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

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

3. 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

4. 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

5. 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

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

7. 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) *

8. 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

9. 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

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

11. 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)

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

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

14. 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

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

16. 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

17. 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

18. 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

19. 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

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

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

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

23. 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 )
Additional Outreach:
Health care
Community and private foundations

24. 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

25. One Statement Approach Statement of Activities

26. Two Statement Approach Statement of Operations

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

28. 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

29. 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” 

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

31. 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)

32. 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

33. 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

34. 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”

35. 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”

36. 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

37. 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

38. 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?

39. 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

40. 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)

41. 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)

42. 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)

43. 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

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

45. 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?

46. 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

47. Project Timeline – Remaining Steps
Board Deliberations First half 2014
Q Exposure Draft
Comment Period Q – Q1 2015
2015
Final ASU

48. Questions?

49. Resources
Regroup from Square One (Business Officer Magazine, February 2014)
Link:

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