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FASB PROJECT ON NOT-FOR-PROFIT FINANCIAL REPORTING

AUGUST 17TH, 2016

Presenters:Richard Cole, CPA – Supervising Project Manager - FASB

Sibi Thomas, CPA – Partner - Marks Paneth

John D’Amico, CPA – Director - Marks Paneth

Richard A. Cole, CPARacole@fasb.org

phone: 203-956-5266Rick Cole is a Supervising Project Manager at the Financial Accounting StandardsBoard (FASB). In that role, he provides oversight to projects involving not-for-profitorganizations (NFPs), consults on other projects affecting NFPs (e.g., Leases), andparticipates in some of the FASB’s broader outreach activities. He is the SupervisingProject Manager on the FASB’s current Financial Statements of Not-for-Profit Entitiesproject and also provides staff support for the FASB’s Not-for-Profit AdvisoryCommittee.

Prior to joining the FASB, Rick was the Vice President and Controller at the AmericanMuseum of Natural History in New York, where he worked for over seven years, andbefore that was a senior manager with KPMG LLP, where he worked for over fourteenyears and specialized in audits of higher education institutions and other NFPs.

Rick earned a BS and an MBA from Montclair State University. He is a member of theAICPA and the New York State Society of CPAs.

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Sibi Thomas, CPA, CFE, CGMASthomas@markspaneth.com

Phone: 212 201 3004Sibi Thomas is a Partner within the Nonprofit and Government Group at Marks PanethLLP, with nearly 12 years of extensive accounting, auditing, tax and consultingexperience within the not-for-profit industry. Sibi plans, coordinates and conducts auditsof nonprofit organizations including: large social service organizations, third partyfunded organizations, educational institutions, charitable, and fundraising andmembership organizations including those requiring audits pursuant to UniformGuidance (Single Audit). Mr. Sibi performs audits of New York State cost reports,preparation and review of tax returns (Form 990, 990-PF, 990-T, CHAR 500) and auditsof pension plans (defined benefit and defined contribution).

Sibi has deepened his expertise as an adjunct faculty of not-for-profit accounting atNew York University. Sibi has authored several articles for the New York NonprofitReview that focused on helping nonprofit organizations evaluate their existinggovernance and financial reporting process. Recently, Sibi published an article onFASB’s new proposed standards on not-for-profit financial reporting in AccountingToday.

Sibi is also a Certified Fraud Examiner and a Chartered Global ManagementAccountant. He volunteers his time as a board member of a nonprofit in New York City.

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John D’Amico, CPAjdamico@markspaneth.com

Phone: 212 710 1808John D'Amico, a Director with Marks Paneth LLP, has over 20 years of experience inproviding audit, accounting, and consulting services to not-for-profit organizations andgovernmental agencies. Prior to joining Marks Paneth LLP John worked at a Big 4 firm andother regional accounting firms. His areas of expertise include Not-for-Profit accounting,Single Audits, government auditing standards, cost allocations, and internal controls. John isalso an Instructor for the AICPA and provides one day seminars on various topics includingnot-for-profit accounting and auditing single audit requirements and government auditingstandards.

John has audited a significant number of not-for-profit clients including higher education,social service agencies, religious organizations, professional organizations, andfoundations. The majority of these organizations were government-funded agencies.

Some of his clients that he as serviced are Fordham University, Wagner College, NYUMedical School, Wildlife Conservation Society (The Bronx Zoo), Heartshare HumanServices, American Arbitration Association, Safe Horizon, Public Health Solutions andAmerican Civil Liberties Union (ACLU). Also, the City of New York and the New York CityBoard of Education. John has authored articles and conducted workshops and numerousseminars on not-for-profit topics including OMB A-133/Uniform Guidance requirements.

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AGENDA

Introduction

Phase 1 of NFP Financial Statements Project• What are the new requirements?• Why did the FASB Board make these decisions?• How will implementation look?

Phase 2 of NFP Financial Statements Project• Operating Measure• Possibility of Segment Reporting• Connection with Financial Performance Reporting research

project for business entities

Q&A

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PHASE 1 OF NFP FINANCIALSTATEMENTS PROJECT

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NFP FINANCIAL STATEMENTS PROJECT—KEY OBJECTIVES

• Update, not overhaul, the current model• Improve net asset classification scheme• Improve information in financial statements and

notes about:• Financial performance• Cash flows• Liquidity

• Better enable NFPs to “tell their financial story”

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WHO DID WE HEAR FROM?

• 264 Comment Letters

• 135 Preparers

• 90 Auditors (including Marks

Paneth)

• 12 Users

• 4 Academics

• 23 Individuals and Others

51%34%

5%1%

9%

Respondent Type

PreparerAuditorUserAcademicOther

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TYPES OF PREPARERS WE RECEIVED COMMENT LETTERS FROM

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10152025303540

Preparer Industry Type

*Including Institutionally Related Foundations

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TYPES OF WORKSHOP PARTICIPANTS

10 Workshops in 5 Cities (Atlanta, Charlotte, Chicago, Dallas, and Denver)• 146 Total Participants

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101520253035

Respondent Type

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OVERALL COMMON THEMES

• Support for Board’s overall objective to update current model.

• Desire by many to maintain as much consistency as possible between NFPs and For-Profit reporting requirements.• Comparability within industries (NFPs and similar For-Profit entities)

may be more important than comparability between dissimilar NFPs, especially for more “business-like” NFPs.

• Most users come from For-Profit backgrounds.

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OVERALL COMMON THEMES

• Desire for a proposal that allows sufficient flexibility to reflect differences among NFPs.

• Industry differences• Size differences

• Concern regarding the potential cost to implement some of the proposals, especially for small NFPs.

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Phase I Phase IIAim: Final ASU by mid-2016, effective for calendar year 2018

(fiscal year 2018-19) Net Asset Classes: Operating Measures--all other elements of the proposal, including:

• Classification scheme • Whether to require intermediate measure(s)

• Disclosure of board designated net assets • Whether and how to define such measure(s), and what items • Underwater endowments should or should not be included in the measure(s) • Expirations of capital restrictions • Alternative disaggregation approaches suggested by

stakeholders

Expenses/Investment Return: Statement of Cash Flows: • Expenses by nature; analysis of expenses by function and • Realignment of certain items nature • Netting of investment expenses against investment return • Disclosure of netted investment expenses • Enhanced disclosures about cost allocations

Operating Measures:

• Modest improvements to disclosures for those that use an operating measure, especially about board appropriations, designations, and similar transfers Liquidity/Availability: • Quantitative disclosures about availability • Qualitative disclosures about liquidity • Consideration of alternatives suggested by stakeholders (e.g., classified balance sheet) Statement of Cash Flows: • Methods of presenting operating cash flows (direct/indirect)

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SPECIFIC ELEMENTS OF PHASE 1– BOARD DECISIONS

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NET ASSETS

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“UNDERWATER” ENDOWMENTS

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BOARD-DESIGNATED NET ASSETS

• The ASU will now require the disclosure of the amounts and purposes of board-designated net assets either on the face of the financial statements or in the notes.

• Assessing the financial statement implications before creating a board designated finds.

• Ensuring the Board of Directors understands the financial reports requirements.

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EXPIRATION OF CAPITAL RESTRICTIONS

• Gifts of long-lived assets and gifts of cash restricted for acquisition or construction of PP&E

• In absence of explicit donor restrictions, NFPs would now be required to use the “placed-in-service” approach and can no longer imply a time restriction and release it over the life of the long-lived asset.

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NET ASSET CLASSES – FASB’S THINKING

“Unrestricted” net assets was misunderstood• Internal or external limitations to use can exist

Uniform Prudent Management of Institutional Funds Act (UPMIFA) blurred lines between temporarily restricted and permanently restricted

Underwater endowment information can help assess liquidity and availability of resources• Especially in depressed markets

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NET ASSET CLASSES – IMPLEMENTATION

Alternative disaggregation of net asset classes on balance sheet

Streamlined activities statement facilitatesmultiyear comparative reporting

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REPORTING OF INVESTMENT RETURN

How to present? Net presentation of investment expenses against investment return on

the face of the statement of activities• Netting limited to external and direct internal expenses• May report net return in multiple, appropriately labeled lines (e.g.,

from different portfolios, in different net asset classes, or in operating versus non-operating)

What to disclose? Disclosure of investment expenses no longer required

• If reported, carefully label and don’t include in expense analysis• No longer require disclosure of investment return components

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10 MINUTE BREAK

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LIQUIDITY AND AVAILABILITY OF RESOURCES –FASB’S THINKING

Limited disclosures required today

Feedback received on ED was mixed• Support for qualitative disclosures• Concern with self-defined time horizon and inclusion of

liabilities in quantitative disclosures• Concern about implementation and audit costs

During re-deliberations, aimed to separate liquidity and availability into 2 separate objectives

• Liquidity – qualitative disclosure of liquidity risk and management

• Availability – draw from information on Balance Sheet using quantitative (and, if necessary, qualitative) disclosures

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Requiring enhanced disclosures of information would improve thedecision usefulness of information helpful in assessing the following:

1. The effects that limits on the use of resources imposed by an NFP’sgoverning board and its donors may have on an NFP’s liquidity, financialflexibility, and allocation of resources.

2. The methods by which an NFP manages its liquidity to meet near-termdemands for cash.

3. The types of resources used and how they are allocated in carrying outan NFP’s operating activities.

4. The effects, if any, of accounting policies and methods used forallocating costs among an NFP’s program and supporting activities

5. The effects, if any, of underwater endowment funds on an NFP’sspending policies and it’s financial flexibility.

LIQUIDITY AND AVAILABILITY OF RESOURCES

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LIQUIDITY AND AVAILABILITY OF RESOURCES

The FASB approved the following two objectives:

• Qualitative information on how an NFP manages its liquidavailable resources and its liquidity risk (in the notes)

• Quantitative information that communicates the availability ofan NFP’s financial assets at the balance sheet date to meetcash needs for general expenditures within one year (on theface and/or in the notes)

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LIQUIDITY AND AVAILABILITY OF RESOURCES –IMPLEMENTATION

Classified balance sheet could be a good starting point for quantitative disclosures on availability• Appropriate labelling• Segregation of assets whose use is limited• However, contains nonfinancial assets

Quantitative disclosures could be provided in chart form

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CASH FLOW STATEMENT

FASB was contemplating requiring all NFP’s to use the direct method of presenting the statement of cash flow

Allow free choice between the Direct Method and the Indirect Method in presenting operating cash flows

• Indirect reconciliation no longer required for Direct Method

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CASH FLOW STATEMENT – FASB’S THINKING

See free choice as a good first step

Hope it will incentivize more NFPs to choose to use direct method for operating cash flows

• More useful• Easier to understand

Public universities that have adopted the direct method (required by GASB), and a fairly small number of NFPs following FASB standards that use the direct method, found it useful and not too costly

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EXPENSE REPORTING

The ASU would require all NFP’s to provide in one location a disclosure of all expenses (other than netted investment expenses).

Report expenses, either on the face of financial statements or in the notes, by:• Function *• Natural classification• Analysis (disaggregate function by nature) **

* currently required in GAAP** choice of location; Board may explore segment reporting instead for HC and possibly others in Phase 2

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EXPENSE REPORTING (CONT’D.)

NFPs required to provide qualitative disclosures about methods used to allocate costs among program and support functions

ASU also provides enhanced guidance on allocations from M&G expenses• Key concept: direct conduct or direct supervision

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EXPENSE REPORTING – FASB’S THINKING

Analysis by both nature and function provides information about stewardship of resources and both fixed and variable costs

Concerns in outreach whether the analysis was sufficiently relevant/cost-effective for health care and certain other “business-like” NFPs

• May explore segment reporting as an alternative in Phase 2

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EXPENSE REPORTING – IMPLEMENTATION

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EXPENSE REPORTING - COST ALLOCATIONS AND MANAGEMENT & GENERAL ACTIVITIES

• FASB’s ASU will require NFPs to provide enhanced disclosures about the method(s) used to allocate costs among program and support functions.

• FASB’s ASU will refine the definition of management and general activities and to provide additional implementation guidance to better depict the types of costs that can be allocated among program and/or support functions and those that should not be allocated.

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EFFECTIVE DATE, EARLY ADOPTION, AND TRANSITION

Effective Date: For fiscal years beginning after 12/15/2017 (e.g., CY 2018, FY 2018-19) Interim financials the following year

Early Adoption: Permitted, but must apply the regular transition provisions.

Transition:• For years of adoption: apply all provisions.• For comparative years presented: apply all provisions, except can

choose not to present:(1) Analysis of expenses by nature and function*, and/or(2) Disclosures around liquidity and availability of resources

*Unless already required to do so under current GAAP

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EXAMPLE OF EARLY ADOPTION

Choose to early adopt in FY 2015-16 Apply all provisions to FY 2015-16 If choose to present comparative financials for FY 2014-15,

apply all provisions to FY 2014-15, except can choose not to present:(1) Analysis of expenses by nature and function*, and /or(2) Disclosures around liquidity and availability of resources

*Unless already required to do so under current GAAP

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IMPORTANT NOTES

NFPs are already permitted to incorporate many of the changes in the ASU

The only changes that cannot be done without formally adopting the ASU are:1) Presenting one class of restricted net assets (consolidating

temporarily and permanently restricted)2) Underwater endowment accounting3) Eliminated disclosures of investment return components and netted

expenses4) Eliminated requirement to provide indirect reconciliation if using direct

method for operating cash flows

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PHASE 2PROPOSED AMENDMENTS IN EXPOSURE DRAFT

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www.MarksPaneth.com/NPGG

RESOURCES: NEW YORK NONPROFIT REVITALIZATION ACT CHECKLIST

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QUESTIONS & ANSWERS

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