FASB Update. NACUBO Higher Ed. Accounting Forum April 28, Jeffrey Mechanick, Assistant Director Nonpublic Entities Richard Cole, Project Manager

Transcription

1 FASB Update NACUBO Higher Ed. Accounting Forum April 28, 2014 Jeffrey Mechanick, Assistant Director Nonpublic Entities Richard Cole, Project Manager The views expressed in this presentation are those of the presenters. Official positions of the FASB are reached only after extensive due process & deliberations

2 Agenda Financial Statements of Not-for-Profit Entities Disclosure Framework Simplification Initiative Private Company Council (PCC) Leases Revenue Recognition Accounting for Financial Instruments Going Concern Government Assistance Disclosures 2

3 Financial Statements of Notfor-Profit Entities 3

4 NFP Financial Reporting Initiative Standards Net asset classification Liquidity, financial performance and cash flows Research Study communications other than f/s that NFPs use to tell their story (removed from agenda 1/29/14) 4

5 Financial Statements of Not-for-Profit Entities: Topics Net asset classification Financial Performance Reporting of Expenses Cash Flow Statement Liquidity NFP Note Disclosures 5

6 Net Assets Current GAAP Unrestricted Temp. Restricted Perm. Restricted Proposed GAAP + Disclosures Without Donor Restrictions Amount and purpose of board designations With Donor Restrictions Nature and amount of donor restrictions 6

7 Financial Performance: Operating Measure Defined a required intermediate operating measure for non-health care NFPs based on two dimensions: Mission Availability 7

8 Financial Performance: Operating Measure Require available revenues separate from board designations (show gross instead of net) Remove req. that if an operating measure is presented, then the change in unrestricted net assets must be shown (ASC ) Additional Outreach: Health care Community and private foundations 8

9 Financial Performance: Statement Approach 1 Statement Ability to present total revenue and contributions Effect of transfers easier to identify Too much information in one statement Labeling of totals difficult 2 Statement Greater emphasis on the operating measure Retain Flexibility Facilitates multi-year comparison Some may ignore the second statement Incorrectly equate the operating measure to net income 9

10 One Statement Approach Statement of Activities Without Donor Restrictions With Donor Restrictions Total Revenue and support: Fees for services $ 495 $ 495 Bequests Other contributions 425 1,500 1,925 Restricted support released for current period 1,375 (1,375) Total revenue and support 2, ,020 Expenses: Total expenses 1,950-1,950 Excess/(Deficit) before appropriations/transfers ,070 Board appropriations/transfers to/(from) operations: Investment returns appropriated from donor endowment 60 a 60 Investment returns appropriated from quasi-endowment 90 b 90 Bequests transferred to quasi-endowment (500) c (500) Total appropriations/transfers to/(from) operations: (350) - (350) Excess/(deficit) from operations $ 595 Investment return, net Board appropriations/transfers from/(to) operations: Investment returns appropriated from donor endowment (60) a (60) Investment returns appropriated from quasi-endowment (90) b (90) Bequests transferred to quasi-endowment 500 c 500 Total appropriations/transfers from/(to) operations: Total change in net assets 1, ,335 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 10

11 Two Statement Approach Statement of Operations Operating Revenue and Support: Fees for services $ 495 Bequests 600 Other contributions 425 Restricted support released for current period 1,375 Total Operating Revenue and Support 2,895 Operating Expenses: Total Operating Expenses 1,950 Excess/(Deficit) before appropriations/transfers 945 Board appropriations/transfers to/(from) operations: Investment returns appropriated from donor endowment 60 a Investment returns appropriated from quasi-endowment 90 b Bequests transferred to quasi-endowment (500) c Total Board transfers to/(from) operations: (350) Excess/(deficit) from operations $ 595 d 11

12 Two Statement Approach (cont d) Statement of Changes in Net Assets Without Donor Restrictions With Donor Restrictions Total Excess/(deficit) from operations $ 595 d $ $ 595 Nonoperating activities Contributions 1,500 1,500 Restricted support released for current period (1,375) (1,375) Investment return, net Board designated transfers from/(to) operations: Investment returns appropriated to operations from donor endowment (60) a (60) Investment returns appropriated to operations from quasi-endowment (90) b (90) Bequests transferred to quasi-endowment 500 c 500 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 12

13 Cash Flow Statement Cash Flows from Operating Activities Cash received from service recipients Cash received from donors Cash paid to employees Cash paid to vendors Purchase of property and equipment Contributions restricted for property and equipment Net cash from operating activities Cash Flows from Investing Activities Cash received from interest and dividends Purchase of investment assets Proceeds from sale of investment assets Net cash from investing activities Cash Flows from Financing Activities Payments of principal on long-term debt Interest paid on long-term debt Contributions restricted for endowment Net cash from financing activities Net increase in cash Cash at the beginning of year Cash at end of year 13

14 Reporting of Expenses N A T U R E * Expense by nature and function one place in the F/S (statement of activities, separate statement, or schedule in notes) Salaries & Benefits Grants to Others Equipment Rental & Maintenance Occupancy Cost Depreciation Information Technology Professional Service Fees Supplies Travel Printing & Publication Interest Other Total FUNCTION Program Activities Supporting Activities Total Operating Program A Program B M&G Fundraising Expenses * Not-functionalized Non- Operating Total Expenses *Either (or both) on face of Statement of Activities 14

15 Remaining Topics Reporting of investment expenses (Board discussion begun) Liquidity and financial flexibility (Board discussion begun) NFP-specific notes (in-process) Expiration of capital restrictions and other display issues concerning capital transactions 15

16 Reporting of Investment Expenses Key Questions Gross v. net? If net, which expenses netted? If netted expenses disclosed, which expenses included in disclosure? (at issue: fees embedded in funds) 16

17 Liquidity and Financial Availability Asset type / debt maturity Donor / other external restrictions Being discussed: Classified balance sheet Separate presentation of assets whose use is limited Additional note disclosure 17

18 NFP-Specific Notes e.g., endowment/ investment / fair value e.g., accounting policies e.g., cost allocation approaches 18

19 Capital Display alternatives Separate line(s) within operating Subsection within operating Separate section Expiration of capital restrictions Current U.S. GAAP (2 alternatives) 1) when placed in service 2) over time, to match depreciation For comparability, do we need to eliminate one of the U.S. GAAP alternatives? 19

20 Project Timeline Board Deliberations First half 2014 Comment Period Q Q Q Exposure Draft 2015 Final ASU 20

21 Disclosure Framework Project 21

22 Disclosure Framework Project Objective: Improve the effectiveness of disclosures in notes to financial statements by clearly communicating the information most important to users of those statements. Are financial statements a vehicle for communications with investors? Or are they more of a compliance exercise? 22

23 Entity s Decision Process Field Study: Designed to test the ability of entities to exercise discretion over which disclosures they provide in the notes Participant Profiles: Assigned materiality or entity-specific relevance Materiality Entity - Specific Relevance Total Public Private NFP Total

24 Field Study Results More guidance around discretion facilitates more qualitative considerations The word materiality has a strong quantitative connotation in practice Preparers thought notes were generally more effective after applying their assigned discretion criterion Obstacles in the financial reporting system discourage the application of discretion 24

25 Entity s Decision Process Next Steps Develop ways the Board can promote the appropriate use of discretion. This will include exploring section-specific disclosure modifications Examine in the context of the Proposed Statement of Financial Accounting Concepts, Notes to Financial Statements. Findings may become a basis for other Codification modifications Pensions Fair Value Measurement Income Taxes 25

26 FASB Simplification Initiative

27 Objective To reduce narrow sources of unnecessary complexity in current standards - To identify aspects of GAAP that might be streamlined for all companies both public and private as well as for not-forprofit organizations - To consider whether improvements can be made to simplify GAAP while maintaining or improving the relevance of reported financial information 27

28 Types of Complexity To Be Addressed Complicated, dense standard obscures its meaning Accounting treatment is clear, but applying it is lengthy, convoluted & expensive 28

29 Private Company Council (PCC) 29

30 Goodwill Current U.S. GAAP Final Alternative Do not amortize goodwill Test for impairment at least annually or more frequently Goodwill impairment test - At reporting unit level - Two-step test - Optional qualitative assessment Amortize goodwill Test for impairment upon occurrence of triggering event Goodwill impairment test - At entity level or reporting unit level - One-step test - Optional qualitative assessment PCC projects Completed: Goodwill, Simplified Hedge Accounting, and VIE guidance In-process: Intangible Assets Pre-agenda Research: Stock Compensation 30

31 Leases 31

32 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 32

33 Lessee Model Approaches Current U.S. GAAP (IFRS) Capital (Finance) Leases IASB Type A FASB Type A Operating Leases Type A Type B All leases are financing. Not all leases are the same. Classification is based on IAS 17 (similar to FAS 13). 33

34 Lessee Accounting Overview Balance Sheet Income Statement Cash Flow Statement Type A Right-of-use asset Lease liability Amortization expense Interest expense Cash paid for principal and interest payments Type B Right-of-use asset Lease liability Single lease expense on a straight-line basis Cash paid for lease payments 34

35 Lessor Accounting Overview Balance Sheet Income Statement Cash Flow Statement Type A Net investment in the lease Interest income and any profit on the lease Cash received for lease payments Type B Continue to recognize underlying asset Lease income, typically on a straight-line basis Cash received for lease payments 35

36 Next Set of Topics for Board Discussion April 2014 Lease Modifications and Contract Combinations Variable Lease Payments In-Substance Fixed Payments Discount Rate May 2014 Definition of a Lease Separating Lease and Non-Lease Components Initial Direct Costs and Lease Incentives June 2014 Residual Value Guarantees Subleases Sale and Leaseback Transactions Future Topics include: initial direct costs, presentation, disclosures, leveraged leases, related party leases, transition, effective date, etc. 36

37 Revenue Recognition 37

38 Revenue Recognition Objective: single, principle-based revenue standard Improve accounting for contracts with customers - More robust framework for recognizing revenue - Increased comparability across industries & capital markets - Better disclosures Excludes contributions and collaborative arrangements Substantially converged on major decisions Final standard expected in 1H

39 Core Principle and Application Core principle: Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services Identify contract(s) with the customer Identify performance obligations Determine the transaction price Allocate the transaction price to the identified performance obligations Recognize revenue when performance obligation is satisfied 39

40 Rev Rec Issuance & Effective Dates: Timeline Issue final standard 2Q 2014 Establish Transition Resource Group 2Q 2014 Effective Date Public Entity Jan Effective Date Nonpublic Entity Jan A nonpublic entity has the option to early adopt (no earlier than a public entity) An entity may apply the guidance retrospectively, either to 1) Each prior period presented 2) The current period with supplemental footnote disclosures 40

41 Accounting for Financial Instruments Classification & Measurement 41

42 Classification and Measurement Model Topic Cash flow Test Business model Equity Securities Redeliberated Model (decisions since ED) Current GAAP - No cash flow test. Revert to the current embedded derivative guidance in Topic 815. Keep existing bifurcation requirements that apply to hybrid financial assets and liabilities Current GAAP - Retain existing separate accounting models to determine the classification and measurement of loans and securities (based on management s intent) From ED - All equity securities measured at fair value through net income (except equity method and nonmarketable securities) FVO Current GAAP - Unrestricted for financial assets and liabilities subject to Topic 825 Still to be Redeliberated: Proposed Update requires FV information for assets and liabilities carried at amortized cost Public parenthetical on face of statements Private no presentation requirement Practicability Exception equity securities with no readily determinable fair value are measured at cost, adjusted for impairment and any observable price changes. 42

43 Accounting for Financial Instruments Impairment (Credit Losses) 43

44 Accounting for Financial Instruments Impairment (Credit Losses) Expected credit loss model reflecting more forward-looking information Immediate recognition of lifetime expected credit losses on income statement Measurement of expected credit losses (ECL) - Reflects management s expectation based on past events, current conditions, and reasonable and supportable forecasts - Reflect the risk of loss (i.e., the possibility that a loss will occur) as opposed to reflecting the most likely outcome (statistical mode) Provide enhanced disclosures compared to current GAAP 44

45 Proposal applies to Debt instruments (e.g., loans and securities) measured at: - amortized cost - FV-OCI Loan commitments Lease receivables Trade receivables Reinsurance receivables Pledge receivables 45

46 Going Concern 46

47 Going Concern: Background Going Concern (GC) presumption is critical to financial reporting; it informs measurements and classifications Today, auditors are responsible for assessing GC uncertainties and U.S. GAAP has no guidance on management s disclosures of GC uncertainties Objective - Provide guidance in U.S. GAAP, thereby reduce diversity, standardize disclosure timing & content (exposure draft issued in June 2013) 47

48 Going Concern: Tentative Board Decisions (Single Threshold at Substantial Doubt Model) Going Concern Presumption Substantial Doubt Assessment Period and Frequency Information to be Assessed Disclosures Entities Not defined, rather the going concern basis of accounting would be used until an entity s liquidation is imminent Incorporate a likelihood based definition with the term probable Assessment period = one year from the date the financial statements are issued (or available to be issued) Assess at each annual and interim reporting period Assess all plans to the extent that it is probable those plans will alleviate the adverse conditions and those plans will be effectively implemented Disclosures of uncertainties and risks required when there is substantial doubt. Additionally, certain disclosures required when management plans alleviate substantial doubt. Applies to both public and nonpublic entities 48

49 Government Assistance Disclosures 49

50 Government Assistance Disclosures Disclosure-only project Applies to all entities Scope: TBD 50

51 Questions / Comments? 51