FASB Update Jeffrey D. Mechanick, FASB Assistant Director Phone: The views expressed in this presentation are those of the presenter. Official positions of the FASB are reached only after extensive due process and deliberations. AAA Government & Nonprofit Section Meeting – 3/28/2014

 Two Noteworthy ASUs from  NFP Financial Statements Project  Two “Convergence” Projects -Leases, Revenue Recognition  Some Initiatives to Improve Relevance/ Reduce Complexity -Disclosure Framework, Private Company Council, Simplification Initiative Agenda 2

Services Received from Personnel of an Affiliate (ASU )  Personnel services received from an affiliate (parent/sub or common control) for which the affiliate doesn’t charge the recipient NFP should be recognized in the recipient NFP’s financial statements, measured at the actual costs incurred by the affiliate Contributed services criteria no longer applicable FV practicability exception if cost will significantly over- state or understate the value of the services received Entities under Topic 954 (healthcare) would report as equity transfer Effective for f/y beginning after Modified retrospective application; early adoption permitted 3

Obligations Resulting from Joint and Several Liability Arrangements (ASU )  Requires an entity to measure such obligations for which the total amount of the obligation is fixed at the reporting date as the sum of: a)amount the entity agreed to pay on the basis of its arrangement among its co-obligors, and b)any additional amount the entity expects to pay on behalf of its co-obligors  Also requires disclosures about nature and amount of obligation and other information about those obligation  Effective date: -Public entities: f/y beginning after Nonpublic entities: f/y ending after Retrospective application; early adoption permitted 4

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 NFP Financial Reporting Initiative 5

Net asset classification Financial Performance Reporting of Expenses Cash Flow Statement Liquidity NFP Note Disclosures Financial Statements of Not-for-Profit Entities Topics 6

Unrestricted Temp. Restricted Perm. Restricted Net Assets 7 Without Donor Restrictions With Donor Restrictions Amount and purpose of board designations Nature and amount of donor restrictions Current GAAP Proposed GAAP Disclosures +

Financial Performance: Operating Measure 8 Defined a required intermediate operating measure for non-health care NFPs—based on two dimensions: MissionAvailability

Financial Performance: Operating Measure 9 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

Financial Performance: Statement Approach 10 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 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 11

Two Statement Approach Statement of Current Operations 12

Two Statement Approach (cont’d) Statement of Changes in Net Assets 13

Cash Flow Statement 14 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 long-term purposes 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 Net cash from financing activities Net increase in cash Cash at the beginning of year Cash at end of year

Expense by nature and function  one place in the F/S (statement of activities, separate statement, or schedule in notes) Reporting of Expenses 15 Program ActivitiesSupporting Activities Total Operating Expenses Non- Operating Total Expenses Program AProgram BM&GFundraising Salaries & Benefits Grants to Others Equipment Rental & Maintenance Occupancy Cost Depreciation Information Technology Professional Service Fees Supplies Travel Printing & Publication Interest Other Total FUNCTION

 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 Remaining Topics 16

Board Deliberations First half 2014 Q Exposure Draft Comment Period Q – Q Final ASU Project Timeline 17

 Lessee -Most lease assets and liabilities are off-balance sheet -Limited information provided about operating leases  Lessor -Lack of transparency about residual values -Enhance consistency with lessee proposal and revenue recognition proposal Why a Leases Project? 18 * Estimate according to the 2005 SEC report on off-balance sheet activities

Proposed Right-of-Use Model 19 A lease contract conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration

 Short-term leases Option to exclude leases with a maximum term of 12 months or less  Variable lease payments Excluded if payments are not linked to an index or a rate  Renewal options Excluded unless significant economic incentive to exercise the option Reducing Cost & Complexity in Response to Feedback on the 2010 ED 20

Dual Approach (Impacts Income Statement) 21 Most equipment/ vehicle leases (Type A) Most real estate leases (Type B) Start of lease End of lease Asset consumption not more than insignificant Asset consumption more than insignificant There is a wide spectrum of lease transactions with different economics

Lessee Accounting Overview (2013 ED) 22 Type A Type B Most leases of equipment/ vehicles Right-of-use asset Lease liability Amortization expense Interest expense Cash paid for principal and interest payments Most leases of real estate Right-of- use asset Lease liability Single lease expense on a straight-line basis Cash paid for lease payments Balance Sheet Income Statement Cash Flow Statement

Lessee Model: Four Approaches Considered in Response to Stakeholder Feedback on 2013 ED 23 Current US GAAP (IFRS) Approach 1Approach 1AApproach 2Approach 3 Capital (Finance)Type A Type A 2 OperatingType ANon- Property Type A Property 1 Type A or Type B by policy election Non- Property Type A Property 1 Type B Type B 2 2 Based on principle in IAS 17/FAS 13 1 Land, buildings, or integral equipment

Lessor Accounting Overview (2013 ED) 24 Type A Type B Most leases of equipment/ vehicles Lease receivable Residual asset Interest income and Day 1 profit on the lease Cash received for principal and interest payments Most leases of real estate Continue to recognize underlying asset Lease income, typically on a straight-line basis Cash received for lease payments Balance Sheet Income Statement Cash Flow Statement

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 o Nonpublic entities exempt from most quantitative ones Revenue Recognition 25 Converged on major decisions up to now Final standard expected in 1H 2014 Effective Date: Years Beginning After Dec. 15, 2016 (public entities), Dec. 15, 2017 (nonpublic entities)

R.R. - Scope 26 Impacts almost all industries * Also excluded: contributions, collaborative arrangements

R.R. - 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 Core Principle 27

1. Identify contract(s) with the customer 2. Identify performance obligations 3. Determine transaction price 4. Allocate transaction price 5. Recognize revenue when performance obligation is satisfied R.R. - Steps to Apply the Core Principle 28

R.R. - Various Guidance Included  Warranties  Licenses  Right of return  Customer options for additional goods or services  Breakage (customers’ unexercised rights)  Principal versus agent  Bill and hold arrangements  Repurchase agreements  Nonrefundable upfront fees  Customer acceptance 29

 FASB’s formation of a transition resource group -To identify and discuss broader issues, including those that may warrant follow-up standard-setting activity by the FASB -Similar to what we’ve done in the past following issuance of FAS 157 (Valuation Resource Group) and certain other broad standards  AICPA’s formation of various industry-focused groups -Includes one for Healthcare and one for NFPs Revenue Recognition: Implementation Significant effort likely to be expended as the U.S. moves from the current industry-specific guidance to this new, broader, principles-based approach 30

Disclosure Framework Project 31 Objective most important  Improve effectiveness of disclosures in notes to financial statements by clearly communicating the information most important to users of those statements Reducing volume of notes is not primary focus Sharpening the focus on important information can increase usefulness and reduce volume

DF - Decision Processes 32 Board Purpose—help the FASB Identify disclosures with broad relevance Develop standards with variable (flexible) disclosure requirements Entity Purpose—provide judgment guidance to help entities: Identify disclosures in their financial statements that are and are not relevant Improve organization and formatting of notes

 Board Process  Reporting Entity Process Disclosure Framework – Next Steps Consider results of field Test entity’s use of discretion Exposure Draft of chapter in Concept Statement 8 Proposed ASU on an Entity’s Decision Process Comments due July 14,

Private Company Council  Established by FAF on May 30, 2012; overseen by FAF  Identifies, deliberates & votes on proposed alternatives within existing U.S. GAAP for private companies -Based on agreed-on criteria w/FASB (Private Company Decision-making Framework) -Subject to FASB endorsement and public due process  Primary advisory body to FASB on active FASB agenda issues on behalf of private companies 34

Standing FASB Project: Two Key Objectives 35 Monitor and consider proposed and final PCC alternatives for private companies with U.S. GAAP, in accordance with endorsement process Private Companies Determine whether such proposed and final alternatives are also appropriate for public companies, not-for-profit organizations, and employee benefit plans Public Companies, NFPs, EBPs

 Final Alternatives -Update No , Accounting for Goodwill Separate FASB project currently considering for public companies, NFPs -Update No , Accounting for Certain Receive-Variable, Pay- Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach Not extended to public companies, NFPs (health care at this time); being considered as part of FASB’s Hedging Project. -Update No , Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements Not applicable to NFPs (already scoped out of VIE guidance) Private Company Council (PCC) Projects 36

Goodwill 37  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 Final PCC Alternative Current U.S. GAAP

 Current Project -Issue No A, Accounting for Identifiable Intangible Assets in a Business Combination FASB simultaneously considering for public companies, NFPs  Preagenda Research/ Potential Future Projects -Stock Compensation -Disclosures (select areas) Private Company Council (PCC) Projects 38

Simplification Initiative “Quick-hit” projects to help address two types of complexity: 39 Complicated, unclear standard obscures its meaning Accounting treatment is clear, but applying it is lengthy, difficult & expensive

Questions / Comments ? 40