of net assets rather than the currently required three. Sikich is not convinced the reduction from three net asset categories to two will have the decrease to complexity and increase to consistency so desired by the FASB. While the face of the statements may become marginally less complex, the proposal stands to either have no impact or increase the complexity of the notes to the financial statements. In relation to net assets, we believe the greatest degree of complexity and inconsistency is found in the notes to the statements which the proposed changes expand with very little relief to current requirements. True impact in this area will only be obtained by adding clarity to the current standards regarding consistent recording and disclosure of donor imposed restrictions.

2 August 19, 2015 Page 2 2. Present on the face of the statement of activities two intermediate measures of operations drawing distinction between inflows and outflows directed at a not-for-profit carrying out its purpose for existence. Sikich believes the addition of the two intermediate measures is in direct contradiction to the efforts of the FASB to make the financial statements more useful and less complex to the user of the information for the following reasons Given the diversity within the not-for-profit industry (charities, foundations, private colleges and universities, nongovernmental health care providers, cultural institutions, religious organizations, trade association, and others) the lack of a clear definition of intermediate measures will cause great inconsistency within the industry. The introduction of the intermediate measures creates a stark difference when compared to current for-profit reporting. As a result, users that are more familiar with for-profit statements will be confused and not-for-profit organizations that compare themselves to for-profit entities (primarily health care organizations) will be required to conduct significant reconciliation and make significant assumptions. Given these considerations, we recommend the FASB consider creating a performance indicator that has clear guidance on what items would be recorded outside of the measure. This measure would be similar to that which is currently required by NFP health care organizations. We additionally recommend return on designated or restricted investments that is appropriated for current operations be included within the measure. 3. Requiring the statement of cash flows be presented using the direct method and re-categorizing elements contained with the statement. We do not believe sufficient evidence exists to support the assertion the direct method of reporting cash flows is easier to understand, or in any way more useful. For that reason, we disagree with the current proposed change to require the direct method. Additionally, moving elements within the cash flow statement will create inconsistency when comparing how managers budget and oversee an organization to the financial statements provided to users, will create inconsistency when compared to for-profit counterparts, and will cause additional confusion and reconciliation when attempting to obtain an organization s true operating cash flow (removing capital transactions, adding financing costs and investment return). We recommend organizations be given the option of utilizing the direct or indirect method when completing the cash flow statement and movement of elements within the cash flow statement be considered congruently with for-profit entities. 4. Providing enhanced disclosures surrounding the following: a. Governing board designations, appropriations, and transfers that result in the addition or removal of self-imposed limits on the use of resources without donor-imposed restriction. We agree with this additional disclosure requirement.

3 August 19, 2015 Page 3 b. Composition of net assets with donor restriction We agree with this additional disclosure requirement. c. Management of liquidity and information about the financial assets available to meet near-term demands for cash. We disagree with the addition of this disclosure requirement. See question 3 below. d. Showing expenses by both function and nature as a separate statement, on the face of the financial statement, or within the notes. We agree with this additional statement, note, or disclosure requirement. See question 13 below. e. Methods used to allocate costs among program and support functions. We disagree with this required disclosure. The usefulness of this information is limited and the quality and depth of the disclosure will create inconsistency. Additionally, organizations that have robust allocation plans are often governed by external requirements. f. Underwater endowment funds: aggregate amount by which funds are underwater, the original gift amount, and governing board policies or decisions to spend or not to spend from underwater funds. We agree with this additional disclosure requirement. 5. Using the placed-in-service approach for reporting expirations of restrictions on gifts to be used to acquire or construct a long-lived asset, thus eliminating the option to release the donorimposed restriction over the estimated useful life of the acquired asset. To promote comparability, we agree with eliminating one of the two methods of reporting the expiration of donor restrictions. We believe recognition as capital assets are acquired and placedin-service is consistent with the donor intent. 6. Report investment income net of external and direct internal investment expense. We agree requiring investment income to be reported net of external and direct internal investment expenses will create comparability and save costs associated with determining, recording, and disclosing such amounts. We also believe the net investment return is a more meaningful measure to users of the financial statements.

4 August 19, 2015 Page 4 SPECIFIC QUESTIONS AND RESPONSES: Question 1: Do you agree that the disclosures about the nature of donor-imposed restrictions and their effects on liquidity in notes to financial statements would help ensure that necessary information is not lost by combining the temporarily and permanently restricted classes of net assets into one donor restricted category for purposes of presentation in the statement of financial position (balance sheet)? If not, please identify the information lost and why it is necessary. (See paragraphs BC22 BC23 and BC27 BC32.) Sikich does not believe the loss of liquidity information from combining temporarily and permanently restricted net assets into one category can be offset by additional disclosure in the notes to the financial statements. First, removing this liquidity information from the face of the statements reduces its prominence to the user of the financial statements and allows for additional assumption and presumption that is not currently present. Users can view the liquidity position of the organization as overly optimistically or pessimistically depending on assumption relating to the make up of the with donor imposed restrictions and when, if ever, it will be available for current operations. Second, liquidity disclosure in the notes to the financial statements adds length, complexity and inconsistency to the financial statement. Finally, combining these categories will require additional changes to the statement of financial position to off-set the loss of information. Additional break-out of assets limited as to use and assets that do not contribute to liquidity (capital assets) may be necessary. Question 2: Do you agree that the aggregated amount by which endowment funds are underwater should be classified within net assets with donor restrictions rather than net assets without donor restrictions? If not, why? (See paragraph BC24.) Sikich agrees endowment funds under water and unappropriated donor restricted earnings should be maintained in a restricted net asset category. Question 3: Do you agree that disclosures describing the NFP s policy on spending from underwater endowment funds, together with the aggregated original gift amount or the amount that is required to be maintained by donor or by law, would provide creditors, donors, and other users with information useful in assessing an NFP s liquidity and potential constraints on its ability to provide services without imposing undue costs? Why or why not? (See paragraph BC32.) Sikich agrees additional disclosure surrounding the fair value of underwater endowment funds and the intentions surrounding future spending from those funds would be useful to the user of the financial statements. We believe the reference to historical dollar value is an outdated concept and should be removed from the standard and any future disclosure. Question 4: Do you agree that providing information in notes to financial statements about financial assets and liabilities and limits on the use of those assets is an effective way to clearly communicate information useful in assessing an NFP s liquidity and how it manages liquidity without imposing undue costs? If not, why, and what alternative(s) would you suggest? (See paragraphs BC27 BC31.)

5 August 19, 2015 Page 5 Sikich does not believe providing additional disclosure surrounding limits on the use of assets and the timing of obligations is an effective way to assess liquidity. We believe the disclosure requirements to be overly complex and have concerns regarding the cost to implement, maintain, update and audit. We also question the value of such a disclosure as the disclosure would likely be outdated by the time the financial statements were available to the user. We believe requiring a classified statement of financial position and maintaining prominence of the restrictions placed on net assets is a more effective measure of liquidity. Question 5: Most business-oriented health care NFPs are required to present a classified balance sheet. Continuing care retirement communities and other NFPs may choose to sequence their assets and liabilities according to their nearness to cash as an alternative to using a classified balance sheet. As a result of the proposed requirement to provide enhanced disclosures of information useful in assessing liquidity, would there no longer be a need to hold business-oriented health care NFPs to the more stringent standard for their balance sheets? If not, why? To maintain consistent reporting requirements with its for-profit counterparts, Sikich believes businessorientated health care NFP should continue to produce classified statements of financial position. Further, we believe the FASB should consider requiring classified statements of financial position for all NFPs in lieu of additional liquidity disclosure. Question 6: Do you agree that requiring intermediate measures of operations would provide users of NFP financial statements with more relevant and comparable information for purposes of (a) assessing whether the activities of a period have drawn upon, or have contributed to, past or future periods and (b) understanding the relationship of resources used in operations of a period to resource inflows available to fund those operations? Do you also agree that classifying and aggregating information in that way would not require major system changes? If not, why? (See paragraphs BC38 BC47.) We disagree that an intermediate measure would provide users of NFP financial statements more relevant and comparable information. Due to diversity within the not-for-profit industry and the vast difference in operating activities, we believe the introduction of a performance measure would decrease comparability, increase complexity, and increase confusion. Given these considerations, we recommend the FASB consider creating a performance indicator that has clear guidance on what items would be recorded outside of the measure. This measure would be similar to that which is currently required by business-oriented NFP health care organizations. We also understand the FASB has a project in place in relation to the income statement for all entities and believe discussion and changes for the statement of activities should be considered in that discussion and changes made to maintain or improve consistency to for-profit entities. Question 7: Do you agree that intermediate measures of operations should include only those (a) resource inflows and outflows that are from or directed at carrying out an NFP s purpose for existence and (b) resources that are available for current-period operating activities before and after the effects of internal governing board appropriations, designations, and similar actions? If not, why? (See paragraphs BC48 BC74.)

6 August 19, 2015 Page 6 Sikich believes the implementation of a performance indicator should be in line with the current requirement for business-orientated NFP health care entities by defining what should be excluded from such an indicator. The notions of mission and availability are far too subjective and will create inconsistency and get further away from comparable financial information. Additionally, defining what should be excluded from the indicator allows an NFP the flexibility that is currently awarded to for-profit entities and necessary given the diversity within the NFP industry. Question 8: Do you agree that all internal transfers (governing board appropriations, designations, and similar actions that make resources unavailable or available for operations of the current period) should be reflected on the statement of activities immediately after an intermediate measure of operations before transfers and immediately before an intermediate measure of operations after transfers? If not all internal transfers, on what basis would you distinguish between those transfers that should and should not be reflected and how would you make that distinction operable? Do you also agree that reflecting those internal decisions (or lack of them) on the face of the statement rather than in notes will help an NFP communicate how its operations are managed without adding undue complexities? Why or why not? (See paragraphs BC46 BC47 and BC67 BC74.) As noted above, we disagree with the notion of a second performance measure and do not believe transfers should be presented on the face of the financial statements. We believe the presence of transfers on the face of the financial statement adds unnecessary complexity and confusion without accomplishing the objective of comparability and consistency. Further, the addition of a second performance measure including transfers causes NFP financial statements to be significantly different from for-profit reporting. Question 9: Do you agree that to promote comparability, the Board should eliminate one of the two optional methods for reporting expirations of donor restrictions on gifts of cash or other assets to be used to acquire or construct long-lived assets? Do you also agree that requiring the expiration of those donor restrictions on the basis of the placed-in-service approach rather than the current option to present a release from restriction over the useful life of the acquired long-lived asset is most consistent with the underlying notions of the intermediate measures of operations? If not, why? (See paragraph BC66.) To promote comparability, we agree with eliminating one of the two methods of reporting the expiration of donor restrictions. We believe recognition as capital assets are acquired and placed-in-service is consistent with the donor intent. Question 10: Do you agree that gifts of, or for, property, plant, and equipment (long-lived assets) should be considered operating revenue and support when received (or when placed in service in the case of a gift to acquire a long-lived asset)? Do you also agree that because the long-lived asset is not immediately fully available to be utilized in the current period, an NFP should be required to present a transfer from operating activities to other activities for the amount of the gifted asset or portion of the asset funded by restricted gifts? If not, why? (See paragraphs BC72 BC74.) Sikich does not agree that gifts of, or for, property, plant and equipment should be considered operating revenue and support when received (i.e. placed in service) unless there is a board approved plan to liquidate the asset and utilize the proceeds in operations. These gifts more closely resemble investing

7 August 19, 2015 Page 7 activities that enable the organization to carry out its operating activities. The presence of these gifts would create complexity (unnecessary movement between operating and non-operating) and comparability from one reporting year to the next within little change in actual operating results. Question 11: Do you agree that the addition of required intermediate measures of operations for all NFPs would make unnecessary the need for NFP business-oriented health care entities to also present their currently required performance indicator? Why or why not? (See paragraph BC99.) Sikich believes the required performance indicator for business-oriented NFP health care entities should remain unchanged as it presents a level of comparability amongst organizations in the same industry and is useful in assessing overall performance. We believe this type of indicator should be used as an example for all NFPs. Question 12: Do you think the flexibility currently allowed by GAAP to present a statement of activities as either a single statement or two articulating statements and to use either a single-column or a multicolumn format should be retained or narrowed? If narrowed, why and in what ways? Sikich believes continuing to allow flexibility for not-for-profit organizations to present the statement of activities as either a single statement or two articulating statements makes the statement more reflective of the organization s industry, more meaningful to the user, and more consistent with internal budgeting and reporting. Question 13: Do you agree that reporting operating expenses by both their function and nature together with an analysis of all expenses (other than netted investment expenses) provides relevant and useful information in assessing how an NFP uses its resources and, thus, should be required? Why or why not? (See paragraphs BC87 BC93.) Sikich agrees with expanding the requirement to present expenses by both function and nature beyond just voluntary health and welfare organizations. However, we do not believe this should be required for all NFPs. In particular, we believe any organization that derives its primary source of revenue from voluntary contributions should be required to present its expenses by nature and function on the face of the statement of activities, within a separate statement, or in the notes. Question 14: Do you agree that requiring investment income to be reported net of external and direct internal investment expenses will increase comparability and avoid imposing undue costs to obtain information about all investment fees (for example, embedded fees of hedge funds, mutual funds, and funds of funds)? If not, why? (See paragraph BC100.) We agree requiring investment income to be reported net of external and direct internal investment expenses will increase comparability and avoid imposing undue costs to obtain the information. Question 15: Do you agree that the disclosure of the amount of all investment expenses is unnecessary but that disclosure of internal salaries and benefits that are netted against investment return is of sufficient relevance, not too costly to obtain, and thus should be required? Why or why not? (See paragraph BC101.)

8 August 19, 2015 Page 8 Sikich agrees the disclosure of the amount of all investment expenses in unnecessary. We also believe the disclosure of internal investment costs netted against investment income is unnecessary as it bears little to no relevance to the user of the financial statements. Question 16: Do you agree that interest expense, whether incurred on short-term or long-term borrowing, and fees and related expenses incurred for access to lines of credit and similar cash management and treasury activities are not directed at carrying out an NFP s purposes and, thus, should not be classified as operating activities? If not, why? (See paragraphs BC59 BC60.) Sikich does not agree that interest expense, fees and related expenses incurred for access to lines of credit and similar cash management and treasury activities should be reported outside operating activities. For many organizations, treasury management has a dynamic impact on operations. Additionally, this change would further bifurcate not-for-profit financial statements from for-profit financial statements. Question 17: Do you agree with the following implementation guidance: a. Equity transfers between NFPs that are under common control and are eliminated in a parent entity s consolidated financial statements and equity transactions between financially interrelated entities should be presented within operating activities unless they are not available for current-period use in carrying out the purpose for the reporting entity s existence? If not, why? (See paragraph BC62(a).) b. Immediate write-offs of goodwill generally should be presented within operating activities? If not, why? (See paragraph BC62(b).) c. Immediate write-offs of acquisitions of non-capitalized items for a permanent collection should be presented within the operating activity section if acquired with net assets without donor restrictions? If not, why? (See paragraph BC62(c).) (a.) We do not agree equity transfers between NFPs that are under common control and are eliminated in a parent entity s consolidated financial statements and equity transactions between financially interrelated entities should be presented within operating activities. We believe these transaction are capital in nature and therefore should be recorded outside of operations. (b.) We agree the immediate write-off of goodwill should be reported within operating activities. (c.) We do not agree that the immediate write-off of acquisitions of non-capitalized items for a permanent collection should be presented within the operating activity section. Collections, by definition, are assets which cannot be liquidated and made available for operations. Question 18: Do you agree that the direct method of presenting operating cash flows is more understandable and useful than the indirect method? Do you also agree that the expected benefits of presenting operating cash flows in that way would justify the one-time and ongoing costs that may be incurred to implement that method of reporting? If not, please explain why and suggest an alternative that might increase the benefits or reduce any operational concerns or costs. (See paragraphs BC75 BC80.)

9 August 19, 2015 Page 9 Sikich believes changes to cash flow reporting should be discussed congruently with for-profit entities. Any change made to the not-for-profit reporting requirements absent a change to the for-profit reporting model would cause greater diversity and confusion and the costs would certainly outweigh the benefits. Additionally, we do not believe sufficient evidence exists to support the assertion the direct method of reporting cash flows is easier to understand, or in any way more useful. For that reason, we disagree with the current proposed change to require the direct method. We believe flexibility should be allowed in reporting the direct or indirect method depending on the format of the financial statements and users of the financial information. Question 19: Does the indirect method s reconciliation of cash flows from operations to the total change in net assets provide any particular type of necessary information that would be lost if, as proposed, that method is no longer required? If so, please identify the potentially omitted information and explain why it is useful and whether it should be provided through disclosure rather than requiring use of the indirect method. If you suggest that requiring the indirect method is necessary, would you require that the amount for cash flows from operations be reconciled to the amount of the (a) change in net assets, (b) change in net assets without donor restrictions, or (c) proposed intermediate measure of operations before or after transfers? Why? (See paragraphs BC75 BC80.) If the FASB continues with the proposed ASU to require the direct method of cash flows, we believe a reconciliation to the indirect method should continue to be required to avoid the unnecessary loss of information. Question 20: Do you agree that although operating activities is defined differently for the statement of cash flows than for the statement of activities, more closely aligning line items presented in the statement of cash flows with the proposed operating classification for the statement of activities will increase understandability even though that reporting would be somewhat different from current requirements for business entities? If you believe that operating items in the two financial statements would not be sufficiently aligned, please indicate how their alignment might be further improved. (See paragraphs BC81 BC86.) Moving elements within the cash flow statement will create inconsistency when comparing how managers budget and oversee an organization to the financial statements provided to users, will create inconsistency when compared to for-profit counterparts, and will cause additional confusion and reconciliation when attempting to obtain an organization s true operating cash flow (removing capital transactions, adding financing costs and investment return). We recommend movement of elements within the cash flow statement be considered congruently with for-profit entities. Question 21: Are there any particular proposed amendments in this Update that would require a longer period to implement than other amendments? If so, please explain. Sikich believes the implementation period should consider a number of factors including, but not limited to, the following: When presenting comparative financial statements (or even three years), organizations will need to implement the appropriate process and controls to capture the additional information. Development of a liquidity policy and capturing the information for the intended disclosure.

10 August 19, 2015 Page 10 Interpretation of mission and availability. Potential debt covenant impact. Development and implementation of the necessary policies, procedures and controls to capture the information necessary to present the direct cash flow method. Question 22: Are there reasons for any particular size or type of NFP to need a longer time frame to implement the proposed amendments in this Update? If so, please explain. We believe all not-for-profits should implement the proposed amendments at the same time. We appreciate the opportunity to comment on this Exposure Draft and the efforts that clearly went into drafting its contents. We also appreciate the diligence with which the FASB reads all comment letters and we hope you will consider our concerns and recommendations. Sincerely, Sikich LLP