Welcome to Today’s NACUBO Webcast Our program will begin shortly with a brief introduction on how to use the desktop interface.

FASB’s Proposed NFP Reporting Changes: What Higher Education Needs to Know April 8, 2014

Speakers Jeff Mechanick, FASB, Assistant Director, Nonpublic Entities and Chair of the NFP Advisory Committee Cynthia Pierce, Partner, Crowe Horwath LLP, and member, FASB NFP Advisory Committee Sue Menditto, Director, Accounting Policy, NACUBO

Learning Objectives Participants will come away from this program with a greater understanding of: The purpose and objectives of the FASB NFP Financial Statements Project FASB decisions to date and the reasoning Remaining issues to be addressed by the Board The project completion timeline: remaining items, exposure, comment period, re-deliberations

Polling Question 1 What type of organization are you? NFP research institution NFP comprehensive doctoral or small institution NFP foundation affiliated with a public institution Public institution Auditor Other

Jeff Mechanick FASB, Assistant Director, Nonpublic Entities and Chair of the NFP Advisory Committee

FASB NFP Advisory Committee (NAC) Formed in 2010 Primary advisory group to FASB on NFP matters 18 members and 2 participating observers Higher Education: Steve Golding (Penn), Cindi Pierce (Crowe Horwath), John Mattie (PwC), Roger Goodman (formerly Moody’s) *

NAC – Areas for Improving GAAP for NFPs 1) “Refresh” the NFP financial reporting (“FAS 117”) model 2) Address disclosure volume/ ineffectiveness (“disclosure overload”) 3) Simplifications and more practical expedients, where possible

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

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

Other Important Influences / Touchstones for NFP F/S Project FASB/ IASB Project on Financial Statement Presentation for business entities ( recently inactive) FASB Disclosure Framework Project AICPA Guide overhaul projects for NFPs, Health Care Entities NACUBO “Blank Slate” Project GASB Standards (BTA Model)

Project Timeline – Steps To-Date NAC Recommendations Sept. 2011 Nov. 2011 Project Added to FASB Agenda Project Planning / Board Education / Initial Outreach 2012 Early 2013 Deliberations Begin Meeting with NACUBO APC on “Blank Slate” Project April 2013 2013 – Early 2014 Board Deliberations Continue

Partner, Crowe Horwath, LLP Member, FASB NFP Advisory Committee Cynthia Pierce Partner, Crowe Horwath, LLP Member, FASB NFP Advisory Committee

FASB NAC (Not for Profit Advisory Committee) Perspective Financial Statements of Not-for-Profit Entities Project Endorsement of Board’s Objectives Continual focus on providing feedback as *Preparers * Auditors * Users Actively engaged in industry groups to clarify matters for effective implementation Overarching theme of the desire for flexibility and the need for comparability

Net Assets - Issues UPMIFA and PRNA/TRNA Distinction TRNA “Hodgepodge” URNA Misinterpretation

Net Assets – Two Approaches Approach 1 – Restrictions as primary cut Approach 2 – Purpose as primary cut Without Restrictions Operating Endowment Plant Operating Without restrictions With restrictions Endowment Without restrictions With restrictions With Restrictions Operating Endowment Plant Plant Without restrictions With restrictions

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

Polling Question 2 Do you currently provide more detailed information about unrestricted net assets? Yes, directly on the statement of financial position Yes, in the notes to the financial statements Yes, both on the face and in the notes No

Two Net Asset Classes Discussion How will having 2 classes of net assets impact F/S presentation? Detail regarding board designations Presentation of unexpended endowment earnings Presentation of underwater endowments    Board designated net assets as “quasi-endowments” Implications for bond compliance covenants and other external reporting requirements

Financial Performance: Operating Measure – Current Landscape Required op. measure? Yes No Health Care Higher Ed. Other NFPs (FAS 117) Greater Comparability Lesser

Financial Performance: Operating Measure – Approaches Rejected Recurring / Non-recurring Large or Unusual “Beyond management’s control”

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

Financial Performance: Operating Measure – Board Decisions 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 958-225-45-10) Additional Outreach: Health care Community and private foundations

Financial Performance: Statement Approach 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 Facilitates multi-year comparison Some may ignore the second statement Incorrectly equate the operating measure to net income Retain Flexibility

One Statement Approach Statement of Activities

Two Statement Approach Statement of Operations

Two Statement Approach (cont’d) Statement of Changes in Net Assets

Polling Question 3 Concerning reporting an operating measure, do you think you’re inclined to use a one or two statement approach in the new reporting environment? One statement, pancake format One statement, column format Two statements, pancake format Two statements, column format for non-operating items Don’t know yet

Operating Measure Discussion The term “operating measure” vs. “performance indicator” How to apply “mission” and “non-mission” criteria “Availability” as a less-subjective criterion Interest expense (non-operating) and depreciation (operating) Restricted support released for capital acquisitions as operating* Appropriated earnings from donor-restricted endowments and board designated endowment as operating Dividend and interest revenue (except from student loans) considered non-operating * See also slide titled, “Capital” 

Cash Flow Statement – Issues #1 Understandability / utility #2 Relation to Statement of Activities (and any operating measure therein)

Cash Flow Statement – Board Decisions Require Direct Method for operating cash flows No longer require Indirect Method Ask in ED if it should still be required for certain NFPs Re-categorize certain items to better align “operating” with activities statement (next slide)

Cash Flow Statement – Board Decisions 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

Polling Question 4 Knowing that it is acceptable for direct cash flows to be derived indirectly (rather than modifying systems) – Please rate your perceived level of difficulty for direct method operating cash flow reporting: Difficult Difficult in the first year, not so ongoing We will likely have to modify systems for even an indirect approach Not sure

Cash Flow Discussion Cash receipts of dividends and interest classified as investing activities (non-operating) Cash payments of interest classified as outflows from financing activities (non-operating) Cash receipts of donor-restricted capital gifts classified as inflows from operating activities* Cash payments for capital purchases classified as outflows from operating activities* * See also slide titled, “Capital”  

Reporting of Expenses – Issues AICPA issue: Who should be required to do a Statement of Functional Expenses? FASB Deliberations: Should natural expenses be required? Should functional expenses still be required? Should both be required together? Which breakout on the Statement of Activities? Should investment / other nonoperating expenses be functionalized? - See additional issues on investment expenses in slide titled, “Reporting of Investment Expenses – Key Questions”

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

Polling Question 5 What are your thoughts concerning a requirement that expenses be analyzed by nature and function? (check all that apply) This would be easy to do This would be difficult to produce We have too many functions – rather than programs – in higher education This analysis would not be meaningful in higher education Not sure yet

Expense Reporting Discussion Flexibility for presentation on the SOA Functionalization of non-operating expenses What’s a program expense for higher education? Show overhead allocations? Institutional support O&M What else?

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

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)

Polling Question 6 A How are you currently reporting investment expenses? All investment expenses are netted against investment returns Only external investment expenses are netted against investment returns All investment expenses are shown gross Other (type what you’re doing and submit through question interface)

Polling Question 6 B If you net investment expenses, what do you disclose? N/A we do not net investment expenses We disclose all internal and external expenses We disclose all internal and all external expenses other than embedded fees. Other (type what you’re doing and submit through question interface)

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

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

Expiration of capital restrictions 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?

More Discussion Items Classified balance sheet (public vs. private institutions) Healthcare breaks out “assets limited as to use” on the SOFP Potential for combining disclosures  

Project Timeline – Remaining Steps Board Deliberations First half 2014 Q3 2014 Exposure Draft Comment Period Q4 2014 – Q1 2015 2015 Final ASU

Questions?

Resources Regroup from Square One (Business Officer Magazine, February 2014) Link: http://www.nacubo.org/Business_Officer_Magazine/Magazine_Archives/February_2014/Regroup_From_Square_One.html

Thank you for your participation Thank you for your participation. Please remain online and complete the webcast evaluation immediately following the presentation.