August 20, Financial Accounting Standards Board Technical Director, File Reference Merritt 7 PO Box 5116 Norwalk, CT

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1 August 20, 2015 Financial Accounting Standards Board Technical Director, File Reference Merritt 7 PO Box 5116 Norwalk, CT Submitted by to Director@fasb.org RE: Exposure Draft: Not-for-Profit (NFP) Entities (Topic 958) Presentation of Financial Statements of Not-for-Profit Entities Dear Technical Director, We are writing on behalf of the Accounting Practices Committee of the Fiscal and Administrative Officers Group for Community Foundations. The Accounting Practices Committee meets monthly via conference call to discuss current accounting and tax issues facing community foundations. We recently read and discussed the Exposure Draft Not-for-Profit Entities (Topic 958), and would like to provide the following comments for your consideration. We have focused our responses on the areas that we believe have the greatest impact to community foundations. Question 1: Q: 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.) A: We do not see this as much of an issue for Community Foundations given that variance power had allowed for Community Foundation s to show their net assets as unrestricted and many would not have shown donor restricted endowments as permanently restricted. Those that do maintain permanent endowment will combine the information for presentation purposes. Question 3: Q: 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

2 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.) A: We do not see liquidity as a significant issue for Community Foundations. Regarding the tracking of underwater funds, allowing the underwater portion to be netted with the original gift and treated as restricted instead of reclassified as unrestricted seems more logical because the underwater portion will not be made whole through the use of unrestricted assets, only future earnings could make it whole. The net amount (original gift less the negative accumulated earnings) is the balance of the fund. In a market downturn the Uniform Prudent Management of Institutional Funds Act ( UPMIFA ) would govern our spending decisions with some consideration being given to whether or not a fund is underwater. Continuing to require disclosure the balance of the underwater funds in a footnote is information the reader of the financial statements should have. Question 4: Q: 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.) A: As stated above, we do not see liquidity as a significant issue for Community Foundations. Most Community Foundations sequence their assets and provide adequate disclosure and prefer to provide the information in that manner versus a classified presentation. There could be additional disclosure regarding specific assets held e.g. beneficial interests in perpetual trusts or assets held in donor advised nonendowed funds that could be granted at any time. There is already a significant amount of disclosure provided in the footnotes regarding illiquid assets in the investment portfolio such as Level II and Level II alternative investments. Community Foundations have three separate time horizons: (1) Operating expenses Cash available to cover 30 days of operating expenses, (2) Annual granting (appropriation / spending) this is tied to the endowment and spending policy disclosures that already exist. These operate on an annual cycle when spending is determined and funding is removed from investment portfolio as needed, (3) Unknown horizon The dollar amount of granting from non-endowed funds that could be spent at any time based on the donor s recommendation and is not subject to the spending policy. One beneficial disclosure might be the liquidity of the investment portfolio, for example reporting that a portfolio is 80% liquid within 90 days. A financial statement reader would conclude that 20% of the portfolio has limited liquidity but when contrasted with 80% liquidity and the needs of the organization to cover a year of granting from all funds (endowed and non-endowed) and operating expenses the reader should conclude there are no liquidity concerns. A well-written note would be needed to provide the reader with the understanding of how a community foundation works and would require additional information above what is currently reported. An issue could arise regarding consistency between organizations 30/60/90 days. Many community foundations have quarterly board meetings where grants are approved but operating expenses are paid within 30 days.

3 Every Community Foundation is different and each community foundation would need to consider their circumstances. Conclusion: Our observation is that the liquidity disclosures that the exposure draft would add to the financial statements of a community foundation should not cause much of a concern, but they would take additional time to draft and make reader friendly. In addition, there needs to be some type of consistency among like organizations. Question 6: Q: 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? A: We do not agree that the requirement of the new intermediate measures of operations would provide users of community foundation financial statements with meaningful information. Since the purpose of a number of community foundation is to create permanent charitable endowment funds, which will ensure a permanent source for grant making through the prudent investment of those funds, it is not meaningful to users of community foundation financial statements to assess whether activities of a particular period have drawn upon, or have contributed to, past or future periods. The goals of a community foundation creating and managing permanent endowment funds are more long term in nature, and cannot be easily evaluated based on one year s operations. We also believe that classifying and aggregating information in this way may require a major system change, and require significant additional work by accounting staff that will not result in any benefit to the users of our financial statements. The Statement of Cash Flows already discloses adequate detail of an organization s operating, investing, and financing activities. We also believe that maintaining intermediate measures more consistent with current reporting, of changes in net assets without restrictions, and changes in net assets with restrictions, is sufficient and provides information in a clear format that it easier for financial statement users to understand. Question 7: Q: 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? A: If the new proposed intermediate measures are required (which we do not believe they should be), it is the opinion of Accounting Practices Committee that in many cases, the investing activities of a community foundation should be considered directed at carrying out an NFP s purpose for existence, since a number of community foundation s purpose for existence is to create and maintain permanent charitable endowment funds. These funds must be invested in order to remain permanent. This is distinctly different from the investing activity of other types of charities, where the investments provide support for the mission but are not an integral part of the mission. We also do not believe that only resources available for current-period operating activities should be included. Disclosing information in

4 the notes to the financial statements about the nature and amounts of time and purpose restrictions, as well as providing disclosures about the nature and amounts of board designations provides sufficient information to the readers of the financial statements about the resources that are available for currentperiod operating activities. Since the mission of many community foundations is to create and maintain charitable permanent endowment funds, in order to provide grants from those funds forever, it is not appropriate to separate a community foundation s investment activities from its other operations on the face of the Statement of Activities (or whatever updated title is adopted for this statement), as it is a critical component of a community foundation s mission to ensure that the funds last forever in order to support ongoing grants. Many community foundations will consistently report a large negative amount in the first measure of operations, since in many cases, the current year grants are not made possible by current year contributions, but rather by contributions from previous years which have been invested to ensure a permanent source for grant making. Users of financial statements may misinterpret this large negative number as a reflection of poor financial management, or interpret this first intermediate measure of operations to mean that a community foundation spends the majority of its time on nonoperating activities which must then be transferred in to support operations. Furthermore, the transfers in and out of operations will very likely confuse financial statement readers who are not familiar with accounting standards. Question 8: Q: Do you agree that all internal transfers) governing board appropriations, designations, and similar actions that make resources available 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 BC 74.) A: Reporting transfers on the statement of activities clutters up the statement and adds additional subtotals that are difficult to understand. It could make the statement confusing and allow for manipulation. We believe that the statement of activities should reflect actual revenue and expense under GAAP and the information on transfers should be disclosed in a footnote. Question 18: Q: 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 is 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 an operational concerns or costs. A: The Statement of Cash Flows is a key financial statement used for any organizations to assess the real performance in terms of transparency. The idea of moving from the direct method to the indirect method certainly has it merits. We believe it will add transparency to the financial entity in terms of understanding to the reader and easier to digest the information provided. The direct method will allow for easier reconciliation or comparison to the statement of activities, and provide a clearer picture

5 overall to the average reader. The time necessary to implement this reporting method is minor compared to its long term benefits to the reader. While we endorse the requirement of the direct method in general, we have reservations in the way certain information would be reported. For instance, we believe investment management is an integral aspect of our operating activity as it is tantamount to our overall mission in working with our donors. Accordingly, we think interest and dividends should be required to be presented as operating activity, not investing activities. Likewise, we have difficulty understanding the requirement of classifying fixed assets additions as an operating activity since those activities are not ongoing day-to-day requirements. This seems to be an integral component of an organization reinvesting in itself for long term purposes. Regarding the classification of interest expense payments, it seems logical to include those cash payments in the financing activities section of the statement. In conclusion, while we endorse the overall concept of the requiring the statement of cash flows using the direct method, we feel certain changes to the proposal need to be addressed, namely dividends and interest to be included in operating activity and fixed asset transactions to remain in the investing activities. Other Comments: Classification of Investment Earnings: The requirement in the exposure draft that investment returns be treated as a non-operating activity may not be appropriate for many community foundations. In many cases, the earnings on endowed assets are the primary source of revenue and have a significant effect on the annual operating budget, often more than the effect of annual donations. Although community foundation earns fees on donor advised funds, the more significant factor in the ability of the community foundation to continue operations is often its ability to manage the endowed assets accumulated through legacy gifts. It therefore seems inconsistent that donation revenue would be considered as part of operating activity, but managing the assets in order to provide operating funds would not be part of operating activity. The applicable section of the exposure draft (shown below) includes general investing activities as part of those activities that are not directly related to carrying out the NFPs purpose for existence. However, for community foundations, being the stewards of legacy gifts and investing them for the benefit of the community is a historical part of the reason for their existence A A statement of activities shall report all revenues, expenses, gains, losses, and other changes in net assets as either operating activities or nonoperating activities. The operating activities section shall report all changes in resources (net assets) that meet both of the following: a. Mission dimension: Resources that result from or are directed at carrying out an NFP s purpose for existence b. Availability dimension: Resources are available for current-period activities, considering both external and internal limitations.

6 Those activities that are not directly related to carrying out an NFP s purpose for existence (for example, general investing and financing activities) do not meet the mission dimension and shall be classified as nonoperating activities. The resources from activities that are unavailable for the current period (for example donor-restricted support or governing board designations, appropriations, or similar transfers, which are described in paragraph B) do not meet the availability dimension and also shall be classified as nonoperating activities. All nonoperating activities, other than those that are a result of governing board action, shall be excluded from both the operating excess (deficit) of a not-for-profit entity before transfers and the operating excess (deficit) of a not-for-profit entity after transfers. See paragraph A through 45-10B for additional guidance on presentation of governing board designations, appropriations and similar transfers. The Basis for Conclusion provides an exception to the rule (noted below). The exception is when a donor provided funding specifically to generate investment returns for the benefit of one or more NFPs. BC57. Substantially all NFPs engage in investing activities that indirectly support them, but they generally are not directed at carrying out their purposes for existence. For example, many NFPs solicit endowment gifts that are to be invested in perpetuity. Those gifts, like other gifts, result from the activities of the entities. That is, donors respond to the entities solicitation requests, including unsolicited donors, as a result of the good works and public purposes the NFPs strive to achieve. However, the investment of the donated assets and the investment returns on those assets generally are not from carrying out the NFPs purposes for existence. An exception, for example, would be for a special purpose NFP (charitable trust) established by a founding donor with the specific purpose of investing charitable resources to generate investment returns for the benefit of a specific NFP or group of NFPs. Unlike a typical foundation that views its grant making activities as the purpose for its existence, that type of charitable trust might view its investing activities as the carrying out of its mission or purpose for existence. Most community foundations receive gifts with the specific instruction to invest those assets for the benefit of selected NFPs or to benefit specific charitable work. The core work of many community foundations is both the grant making and the investing of the assets. One could not exist without the other. Additionally, donors often look at the ability of a community foundation to successfully invest their planned contribution, whether to a donor advised fund or an endowed fund. This is part of the core work of community foundations and a necessary part of its operations. Reporting on the release of restricted assets: It is unclear from the exposure draft whether the release of restricted assets needs to be done in two sections one for the release of the principal and one for the release of the earnings on endowed funds. One example of this presentation is on page 88, in the sample Not-for-Profit Entity University, Statement of Activities. The section on Net Assets Released from Restriction appears to provide for an additional type of release of restriction -- one for Appropriation of Endowment returns (the fourth and

7 fifth items listed in the section Net Assets Released from Restrictions shown below: Another example is in on page 64, in the sample Not-for-Profit Entity A Statement of Activities. The footnote (on page 76) explaining the appropriation from donor endowment of $7,500 again mentions that this is a release of returns:

8 It is unclear whether it is the intent of the FASB to require that earnings be released separately from principal. However, if it is the intent, this would be a burden on organizations that use a spending policy approach. For not-for-profit organizations that utilize a spending policy approach, generally the spending policy amounts appropriated annually are not broken out between principal and earnings. We appreciate the opportunity to read and comment on the exposure draft. Sincerely, The Accounting Practices Committee: Tracy Branson, Orange County Community Foundation (CA) Dwight Canning, Greater St. Louis Community Foundation Ray Biddiscombe, The Columbus Foundation Carol Crenshaw, The Chicago Community Trust Kim Cryan, Toledo Community Foundation Alyssa Federico, Foundation for the Carolinas Susan Frohlich, The San Francisco Foundation Kareen Holmquist, The Seattle Foundation Cathy Lippard, Oklahoma City Community Foundation Melissa Pelland, Minnesota Philanthropy Partners Jerry Reger, Community Foundation for Greater Buffalo Bryan Tait, The Pittsburg Foundation Cyndi Vara, Permian Basin Area Foundation (TX)