Presentation Transcript

1. 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
2. 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”
3. 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
4. Some Challenges – Financial Performance Can the Board develop a notion of operations that is 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?
5. Operating Measures 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 Still considering presentation alternatives (see later slides) 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. Summary of Tentative Decisions Reached (May 29 BM)
6. NFP FSP – Financial Statement Formats (single page)
7. Some Challenges – Net Assets/ Liquidity Shouldclasses 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.? Can we improve the current net asset classification scheme and improve information about liquidity?
8. Net Assets Summary of Tentative Decisions Reached (September 4 BM) Replace current requirements to present three classes of net assets with similar requirements for two classes of net assets with donor-imposed restrictions 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 remove the hard-line distinction between temporary and permanent restrictions 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.
9. 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?
10. Cash Flow Statement Summary of Tentative Decisions Reached (October 23 BM) Require the Direct Method of presenting operating cash flows and no longer require the Indirect Method (reconciliation),. Revise the components of the cash flow classes as follows: Interest and dividends received as investing cash flows, rather than operating cash flows Interest paid as financing cash flows, rather than operating cash flows Construction/acquisition/purchases of long-lived assets, and proceeds of gifts for such, as operating cash flows rather than investing/financing ED to ask stakeholders for feedback on the Indirect Method Whether to require for certain (e.g., business-like) NFPs How it might be improved if required or encouraged.
11. Some Challenges – Other Statements What other statements or schedules should be required? Should NFPs other than voluntary health and welfare organizations (VH&W Orgs.) 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
12. Reporting of Expenses Require NFPs to report expenses by both their nature and function Continue to allow NFPs the flexibility to present expenses by either function or nature, or by both on the face of the statement of activities or within the notes Require NFPs to provide an analysis of all expenses by function and by nature in one location, in the statement of activities, a separate statement of expenses, or a schedule in the notes. Analysis would include all expenses (operating and non-operating) but neither require nor preclude functionalization of non-operating expenses Specific format would not be required. Summary of Tentative Decisions Reached (December 18 BM)
13. Reporting of Expenses – Illustrative Example
14. Format Alternatives –Revenues, Expenses and Other Changes in Net Assets Advantages/disadvantages—single all-inclusive page Shows all types of gift revenue on one-page Shows gift revenue and fund-raising expense on same page Lacks focus on current operations Impedes multi-year comparisons Advantages/disadvantages—two-page formats Places emphasis on current operating activities Facilitates multi-year comparisons of operating activities Movements between operating and nonoperating resources may lack transparency and impede understandability. How important is comparability versus flexibility in presenting activities of the period?
15. NFP FSP – Financial Statement Formats (single page)
16. NFP FSP – Financial Statement Formats (page 1 of 2)
17. NFP FSP – Financial Statement Formats (page 2 of 2)
18. Liquidity and/or Financial Flexibility Net asset classifications alone are insufficient Requires information for both assets and liabilities Considering requirements for healthcare providers: Classified statement of financial position Breakout assets limited as to use Notes to financial statements might be feasible but . . . Some needed information may be forward-looking May raise audit issues Other financial communications may be best How might financial reporting provide more useful information for assessing an NFP’s liquidity and financial flexibility?
19. Reporting Investment Expenses Issue raised by AICPA’s NFP Expert Panel Issues for consideration: Is any analysis of expenses impaired if current practice of netting is allowed to continue? If netting were not permitted, would investment expenses need to be defined/distinguished from transaction costs? If yes, what about investment fees of mutual funds? Should FASB address this GAAP issue in a NFP financial reporting project? Should netting of investment expense with investment returns continue to be permitted?
20. Improvements to Notes Coordinate and build on what is learned through disclosure framework project NFP participation in field study—application of relevance and materiality notions Focus on most important information Seek opportunities to streamline disclosures Investment assets, including: fair value requirements (leveling) limitations imposed by donors and laws How might we improve NFP unique notes to financial statements?
21. NFP FSP – Remaining Steps Ongoing outreach with project resource group, NAC and others Exposure Draft (ED) – proposed ASU for comments (est. mid – 2014) Comment period: more outreach, field visits, testing, roundtables, etc. Redeliberations followed by final ASU issuance (est. first half of 2015)