FASB proposes improving financial statements for NFPs

Contents FASB proposes improving not-for-profit financial statements
Three standards proposed to simplify employee benefit plan accounting
Certain electricity contracts to meet ASC 815 scope exception
Highlights of April 22 FASB meeting posted
     Financial instruments – Impairment
     Disclosure framework – Entity’s decision process
PEEC approves exception to ‘affiliate’ application
Q&As on ALTA Best Practices Framework issued
IFAC board clarifies independence requirements for nonaudit services

FASB proposes improving not-for-profit financial statements The Board recently issued a proposed ASU, Presentation of Financial Statements of Not-for-Profit Entities, to improve the existing financial statement presentation standards for not-for-profit organizations (NFPs).

Specifically, the improvements focus on four distinct topics, which are discussed below:

  • Net asset classifications
  • Intermediate measures of operations in the statement of activities
  • Presentation of expenses
  • Statement of cash flows

Net asset classifications Under the proposed guidance, NFPs would be required to present only two classes of net assets on the face of the statement of financial position and in the statement of activities: net assets with donor restrictions and net assets without donor restrictions. This differs from the current requirement for NFPs to present three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets.

NFPs would be required to provide information within the financial statements on the nature and amount of the different types of donor-imposed restrictions, as well as similar information on governing board designations that create or remove self-imposed limits on the use of resources without donor-imposed restrictions, including how those restrictions affect the use of resources. The NFP would also disclose how it manages liquidity. Quantitative and qualitative information about the liquidity of assets and near-term demands for cash would be disclosed as of the reporting date.

In addition, underwater donor-restricted endowment funds would be presented as net assets with donor restrictions. An “underwater endowment fund” is a fund for which the current fair value is below either its original gift amount or an amount that the donor or law requires the NFP to maintain.
Intermediate measures of operations in the statement of activities Under the proposed guidance, NFPs would be required to present two operating activities subtotals for the change in net assets without donor restrictions, as follows:

  • First subtotal: Includes operating revenues, support, expenses, and gains and losses that are without donor-imposed restrictions and that occur before internal transfers
  • Second subtotal: Includes the effects of internal transfers as a result of governing board designations, appropriations, or similar actions that affect self-imposed restrictions on the use of the resources, making the resources either available or unavailable for current-period operating activities

Disclosure of expenses Under the proposed guidance, NFPs would be required to provide information on operating expenses by both their nature and function, either on the face of the statement of activities, as a separate statement, or in the notes to the financial statements. In addition, NFPs would disclose the methodology used to determine the allocation of costs among functions.

The proposed guidance would also require NFPs to present investment returns net of related external and direct internal expenses.

Statement of cash flows The proposed guidance would require NFPs to use the direct method of presenting operating cash flows within the statement of cash flows and would change certain cash flow classifications, as follows:

  • Cash flows resulting from purchases of long-lived assets, contributions received that are restricted to acquire long-lived assets, and sales of long-lived assets would all be classified as operating cash flows rather than investing cash flows, as would be the case under existing guidance.
  • Payments of interest on borrowings and cash management activities would be classified as financing cash flows rather than operating cash flows.
  • Cash flows resulting from receipts of interest and dividends on loans and investments, other than those made for program purposes, would be classified as investing cash flows rather than operating cash flows.

Transition, effective date, and other information The proposed guidance includes enhanced liquidity disclosure requirements and is expected to reduce complexity while increasing the comparability and usefulness of the financial statements. The Board will determine the effective date of the proposed guidance after it considers stakeholder feedback.

NFPs would apply the proposed amendments retrospectively. The guidance would not apply to interim financial statements issued within the initial year of application, but would apply to interim information reported with annual financial statements. Transition disclosures would include the nature of any reclassifications or restatements and their effect on changes in the net asset classes for each year presented.

The comment period on the proposed ASU ends August 20.

More information on the proposed ASU is available in the publication FASB in Focus, “Proposed Accounting Standards Update, Not-for-Profit Entities (Topic 958) and Health Care Entities (Topic 954): Presentation of Financial Statements of Not-for-Profit Entities.”

In addition, the Board will present a webcast on May 12 from 1:30 p.m. to 3:10 p.m. (EDT) to discuss the proposed NFP financial statement guidance.

Three standards proposed to simplify employee benefit plan accounting The FASB recently issued an exposure document containing three proposed ASUs, Fully Benefit-Responsive Investment Contracts, Plan Investment Disclosures, and Measurement Date Practical Expedient – a consensus of the FASB Emerging Issues Task Force, to simplify the measurement and disclosure requirements for employee benefit plans. These proposed standards would amend the existing guidance in ASC 960, Defined Benefit Pension Plans, ASC 962, Defined Contribution Pension Plans, and ASC 965, Health and Welfare Benefit Plans.

The amendments in the proposed ASUs would simplify plan accounting as follows:

  • Fully benefit-responsive investment contracts would be measured, presented, and disclosed only at contract value, and plans would no longer be required to reconcile contract value to fair value. However, a plan would continue to disclose information that assists financial statement users in understanding the nature and risks of fully benefit-responsive investment contracts.
  • Plan assets would be grouped and disclosed by general type either on the face of the financial statements or in the notes, and would no longer be disaggregated in multiple ways.
  • Plans would no longer disclose individual plan assets that constitute 5 percent or more of net assets available for benefits.
  • The net appreciation or depreciation in investments for the period would be presented in aggregate and would no longer be disaggregated and disclosed by general type.
  • Plans with investment funds measured using the net asset value per share practical expedient in ASC 820, Fair Value Measurement, that file Form 5500 with the Department of Labor as direct filing entities would no longer be required to disclose that investment’s strategy.
  • Plans would be permitted to measure investments and investment-related accounts as of a month-end that is closest to the plan’s fiscal year-end when the fiscal year-end does not coincide with a month-end. Plans that utilize this practical expedient would be required to disclose the policy election, the measurement date, and the financial effects of contributions, distributions, and significant events occurring between the measurement date and the plan’s fiscal year-end.

The proposed measurement-date practical expedient would be applied prospectively. The other proposed guidance would require retrospective application. The proposed effective dates will be determined after the EITF considers feedback from stakeholders.

The comment period on these proposed ASUs ends May 18.

Certain electricity contracts to meet ASC 815 scope exception The FASB recently released proposed ASU, Derivatives and Hedging (Topic 815): Application of the Normal Purchases and Normal Sales Scope Exception to Certain Electricity Contracts within Nodal Energy Markets – a consensus of the FASB Emerging Issues Task Force, to resolve diversity in practice regarding the accounting for energy contracts within nodal energy markets. The proposal addresses whether certain contracts to purchase or sell electricity on a forward basis would meet the “normal purchases and normal sales” (NPNS) scope exception in ASC 815, Derivatives and Hedging, and therefore would not be recognized at fair value.

The transmission of electricity in a nodal energy market between delivery and withdrawal points (nodes) is managed by an independent system operator (ISO). ISOs invoice market participants for using the grid within a nodal energy market, and many ISOs take title to electricity transmitted within their markets before it is delivered to the purchasing market participant. Market participants pay a fee to use the grid, consisting of a transmission charge to the line owners, an administrative service charge to cover the ISO’s operating expenses, and locational marginal pricing (LMP) differences between the delivery and withdrawal locations. LMP is essentially the spot market price at a particular location.

The proposed amendments would specify that an ISO’s use of LMP would not cause an electricity contract within nodal energy markets to fail to meet the physical delivery criterion of the NPNS scope exception. Therefore, an entity could designate such a contract as a normal purchase or normal sale, as long as the physical delivery and all other criteria in the NPNS scope exception are met.

Entities would be required to adopt the proposed guidance prospectively. Entities could elect to apply the NPNS scope exception for qualifying contracts existing on or after the effective date. The effective date will be determined after the EITF considers feedback from stakeholders.

The comment period on the proposed ASU ends May 18.

Highlights of April 22 FASB meeting posted All decisions reached at FASB meetings are tentative and may be changed at future meetings. Decisions are included in an Exposure Draft only after a formal written ballot. Decisions reflected in Exposure Drafts are often changed in redeliberations by the Board based on information received in comment letters, at public roundtable discussions, and from other sources. Board decisions become final after a formal written ballot to issue a final Accounting Standards Update.

The FASB met on April 22 to continue redeliberating the 2012 proposed ASU, Financial Instruments – Credit Losses, the 2010 proposed ASU, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities, and the disclosure framework project.

The Board did not reach any tentative decisions on the derivative instruments and hedging activities project. Highlights of the discussions on the impairment of financial instruments and the disclosure framework are featured below.

Financial instruments – Impairment The Board tentatively decided to amend the proposed definition of purchased credit-impaired (PCI) assets so that assets with more than an insignificant credit deterioration since origination would be accounted for under the PCI approach. The PCI approach would require an entity to gross up the purchase price for expected credit losses, which means there would be no Day 1 provision for credit loss recognized in the income statement. The previously proposed definition included only assets that had a significant deterioration in credit quality since origination.

For assets acquired in a business combination, the Board tentatively decided that only acquired assets qualifying as PCI assets at the time of the business combination would be accounted for under the PCI approach.

Disclosure framework – Entity’s decision process The Board discussed the results of additional staff outreach on the disclosure framework project and tentatively decided that the expected benefits outweigh the anticipated costs of applying the proposed changes.

The proposed changes would be effective upon issuance and would be applied prospectively, with an option to apply them retrospectively.

PEEC approves exception to ‘affiliate’ application The AICPA’s Professional Ethics and Executive Committee (PEEC) approved an exception to the application of the AICPA’s “client affiliate” interpretation under the AICPA Code of Professional Conduct when a financial statement attest client (FSAC) is acquired by another entity (acquirer).

The exception addresses circumstances where, as result of an acquisition or a business combination, the auditor of an FSAC may no longer be independent of the acquirer under the AICPA code (for example, if prohibited nonaudit services were provided to the acquirer), which could lead to re-audits and/or to the acquirer being unable to meet its SEC filing deadlines.

Under the AICPA affiliate definition, the acquirer would be an affiliate if it controls or has significant influence over the FSAC and the acquirer’s interest is material to the financial statements. For example, an acquirer would be considered an affiliate of the FSAC as of the acquisition’s effective date if it is required to include the FSAC’s audited financial statements and reviewed interim financial information in an SEC filing.

The exception can be applied, however, only if all of the following conditions are met:

  • The accounting firm is not otherwise required to be independent of the acquirer during the period of engagement because the acquirer is not an attest client. The acquirer may engage the accounting firm to perform the FSAC’s audits or interim reviews, but if it is not an FSAC, the affiliate definition will not apply.
  • The auditor’s report(s) or interim review procedures for the FSAC cover only periods prior to its acquisition by the acquirer.
  • The accounting firm will not continue to provide financial statement attest services for the FSAC for periods after the acquisition. However, if the accounting firm is or will be engaged to perform subsequent attest services for the FSAC, the affiliate definition would apply to the acquirer.

The exception is effective April 30, 2015.

Q&As on ALTA Best Practices Framework issued The AICPA’s Financial Reporting Center published the following five new Technical Inquiry Services (TIS) sections to provide guidance to practitioners performing attest engagements under the American Land Title Association (ALTA) Best Practices Framework:

  • TIS Section 9540.01, “Types of Engagement,” discusses the types of engagements that may be performed for a title insurance and settlement company to assist management and third parties in determining whether the company has implemented, and is in compliance with, the framework.
  • TIS Section 9540.02, “Applicability to an Attest Engagement,” discusses that an examination or review of a company’s title insurance and settlement practices to determine compliance with the framework is an attest engagement under AT Section 101, Attest Engagements.
  • TIS Section 9540.03, “Suitability of Criteria,” discusses the criteria for evaluating a company’s practices against the best practices identified in the framework.
  • TIS Section 9540.04, “Nature of Examination or Review Procedures,” discusses the nature of the examination or review procedures to be applied to a company’s practices.
  • TIS Section 9540.05, “Form and Content of Report,” provides guidance on the structure and form of the examination and review reports as well as illustrative report examples.

IFAC board clarifies independence requirements for nonaudit services IFAC’s International Ethics Standards Board for Accountants (IESBA) made revisions to enhance its independence provisions relating to nonaudit services in its Code of Ethics for Professional Accountants.

The revisions set forth in the Changes to the Code Addressing Certain Non-Assurance Services Provisions for Audit and Assurance Clients strengthen and clarify the independence requirements for an auditor providing nonaudit services and more closely align with related AICPA independence interpretations. Since Grant Thornton International Ltd is a founding member of the IFAC Forum of Firms, our firm is required to apply the standards in the IESBA code as the baseline for its policies.

The revisions

  • Specify that management must accept responsibility when an auditor provides nonaudit services. Similar to the AICPA independence interpretation, the auditor should document whether an individual designated by client management to oversee the services has the suitable skill, knowledge, and experience to be responsible at all times for the client’s decisions and to oversee and evaluate the adequacy of the nonaudit services.
  • Clarify that certain administrative services, such as routine or mechanical tasks, are not subject to the nonaudit services requirements. Administrative services are those that require little or no professional judgment or that are clerical in nature. Examples include performing word processing services, preparing administrative or statutory forms for client approval, monitoring filing dates, or submitting forms as instructed by the client.
  • Remove provisions that previously permitted an auditor to provide certain tax and bookkeeping services to a publicly traded audit client or public interest entity audit client in emergency situations.

The amendments will be effective April 15, 2016. Early adoption is permitted.

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