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FASB UpdateAAA GNP Section Midyear Meeting

March 3, 2012

Jeff Mechanick Assistant Director Financial Accounting Standards Board Tele: 203-956-5301 Email: jdmechanick@fasb.org

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The views expressed in this presentation are my own and not the positions of the Financial Accounting Standards Board (FASB).

Positions of the FASB are arrived at only after extensive due process and deliberations.

Disclaimer

3Agenda

• Environment and General Activities:

– Standard-Setting Environment and Ongoing Changes at the FASB

– Recent ASUs and Ongoing Projects of Note for NFPs

• NFP-specific Activities:

– Work of the FASB Not-for-Profit Advisory Committee

– Major NFP agenda projects

– EITF issues and other

• Q&A

4Convergence/ IFRS

• FASB and IASB continue working towards completion of MOU projects

• SEC trying to determine whether and how best to incorporate IFRS into U.S. financial reporting regime for public companies

• SEC staff work plan and recent reports

• Decision in 1H 2012?

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Private Companies: Blue-Ribbon Panel Recommendations

• Single GAAP, better exceptions/modifications, underlying framework

• Separate standard setter

– Minority: EITF-type structure

• Shorter-term recommendations

NOTE: NFPs excluded from the work of the Panel (slide 11)

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Private Companies: FAF Proposal• Embraces most of Blue-Ribbon Panel’s

recommendations, including the need for a separate structure dedicated to private companies

• Wholly autonomous board not in best interest of U.S. financial reporting system

– Constituent views on this are mixed

– Proposed Private Company Standards Improvement Council (PCSIC) would leverage the FASB and initially focus on relevance of certain standards for private companies while FASB addresses broader GAAP complexity issues (key project: Disclosure Framework [slide 32])

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Private Companies: FAF Proposal• NFPs excluded from the proposal (slide 11)

• Comment period ended January 14, 2012, followed by four public roundtables

• Final FAF decision expected in the spring

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FASB Work Towards a Framework for Private Companies

•Internal white paper on differential factors summarized in recent FASB in Focus document posted to website last July:

– Factors: types of financial statement users; access to management; investment strategies; ownership structures; accounting resources; learning and education cycle

•Now working to draft Framework, centered on those factors, for making decisions on whether and when differences may be appropriate in:

– Effective date, transition, disclosure, display (presentation), and (most controversially) recognition and measurement

•Expected to be released for public comment in Spring 2012, and then finalized with the new private company structure (PCSIC or other) put into place by the FAF.

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FASB Work Towards a Framework Private Companies

•Also reexamining current definitions of “private entity”/ “nonpublic entity”

– Key issues: financial institutions (public accountability), conduit debt obligors

•NFPs:

– Parallel process, with Concept Statements 4 & 6 as starting point

– Key issues for public/nonpublic split: public accountability, conduit bond obligors

– NAC/ NFP Resource Group will help in vetting these issues (slide 37)

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Some Other Changes at FASB/FAF

• FASB:

– People

– Processes

– Communication, Outreach & Education

• FAF Post-Implementation Review Process

– FASB standard for initial review: FIN 48 (report issued in January 2012)

– Next FASB standards for review: FAS 141(R), FAS 131

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NFPs vs. Private Companies• Public accountability and generally much broader

dissemination of financial statements

• Thus, neither the subject of the Blue-Ribbon Panel nor the FAF’s Proposal

• Work of the FASB NFP Advisory Committee (NAC) is crucial here

12ASUs Issued in 2011

• Update No. 2011-01—Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20

• Update No. 2011-02—Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring

• Update No. 2011-03—Transfers and Servicing (Topic 860): Reconsideration of Effective Control for Repurchase Agreements

• Update No. 2011-04—Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs

• Update No. 2011-05—Comprehensive Income (Topic 220): Presentation of Comprehensive Income

• Update No. 2011-06—Other Expenses (Topic 720): Fees Paid to the Federal Government by Health Insurers

• Update No. 2011-07—Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities

 

 

13ASUs Issued in 2011• Update No. 2011-08—Intangibles—Goodwill and Other (Topic 350): Testing

Goodwill for Impairment

• Update No. 2011-09—Compensation—Retirement Benefits—Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer’s Participation in a Multiemployer Plan 

• Update No. 2011-10—Property, Plant, and Equipment (Topic 360): Derecognition of in Substance Real Estate—a Scope Clarification

• Update No. 2011-11—Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities

• Update No. 2011-12—Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05

 

14Fair Value Measurements (ASU 2011-04)• IASB putting into place an equivalent of FAS 157 (Topic 820);

we’ve made revisions to attempt to get identical language

• Primarily will affect U.S. GAAP disclosure rather than measurement

• Most significant change to U.S. GAAP: qualitative sensitivity disclosure for measurement uncertainty for level three FV measurements

• Requires (1) identification of key inputs for which material changes in fair value would result if another feasible value for the input were used (2) quantitative information indicating the numerical input used and (3) discussion of the nature of the change in fair value if another feasible input amount was used

• Nonpublics exempt from part (3)

• Project on Nonpublic Entity FV Measurement Disclosures (slide 30)

15Fair Value Measurements• Other key changes to disclosures for public entities only:

• Level tables for FV used in “FAS 107” disclosures

• Note that “FAS 107” disclosures are being reexamined in Financial Instruments project

• All transfers between Levels 1 and 2 (not just significant transfers)

• Nonpublics will no longer have to disclose any such transfers

• Effective date:

– Publics: Effective for fiscal years beginning after December 15, 2011 and interim periods therein.

– Nonpublics: Effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter. Early adoption permitted but no earlier than interim periods beginning after December 15, 2011.

– Applied prospectively.

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Patient Service Revenue and Bad Debts(ASU 2011-07)

• Scope: health care entities that recognize significant amounts of patient service revenue at the time services are rendered, even though the entity does not assess a patient’s ability to pay

• Bad debt as contra-revenue amount rather than operating expense; also, quantitative and qualitative disclosures

• Effective date:

– Publics: Effective for fiscal years beginning after December 15, 2011 and interim periods therein.

– Nonpublics: Effective for fiscal years ending after December 15, 2012, and interim and annual periods thereafter.

– Early adoption permitted

– Change in presentation of bad debt applied retrospectively for all periods presented; new disclosures provided prospectively, beginning with year of adoption

17Goodwill Impairment Testing (ASU 2011-08)

• Existing requirement: – Step one: Determine the fair value of the reporting unit, compare to

carrying amount (can carry forward prior year FV under certain conditions)

– Step two: Determine the implied fair value of the goodwill of the reporting unit by assigning the fair value of the reporting unit used in step 1 to all the assets and liabilities

• New guidance: – Allows an optional assessment of qualitative factors to determine

whether it’s necessary to perform the two-step quantitative goodwill impairment test

• Examples of events and circumstances in the ASU

– Fair value of reporting unit needed for the quantitative test would not have to be calculated unless it’s more likely than not (>50%) that its fair value is less than its carrying amount

18Goodwill Impairment Testing

• Applicable for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011; early adoption permitted with some caveats

19Multiemployer Plan Disclosures (ASU 2011-09)

• Enhance disclosures to allow financial statement users to better assess risks an entity faces by participating in a multiemployer plan. Previous disclosures generally were limited to contributions for period.

• Some of the new disclosures include:

– The amount of employer contributions made to each significant plan and to all plans in the aggregate

– An indication of whether the employer’s contributions represent more than 5% of total contributions to the plan

– Expiration date(s) of collective bargaining agreement(s) and any minimum funding arrangements

– An indication of which plans, if any, are subject to a funding improvement plan (ERISA “zone status”)

20Multiemployer Plan Disclosures

• Effective date:

– Publics: For annual periods for years ending after December 15, 2011

– Nonpublics: For annual periods for years ending after December 15, 2012

– Early adoption permitted

– Applied retrospectively for all prior periods presented.

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Leases – Joint*

Revenue Recognition – Joint*

Accounting for Financial Instruments – “Joint”*

Insurance Contracts – Joint*

Consolidation (Investment Companies) – Joint

Consolidation (Voting Interest Entities) – Joint

Financial Statement Presentation – Joint

Fin. Instruments w/ Characteristics of Equity – Joint

Reporting Discontinued Operations – Joint

Emissions Trading Schemes – Joint

Joint (MOU and other) and FASB-Only Projects(* high-priority)

•Disclosure of Loss Contingencies – FASB only

•Disclosure of Risks and Uncertainties and Liquidation Basis of Accounting (Going Concern) – FASB only

•Investment Properties – FASB only (but converging)

•Impairment of Indefinite-Lived Intangible Assets – FASB only

•Other Comprehensive Income (reclassification items) – FASB only

•Nonpublic Entity FV Measurement Disclosures– FASB-only

•Decision-Making Framework for Private Companies—FASB only

•NFP Financial Reporting: Financial Statements—FASB only

•NFP Financial Reporting: Other Financial Communications—FASB only

• Disclosure Framework – FASB only

•Technical Corrections – FASB only

•Various EITF Issues – FASB only

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• Proposed right-of-use model for lessees

• Feedback: general agreement for on-balance sheet treatment but concerns about complexity:

– Measurement (renewal options, contingent rents, short-term leases)

– Expense pattern/ categorization (front-loading, cost recovery allowability)

• Redeliberations:

– Measurement simplifications

– Pursued and discontinued finance versus other-than-finance distinction, but FASB and IASB are now “re-mulling”

Leases Project: Lessees

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• Proposed two different models ([partial] derecognition, performance obligation)

• Feedback: concern about complexity, representation of underlying economics, relationship to lessee model

• Boards currently pursuing one model (‘receivable and residual,’ i.e., partial derecognition)

– Exception for investment properties (being defined)

Leases Project: Lessors

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• Redeliberations still ongoing

• Revised ED now expected in mid-2012

• Likely 120-day comment period

• Final standard now expected to be issued in 2013

• Effective date for public entities now likely 2016

• Likely incremental deferral for nonpublic entities for one or two years beyond the public entity effective date

Leases Project: Timeframe

25Revenue Recognition Project

• Contracts with customers

• Excluded:• Donations

• Collaborative arrangements

• May significantly change recognition pattern for some industries, but probably not for most NFPs

• Bad debts as contra-revenue

• Onerous performance test exclusion for many NFP contracts

• Disclosure exemptions for nonpublic entities

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• Comment deadline for revised ED is March 13, to be followed by public roundtables in April and May

– Separate roundtable dedicated to private companies and NFPs on May 8 in Salt Lake City

• Standard expected to be issued in 4Q 2012 or 1Q 2013

• Effective date for public entities no earlier than 2015, perhaps later

• Likely incremental deferral for nonpublic entities for one or two years beyond that

Revenue Recognition Project: Timeframe

27Financial Instruments Project

• Classification and Measurement: • For the most part, changes no longer significant for NFPs

• Loans receivable and liabilities remain at cost

• NFPs already at FV for debt securities (key change for business entities)

• Liquidity risk disclosures being developed (now spun off into a separate project, which also covers interest rate risk for financial institutions only)

• IASB has reopened some aspects of IFRS 9 in an effort to pursue additional convergence

28Financial Instruments Project

• Impairment: FASB and IASB continue to work towards an improved and converged model, going beyond incurred losses

• Hedge Accounting: FASB and IASB are currently in very different places here

• Reexposure? Timing?

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Ongoing FASB-only Projects of Note• Impairment of indefinite-lived intangible assets 

– “Spin-off” of Goodwill Impairment Testing Project (ASU 2011-08)

– Companies were analogizing to carry-forward provisions for goodwill impairment testing

– ASU 2011-08 eliminates those provisions in favor of an optional assessment of qualitative factors

– FASB has tentatively decided to allow a similar optional assessment of qualitative factors, to obviate the need for FV calculations in certain circumstances

– Example: hospital certificates of need, FCC broadcast licenses

– ED released on January 25; comments due April 24

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Ongoing FASB-only Projects of Note

• Nonpublic entity FV measurement disclosures 

• Focus: disclosures about Level Three FV measurements

• Grew out of relevance concerns heard at Fall 2011 private company roundtables and elsewhere

• ED expected in 1H 2012

• Disclosure of certain loss contingencies 

• Investors complain that they often have no idea about litigation settlements until after the check has been written

• FASB issued two EDs to attempt to rectify this concern

• Future direction of project is not yet clear

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Ongoing FASB-only Projects of Note

• Risks and uncertainties (going concern)• Had been focused on disclosures aimed at earlier identification of

circumstances that might lead to going concern issues, as well on providing guidance on the liquidation basis of accounting

• Project was on-hold while awaiting input from SEC, PCAOB; resumed in late 2011, with FASB staff working with PCAOB and AICPA ASB staff

• FASB has tentatively decided:

• Not to add to GAAP the requirement for management to make an affirmative going concern assertion, or to define “substantial doubt”

• Coordinate disclosures with the project on liquidity risks

• Focus here on liquidation basis of accounting

• ED expected in 1H 2012

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Ongoing FASB-only Projects of Note

• Disclosure Framework• Goal: disclosure standard or conceptual framework guidance

that reduces disclosure overload while making disclosures more comparable and effective

• Two approaches within project:

• “Top down” (development of principles)

• “Bottom up” (looking at actual current disclosure requirements)

• Many view this as a critical project in addressing GAAP complexity for all entities (public companies, private companies, NFPs)

• Initial discussion document to be issued in 1H 2012

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FASB Not-for-Profit Advisory Committee(NAC)

• Established in October 2009 to serve as a standing resource for the FASB in obtaining input from the NFP sector on

• Existing guidance

• Current and proposed technical agenda projects

• Longer-term issues affecting those organizations

• 17 members, plus 4 participating observers.• NFP financial officers, auditors, foundation and other donors,

creditor, watchdog agency, charities regulator, attorney, and academic (Teresa Gordon)

• Recently added an observer from the GASB staff

• Also, NFP Resource Group (a standing group of over 150 members)

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FASB Not-for-Profit Advisory Committee(NAC)

• Marquis project: Three NAC subgroups worked to identify potential improvements in NFP financial reporting, discussed at the September 2011 NAC meeting

• Reporting financial performance

– Statements of Activities and Cash Flows and related notes: operating measures, net asset classes, functional and natural expenses, cash flow presentation, etc.

• Reporting liquidity/ financial health

– Balance Sheet and related notes: liquidity, other financial health measures

• “Telling the story”

– MD&A, functional expense reporting/ segment reporting, summary financials

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FASB Not-for-Profit Advisory Committee(NAC)

• Recommendations for FASB Standards Project(s):• (1) Reexamine net asset classes and improve how liquidity is

depicted in NFP financial statements

• (2) Improve reporting of financial performance in statements of activities and cash flows

• (3) Reexamination of NFP footnotes, with aim of streamlining

• (4) Management’s Discussion Analysis (MD&A) to better tell the organization’s financial story

• Also, recommendation for educational efforts by FASB/ others

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FASB NFP Financial Reporting Projects• In November, the FASB added two projects to its

technical agenda:

– NFP Financial Statements: A standards project, addressing NAC recommendations (1), (2), and (3).

– Other NFP Financial Communications: A research project, addressing NAC recommendation (4).

• Have formed project resource groups and are currently doing other detail project planning.

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Topics Discussed at March 1-2, 2012 NAC Meeting

• Recent trends, concerns, observations– Especially valuation/ reporting of donated pharmaceuticals

• Standard-setting environment (update on SEC consideration of IFRS and FAF proposal for private companies)

• Select current FASB projects (revenue recognition, leases, FV measurement disclosures, EITF issues)

• Issues with existing general GAAP for NFPs• “Public accountability” and definitions of “public” and

“private” for NFPs• NFP financial reporting projects

38Issues Referred to the FASB in Updating the AICPA Audit and Accounting Guide, Not-for-Profit Entities

Issue Description Action Taken

Reporting the Contribution Portion of Charitable Gift Annuities

Whether an NFP should report the contribution portion of a charitable gift annuity as unrestricted regardless of state requirements regarding required levels of annuity reserves and allowable types of related investments.

To be considered as part of the Not-for-Profit Financial Reporting: Financial Statements project, which is expected to review the current net asset classification scheme.

Reporting Investment Expenses

How investment expenses should be presented and disclosed by a not-for-profit entity. (Whether they should be presented gross on the face of the statement of activities or disclosed if netted against investment return and whether they should be included and functionalized in the statement of functional expenses.)

The FASB Chairman recommended that the presentation of investment expenses on the statement of functional expenses be addressed as part of the FASB’s ongoing project that addresses corrections and improvements to the Codification. The disclosure of investment expenses should be considered as part of the Not-for-Profit Financial Reporting: Financial Statements project, as that project is expected to review existing NFP-specific disclosure requirements.

Recognition of Beneficial Interests in Trusts Held by Others When Information to Measure Is Unavailable

When an NFP should recognize its beneficial interest in specified assets if it is the beneficiary of a split-interest agreement held by a third party but determines it does not have the information available to measure the fair value of that beneficial interest.

The FASB Chairman recommended that the FASB address this issue as part of the FASB’s existing project that addresses corrections and improvements to the Codification.

39Issues Referred to the FASB in Updating the AICPA Audit and Accounting Guide, Not-for-Profit Entities

Issue Description Action Taken

Subsequent Measurement of Other Investments

Whether the NFP subsector guidance for subsequent measurement of other investments in Section 958-325-35 should be amended to conform the guidance for all NFPs.

The FASB Chairman recommended that the Board consider this issue as part of its current projects on Accounting for Financial Instruments, Investment Companies, and Investment Property Entities, with a focus on conforming the impairment analysis.

Classification of Gifts of Securities Immediately Sold in the Statement of Cash Flows

How NFPs should classify the sale of donated securities that immediately upon receipt are directed for sale and conversion to cash in the statement of cash flows.

This issue was added to the EITF agenda and is expected to be discussed at the March 15, 2012 EITF meeting.

Employee Services “Contributed” by an Affiliate

Whether recipient NFPs should apply the contributed services guidance in paragraph 958-605-25-17 for recognizing personnel costs incurred on its behalf by an affiliate. If not, what recognition and measurement guidance should the recipient NFP apply.

This issue was added to the EITF agenda and is expected to be discussed at the March 15, 2012 EITF meeting.

Statement of Functional Expenses

Whether the statement of functional expenses should be required for more types of donor-supported not-for-profit organizations.

To be considered as part of the Not-for-Profit Financial Reporting: Financial Statements project.

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Staying Current

Best ways to stay current

Sign up for electronic Action Alert

FASB on Twitter

www.fasb.org Nonpublic Entities Portal on FASB website

Project summaries

FASB in Focus executive summaries

Podcasts

Webcasts

Semiannual FASB Updates for Nonpublic Entities (for CPE!; next one will be on June 28, 2012)

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Questions?