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FASB’s Not-for-Profit Financial Reporting: Financial Statements Project

FASB’s Not-for-Profit Financial Reporting: Financial Statements Project. Lee Klumpp, CPA, CGMA FASB Practice Fellow lklumpp@fasb.com ; 203-656-5388.

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FASB’s Not-for-Profit Financial Reporting: Financial Statements Project

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  1. FASB’s Not-for-Profit Financial Reporting: Financial Statements Project Lee Klumpp, CPA, CGMA FASB Practice Fellow lklumpp@fasb.com; 203-656-5388 The views expressed in this presentation are those of the presenter. Official positions of the FASB are reached only after extensive due process & deliberations

  2. Agenda • NFP Financial Reporting Initiative: • Financial Statement Presentation • Other Financial Communications (MD&A) (research) • Recently Issued Standards (ASUs) • Cash Flow Presentation of Sale of Donated Financial Assets (2012-05) • Personnel Services from Affiliates (2013-06) • Joint and Several Liability Arrangements (2013-04)

  3. NFP Financial Reporting Initiative

  4. Why an NFP Financial Reporting Initiative? Recommended by NAC, part of improving financial reporting • Revisit net asset classifications/terminology • Improve liquidity portrayal • More clearly communicate NFP performance • Enhance relevance & clarity of NFP-specific disclosures • Provide framework for commentary & analysis on operations / financial health

  5. NFP Financial Reporting Initiative: Two Projects • Standards: NFP Statement Presentation • Improve net asset classifications • Reexamine NFP statement standards • Research: NFP Other Communications • The use of commentary and analysis (MD&A) in conjunction with NFP GAAP statements to tell a “financial story”

  6. Standards: NFP Statement Presentation

  7. NFP Financial Statements Presentation: Modules • Financial Performance (especially operating measure, one- versus two-statement approach) • Net asset classification • Liquidity information • Cash Flow Statement • Other potential statements or required schedules • Improvements to NFP note disclosures

  8. Some Challenges – Financial Performance Can the Board develop a notion of operations that is seemingly sought by users & preparers of NFP financial statements but for which consensus has been elusive? • Looking at two key dimensions (next slide): • mission-relationship • time (current operations) • Should this be augmented by a required two-statement approach (statement of operations linked to a statement of other changes in net assets)? What transactions & events define performance, and how is this best conveyed?

  9. Operating Measures Summary of Tentative Decisions Reached (May 29 BM) • Defined an intermediate operating measure—based on two dimensions • A mission dimension based on whether resources are from or directed at carrying out a NFP’s purpose for existence • An availability dimension based on whether resources are available for current period activities, and reflecting both external donor-imposed limitations and internal actions of a NFP’s governing board • Considered alternatives presenting the intermediate measure • Supported presenting all legally available mission related revenues before reductions for amounts designated by the governing board for use in future periods, rather than only net of those amounts.

  10. Some Challenges – Net Assets/ Liquidity Can we improve the current net asset classification scheme and improve information about liquidity? • Should classes focus primarily on donor restrictions? • If yes, perhaps some regrouping, relabeling and/or redefining may be needed • Would users, including governing boards, be better served by a scheme that focuses: • primarily on other distinctions (e.g., operating/ nonoperating, current/ noncurrent, operating/ endowment/plant) • secondarily on external restrictions (including but perhaps not limited to donors) versus internal limitations? • To what extent could, or should information about liquidity be conveyed by net assets, as opposed to assets, liabilities, disclosures, etc.?

  11. Net Assets Summary of Decisions Reached (September 4 BM) • Replace current requirements to present three classes of net assets with similar requirements for two classes of net assets that convey net assets with donor-imposed restrictions and without donor-imposed restrictions. • Retain, but modify, current requirement to provide information about the nature and amounts of different types of donor-imposed restrictions but (a) remove the hard-line distinction between temporary and permanent restrictions and (b) focus on describing differences in the nature, including both how and when the resources (net assets) can be used • Require disclosure of information about the amount and purposes of board designations of net assets without donor-imposed restrictions.

  12. Some Challenges – Cash Flows • Can indirect method of presenting cash flows from operations be improved? • Indirect reconciliation approach said to be confusing • Linkage with a required intermediate measure of operations might help • Should all NFPs be required to use the direct method for presenting cash flows from operations? • Direct method said to be more understandable, intuitive • If required, should indirect method be permitted rather than required How might we improve the statement of cash flows?

  13. Some Challenges – Other Statements or Schedules • Should NFPs other than voluntary health and welfare organizations be required to present a statement of functional expenses (matrix of expenses by nature & function)? • AICPA NFP Expert Panel recommended this for all NFPs for which contributions are a significant pct. of revenue • NAC members have expressed mixed views about the utility of this statement What other statements or schedules should be required?

  14. NFP FSP – Remaining Steps • Board deliberations (2013/ early 2014) • Ongoing outreach with project resource group, NAC and others • Exposure Draft (ED)—proposed ASU exposed for comments (estimated: first half of 2014) • Comment period: more outreach, field visits, testing, roundtables, etc. • Redeliberations by Board • Final ASU issuance (estimated: first half of 2015)

  15. NFP: Other Financial Communications Research Project

  16. NFP: Other Financial Communications Project (MD&A) • Conducted outreach & initial research, with assistance of members of a project resource group • Shared findings & observationswith resource group, NAC and others, and FASB Board • Discussed next steps with Board What background work has been done?

  17. NFP OFC – Current Practice Observations • Existence varies; where available, often shared via website • Respondents cite: variable quality & consistency, lack of liquidity & forward-looking information • Findings coincide with NAC recommendations; framework needed for NFP directors & managers to provide commentary & analysis on financial health & operations

  18. NFP OFC – Next Steps Board to issue Invitation to Comment (Discussion Paper) concurrently with ED for NFP Financial Statements project, in first half of 2014. Purpose: to solicit broad public input to help the Board decide whether to add a standard-setting project and to help inform direction of a standard-setting project if added. Feedback may also be useful for re-deliberations of NFP Financial Statement Presentation ED

  19. Recently Issued Standards

  20. ASUs Issued Since October 2012

  21. ASUs Issued Since October 2012

  22. ASUs Issued Since October 2012

  23. ASUs Issued Since October 2012

  24. Classification of Sales Proceeds of Donated Financial Assets (ASU 2012-05) • NFP should classify cash receipts from thesale of financial assets that upon receipt are directed without any NFP-imposed limitations for sale, and which were converted nearly immediately into cash, as operating or financing activities in the statement of cash flows, rather than as investing activities • Operating unless restricted to a long-term purpose, e.g., endowment or plant, then classified as financing activities • Consistent with cash contributions • Effective for f/y beginning after 6-15-2013. Retrospective application, early adoption permitted 24

  25. Services Received from Personnel of an Affiliate (ASU 2013-06) • 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 6-15-2014. Modified retrospective application; early adoption permitted

  26. Obligations Resulting from Joint and Several Liability Arrangements (ASU 2013-04) • 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 12-15-2013 • Nonpublic entities: f/y ending after 12-15-2014 • Retrospective application; early adoption permitted

  27. Questions / Comments ?

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