Financial Accounting Standards Board

Financial Accounting Standards Board FASB Update: “The Calm Before the Storm” NYSSCPA Not-for-Profit Committee August 3, 2011 Jeffrey D. Mechanick Assistant Director Financial Accounting Standards Board 401 Merritt 7, Norwalk, CT 06856 Tele: 203-956-5301 Email: jdmechanick@fasb.org

Disclaimer 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.

Agenda • Standard-Setting Environment and Ongoing Changes at the FASB • Public Companies • Private Companies & NFPs • Work of the FASB Not-for-Profit Advisory Committee (NAC) • Standards Projects • FASB/IASB Convergence Projects • Other FASB Projects • Q&A

Convergence: A Brief History Ideal of globally comparable standards is decades old FASB and IASB have been working towards this ideal for nearly a decade, and on a set of major convergence and improvement projects under a Memorandum of Understanding (MOU) since 2006 SEC removed reconciliation requirement for foreign registrants in 2007, and proposed Roadmap in 2008 for potentially moving domestic registrants to IFRS in 2014-2016 In February 2010, SEC committed to staff work plan to help inform decision by end of 2011. Looking to progress on MOU projects, among other factors, to help determine whether to incorporate IFRS into U.S. financial reporting regime for domestic registrants.

“Condorsement” and the SEC’s Decision One potential means of incorporating IFRS; articulated in May 2011 staff work plan update Combines elements of convergence and endorsement U.S. GAAP would stay in place and elements of IFRS would gradually be brought into it over approximately a 5-7 year transition period Long-term role envisioned for FASB similar to that of many other national standard setters Other progress reports expected from SEC staff in 2011 Impact of remaining differences between U.S. GAAP and IFRS after MOU projects Report on experience of other countries in adopting IFRS Decision in 2011?

FAF Strategic Initiative on Nonpublic Entities Result of Summer 2009 FAF (FASB’s parent) “listening tour” Key Messages Heard: Complexity and “Disclosure Overload” Insufficient understanding of and attention to private companies and, to a lesser extent, NFPs Blue-Ribbon Panel, one key part of initiative with respect to private companies (but not NFPs), resulted from: FAF listening tour AICPA Council resolution PCFRC letter

Blue-Ribbon Panel on Standard Setting for Private Companies Sponsored by FAF, AICPA, and NASBA Mission: To address how accounting standards can best meet the needs of users of U.S. private company financial statements in a cost-effective manner Completed its work and issued its report to the FAF Trustees in January 2011 Key recommendations: GAAP with exceptions and modifications, underpinned by creation of a differential framework Separate private company standards board Minority view: EITF-type structure Shorter-term recommendations

FAF Trustee Working Group Created by the FAF Trustees to evaluate the adequacy and effectiveness of the FASB’s efforts in setting standards for nonpublic entities (both private companies and NFPs) Considering recommendations of the Blue-Ribbon Panel as well as other possible solutions Doing outreach to all key stakeholder groups, including those who did not weigh in significantly during Blue-Ribbon Panel process FAF will share findings with all constituents later this year

Some Changes at FASB/FAF Personnel Assistant Director for Nonpublic Entities (June 2009) Expansion of FASB nonpublic team staff (Fall 2010) Expansion of Board, adding private company experience (February 2011) Process Creation of NFP Advisory Committee (NAC) (Fall 2009) Closer Board and staff working relationship with PCFRC (from Spring 2010 forward) Deployment of nonpublic staff (and most recently, PCFRC member liaisons) across project teams, with more explicit consideration of nonpublic entities throughout standard-setting process (from agenda-setting to final standards)

Some Changes at FASB/FAF Current Work towards Differential Framework Private Companies: Internal white paper on differential factors summarized in recent FASB in Focus document posted to website. Feedback is welcome! Private Company Resource Group formed to help vet paper and use it in creating Differential Framework, which will be publicly vetted NFPs: Parallel process, with Concept Statements 4 & 6 as starting point NAC/ NFP Resource Group will help in process Likely project to reexamine definition of “public entity”

Some Changes at FASB/FAF Communication, Outreach & Education FASB in Focus documents, webcasts (for CPE) Nonpublics section of FASB website Private company issues roundtables Nonpublic entity-focused roundtables on major projects (e.g., Leases, Financial Instruments) NFP Resource Group created: informs work of NAC and staff Piloted Electronic Feedback Form with Goodwill Impairment Testing Project FAF Post-Implementation Review Process FASB standard for initial review: FIN 48

Challenges of NFP Standard Setting In some ways similar to those of private companies, but there’s a fundamental difference that also must be factored in: many/ most NFPs have a much greater degree of public accountability and a much wider distribution of GAAP financial statements As the FAF considers the standard-setting structure and approach for nonpublic entities, the FASB’s Not-for-Profit Advisory Committee (NAC) is examining the NFP financial reporting model to identify areas for possible standard-setting or educational action.

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 3 participating observers. NFP financial officers, auditors, foundation and other donors, creditor, watchdog agency, charities regulator, attorney Also, NFP Resource Group (>100 members)

FASB Not-for-Profit Advisory Committee (NAC) Marquis project: Three NAC subgroups are working to identify potential improvements in NFP financial reporting for discussion at the next NAC meeting (in September 2011) Reporting financial performance Statements of Activities and Cash Flows: operating measures, net asset classes, functional and natural expenses, cash flow presentation, etc. “Telling the story” MD&A, functional expense reporting/ segment reporting, summary financials Reporting liquidity/ financial health Balance Sheet and related notes: liquidity, other financial health measures

What Will the Future Hold for Private Co. and NFP Standards? FAF decision on Blue Ribbon Panel recommendations Separate Board? Modified GAAP with exceptions? Same or different solution for NFPs? Future of IFRS convergence SEC work plan/ 2011 (?) decision Regardless, significant changes and progress achieved More work to be done, progress requires embedding and collaboration

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

Fair Value Measurements (ASU 2011-4) IASB is putting into place an equivalent of FAS 157 (Topic 820); we have 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: Adds 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)

Fair Value Measurements (ASU 2011-4) Other key changes to disclosures for public entities only: Level tables for FV used in “FAS 107” disclosures All transfers between Levels 1 and 2 (not just significant transfers) Nonpublics will no longer have to disclose any such transfers Final standard (ASU 2011-4, IFRS 13) issued in May Effective for publics @ beginning of 2012; for nonpublics, @ end of 2012

Leases Project ED issued in August 2010 Key feature: “right-of-use” model: asset and liability on the balance sheet Approximately 800 comment letters received. Public roundtables included one devoted to private companies and NFPs. Several changes made in response to comments Boards have committed to reexpose Standard likely to be finalized in mid-2012, with effective date for public companies likely not until 2015, and likely incremental delay for nonpublics beyond that

Leases: Redeliberations Some key developments: Measurement simplifications (both lessees and lessors): Generally, limited to noncancellable period. Only factor in renewal options if significant economic incentive to exercise. Generally, limited to minimum lease payments. Index-based contingent rents estimated and included in lease payments, as well as those that are in-substance fixed payments. Other contingent rents (performance or usage-based) not recognized until incurred.

Leases: Redeliberations Some key developments (cont’d): Lessees: Short-term leases: Boards decided to allow an accounting policy option not to capitalize short-term leases (12 months or less without renewal options) Boards explored two different lease models, “finance” versus “other-than-finance,” to try to find a way to retain straight-line rent expense for the latter, but determined that trying to do so retained too much complexity, and instead focused on a disclosure alternative Key concern: cost recoveries FASB staff will propose practical expedient for nonpublics on shorter-term multiyear leases

Leases: Redeliberations Some key developments (cont’d): Lessors: Still being redeliberated but now leaning toward the (partial) derecognition approach for all multiyear leases. Key areas still to be redeliberated: Month-to-month leases, unwritten leases FASB: related party leases (prevalent with private companies) Disclosure exceptions for nonpublics (FASB only) Effective date and transition Potential differences for nonpublics, possibly small public companies (FASB only)

Leases: Preparing for Change Inventory all leases Assess capitalization threshold Monitor the continued developments in the project at fasb.org Depending on final decisions: Understand any potential impact on debt financial covenants (debt/equity ratios) and any other key financial metrics by which the organization is measured. Understand any potential impact on cost recovery agreements. The FASB is very aware of these issues for NFPs, as well as other Government contractors, etc.

Revenue Recognition in Contracts with CUSTOMERS • NOT within scope: Donations, Collaborative Arrangements • Single rights/obligations approach rather than industry specific “earnings process” approach • Revenue recognized as benefits are transferred to customer and performance obligations (deliverables) are satisfied • Five key steps in applying the proposed model • Identify the contract(s) with a customer • Identify the separate performance obligations in the contract • Determine the transaction price • Allocate the transaction price to the separate performance obligations • Recognize revenue when the entity satisfies each performance obligation. Recognition pattern for some arrangements may change

Rev Rec: Redeliberations • Key developments: • Guidance for determining the transfer of a service (or a nondistinct bundle of goods or services) as opposed to a good. • Report expected credit losses as a contra revenue account • NFPs exempt from “onerous performance” test for all contracts with customers that they enter into for social benefit or charitable purposes; all other contracts: test is at contract level rather than performance obligation level • Nonpublic entities exempt from most of the new quantitative disclosures • Transition: retrospective for publics, nonpublics

Rev Rec: Redeliberations • Area Pending Redeliberation: • Effective Date • As with Leases project, Boards have committed to reexpose, pushing back expected date of final standard until sometime in 2012. • Likely effective date 2015 for public companies, and likely incremental delay beyond that for nonpublics, possibly small public companies.

Financial Instruments • Scope: all financial instruments, other than those under certain other standards (e.g., leases, pension obligations, etc.) • NFP pledges receivable and payable also excluded • Three sections of project: • 1) Classification and Measurement • IASB completed this phase first • FASB moved away from much of what was proposed in ED regarding greater use of FV (especially loans and liabilities), in exchange for possible enhanced disclosures on interest rate risk (financial institutions) and liquidity risk (all entities), paving way for significant degree of convergence • Greatest change for business entities: most debt securities at FV (NFPs already at FV there) • 2) Impairment: Boards working toward converged solution • 3) Hedge Accounting: FASB studying IASB’s (very different) proposal

Financial Instruments • Overall impact on most of NFP sector probably no longer significant, with possible exception of some disclosure changes. • Effective date(s) likely 2015 (or later) for public companies, with potential incremental delay for nonpublics

Ongoing FASB-only Projects of Note Testing goodwill for impairment To reduce costs, especially for nonpublic entities, proposing that Step 1 of the impairment test (comparing carrying value of reporting unit to fair value) not be required if an elective qualitative assessment indicates that it is more-likely-than-not that goodwill isn’t impaired Final standard expected in 3Q 2011 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

Ongoing FASB-only Projects of Note Disclosures about an employer's participation in a multiemployer plan Key issue during redeliberations involved the identification of a quantitative measure of potential exposure Have moved off of requiring disclosure of withdrawal liability in favor of directing statement readers to information contained in the IRS Form 5500 for significant plans Final standard expected in 3Q 2011 Risks and uncertainties (going concern) 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 has been on-hold while awaiting input from SEC, PCAOB

Ongoing FASB-only Projects of Note Disclosure Framework Goal is 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, privare companies, NFPs)

Staying Current Best ways to stay current Sign up for electronic Action Alert FASB on Twitter and (soon) Facebook! 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 is scheduled for Tuesday, December 20)

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