Course 102 FASB Issues

1. Course 102 FASB Issues Presented by: Len Eschbach, Partner - Accounting & Auditing Director - St. Louis/Decatur

2. Alternative Investments & Other Fair Value Issues

3. Overview ASU 2009-12 (FAS 157-g) Fair value practical expedient for alternative investments Examples Other FAS 157 (ASC 820) matters for NFPs

4. ASU 2009-12 Formerly FSP FAS 157-g NAV as practical expedient for fair value (FV) FV hierarchy guidance Additional disclosure requirements Issued 9/30/09

5. ASU 2009-12 Steps to apply Scope of applicability NAV � practical expedient FAS 157 hierarchy Disclosure requirements

6. ASU 2009-12 Transition Effective periods ending after 12/15/09 Early adoption permitted if financials not yet issued May early adopt NAV practical expedient & FAS 157 classification without also early adopting disclosures Disclose any changes in valuation technique & quantify, if applicable

7. ASU 2009-12 Scope You�re out, unless you�re in 2 criteria to get in Investment does not have readily determinable market value Investment in entity that follows investment companies A&A Guide or similar industry practice

8. ASU 2009-12 Practical expedient for FV NAV may generally be used NAV at other than measurement date Client must evaluate variance Audit for reasonableness Investment by investment basis Exception � probable sale at other than NAV

9. ASU 2009-12 Practical expedient for FV Criteria for probable sale Management commits to plan Actively trying to sell Investment currently available for sale Unlikely plans will be changed If probable sale, practical expedient may not be used

10. ASU 2009-12 FAS 157 hierarchy If can be redeemed currently at NAV, Level 2 If never redeemable at NAV, Level 3 Everything else, either Level 2 or 3 Entity doesn�t know when it will be able to redeem at NAV � Level 3 No ability to redeem in near term at NAV � Level 3 In near term � generally within one year

11. ASU 2009-12 Disclosure requirements Apply whether practical expedient is applied or not Help users understand Nature & risks of investments Whether probable sale will occur at other than NAV

12. ASU 2009-12 Disclosure requirements FV by major category If never redeemable but will liquidate over time, approximate time to liquidate Unfunded commitments Terms & conditions for redemption Restrictions on redemption or transferability Information about investments subject to probable sale at other than NAV

13. ASU 2009-12 Sources of NAV information Investee audit reports If different year-end, must audit NAV changes

14. NFP Mergers & Acquisitions �ASC Topics 805, 954 & 958

15. Overview Mergers & acquisitions (M&A) by not-for-profits (NFP�s) (FASB Statement No. 164, ASC Topics 805, 954 & 958) Current environment for M&A activity Accounting considerations Disclosures Subsequent accounting for goodwill & intangibles Noncontrolling interests

16. Current Environment for M&A Activity Impact of financial crisis Dynamics of for profits vs. NFP�s Financial strain on NFP�s increasing potential activity Universities � Not very common, other than diversification & acquisition of subsidiaries

17. Current Environment for M&A Activity Drivers of recent activity Economies of scale Collaboration vs. competition Access to capital Streamlining provision of services to maintain relevance

18. NFP M&A: Scope Transaction driven NFP organization initially recognizes in its financial statements Another NFP Business NFP activity

19. NFP M&A: Scope Does not include Formation of joint venture Acquisition of assets that are not business Combination of entities under common control Transaction in which NFP obtains control but does not consolidate SOP 94-3 HC A&A Guide

20. NFP M&A: Key Decision Merger or acquisition Merger Transaction or other event Governing bodies of both entities cede control Not same as shared control New NFP entity created Newly formed governing body Not necessarily new legal entity

21. NFP M&A: Key Decision Merger or acquisition Acquisition Transaction or other event Acquirer obtains control of one or more NFP activities or businesses & initially recognizes their assets & liabilities in acquirer�s financial statements

22. NFP M&A: Key Decision Merger or acquisition Ceding of control by both entities is sole definitive criterion for merger One entity obtaining control over other is sole definitive criterion for acquisition

23. NFP M&A: Key Decision Merger or acquisition Other factors (not definitive) Process leading to combination Did one entity dominate? Participants to combination Governance, control & financial capacity Was cash paid? Cashless transaction may indicate merger If unclear, based on weight of evidence

24. Accounting for Mergers Carryover basis at merger date GAAP assets & liabilities carry over Carry forward classifications & elections Exceptions Merger results in modification of contract Reclassification necessary to conform accounting policies

25. Accounting for Mergers New entity is created Operations & cash flows shown from merger date Merger date is beginning of period Merger itself not reflected in operations Operations shown from merger date through end of period

26. Disclosures for Mergers Identification of merging entities Merger date Primary reasons for merger Amounts recognized by major class of assets, liabilities & net assets Nature & amount of significant adjustments to prior amounts Additional disclosures for �public entities�

27. Accounting for Acquisitions Acquisition method Same as acquisition method in FAS 141(R) (ASC 805) Some modifications for unique NFP considerations

28. Accounting for Acquisitions Acquisition method Steps Identify acquirer Determine acquisition date Recognize assets acquired & liabilities assumed at FV Recognize & measure goodwill or contribution received

29. Accounting for Acquisitions Identify acquirer Apply consolidation guidance NFP other than health care � SOP 94-3 NFP Health Care � Chapter 11 of HC A&A Guide If acquisition has occurred but above guidance does not clearly indicate acquirer, consider other factors

30. Accounting for Acquisitions Identify acquirer � other factors (not definitive) Who paid cash? Who was larger? Will one dominate management team &/or governance? Who initiated transaction?

31. Accounting for Acquisitions Determining acquisition date Date on which acquirer obtains control of acquiree Generally closing date

32. Accounting for Acquisitions Identifiable assets acquired & liabilities assumed at FV Includes identifiable intangible assets Potential elections to make Classification of investments as trading Hedge designations

33. Accounting for Acquisitions Accounting classifications generally based on conditions at acquisition date Exception Lease classification based on terms at lease inception, not at acquisition date Noncontrolling interest (formerly minority interest) measured at acquisition date FV

34. Accounting for Acquisitions Exceptions to recognition principle Donor relationships � not recognized Collections � if acquirer does not capitalize collections Complicated � see Appendix A Conditional promises to give � not recognized

35. Accounting for Acquisitions Exceptions to recognition & measurement principles Contingent assets & liabilities If acquisition date FV can be determined, recognized at FV If acquisition date FV cannot be determined, but contingency is probable & can be reasonably estimated, should be recognized Income taxes � in accordance with FAS 109 (ASC 740)

36. Accounting for Acquisitions Exceptions to recognition & measurement principles Employee benefits � in accordance with other GAAP Indemnification assets � recognized when related asset or liability recognized

37. Accounting for Acquisitions Exceptions to measurement principles Reacquired rights � basis of remaining contractual term of related contract Assets held for sale � FV less cost to sell

38. Accounting for Acquisitions Calculation of goodwill or inherent contribution Goodwill if (a) > (b) � acquisition by purchase Contribution if (b) > (a) � acquisition by gift Item (a) is aggregate of Consideration transferred, if any FV of any noncontrolling interest in acquiree FV of any equity interest held in acquiree Item (b) is net of Identifiable assets acquired Liabilities assumed

39. Accounting for Acquisitions Exception to goodwill recognition Acquiree predominantly supported by contributions & investment return Predominantly supported means contributions & investment return expected to be significantly more than total of all other revenue sources �Goodwill� [excess of (a) over (b)] recognized as separate charge in operating statement

40. Accounting for Acquisitions If (b) > (a), treated as contribution Separate credit in operating statement as of acquisition date

41. Accounting for Acquisitions Other factors to consider Acquisitions in stages (step acquisitions) Previously held equity interest remeasure at FV when control obtained Measurement period Some flexibility if accounting not finalized at reporting date Must evaluate pre-existing relationships for accounting consequences Acquisition-related costs expensed other than debt issuance costs

42. Accounting for Acquisitions Financial statements of acquirer reflect acquisition as activity of period in which it occurs Noncontrolling interests � apply FAS 160 (ASC 810) Separate component of net assets Can go negative

43. Subsequent Measurement Goodwill & identified intangibles � follow FAS 142 (ASC 350) Test for impairment Amortize definite lived intangibles Other subsequent measurement guidance Reacquired rights Contingent assets & liabilities Indemnification assets Contingent consideration

44. Disclosures for Acquisitions Numerous disclosures regarding (almost 4 pages in standard) Nature & structure of transaction Consideration paid & assets/liabilities acquired/assumed Numerous specific details to extent applicable

45. Effective Date & Transition Prospective application Mergers for which merger date is on or after beginning of initial reporting period beginning on or after 12/15/09 Acquisitions for which acquisition date is on or after beginning of first annual reporting period beginning on or after 12/15/09 Earlier application prohibited

46. Effective Date & Transition Following standards applied prospectively in first reporting period beginning on or after 12/15/09 FAS 142 (ASC 350) � subsequent accounting for goodwill & intangibles FAS 160 (ASC 810) � noncontrolling interests Other standards amendments from FAS 141(R) & FAS 160 (ASC 805 & 810)

47. Effective Date & Transition For previously recognized goodwill If predominantly supported by contributions & investment return, write-off previously recognized goodwill through operating statement Otherwise, assign goodwill to reporting units (FAS 142 or ASC 350) & evaluate for impairment

48. Effective Date & Transition For previously recognized intangibles other than goodwill Reassess useful lives & adjust amortization periods prospectively as necessary

49. Revisiting FSP FAS 117-1 & UPMIFA

50. Overview UPMIFA implementation status www.upmifa.org Net asset classification Five step program Common implementation questions

51. UPMIFA Uniform Prudent Management of Institutional Funds Act of 2006 Model act Basis for state-by-state legislation Overhauls predecessor UMIFA

52. UPMIFA Highlights Investment freedom Costs Expenditure of funds Abolishes historic dollar value (HDV) Seven percent rule Release of restrictions for small institutional funds

53. Net Asset Classification Addressed in FSP FAS 117-1 NFPs not locked into HDV In practice, HDV still important concept Explicit donor stipulations override Absent explicit donor stipulations, judgment involved

54. Net Asset Classification GAQC/FASB webcast on September 1 Clearly principle-based standard Room for interpretation Enacted state law Client circumstances Much less clear cut than before

55. Net Asset Classification Areas for interpretation Does law require maintenance of purchasing power? Plain vanilla UPMIFA encourages, but does not require Look for modifications at state level

56. Net Asset Classification Areas for interpretation UPMIFA implies time restriction until funds appropriated Appropriation occurs with approval for expenditure, unless approval for future period Still may be purpose restrictions

57. Five Step Program Step I: New gift comes in for endowment, without explicit donor language affecting initial net asset classification Managed as 1 fund, likely unitized as part of an investment pool All (or some) classified as PRNA for financial reporting purposes Remainder (if any) is classified as TRNA

58. Five Step Program Step II: Investment activity Allocated to fund based on unitization PRNA normally does not increase or decrease Exception: requirements by donor or law such as to maintain purchasing power Increase or decrease is to TRNA Exception: In underwater situations, TRNA cannot be negative so URNA would be decreased Very Important: That URNA �deficit� is within the endowment (see slide 34)

59. Five Step Program Step III: Moneys are spent elsewhere for same purpose No effect on either the fund balance or on net asset classification A time restriction is still in place until appropriation & thus funds are unavailable for spending for that purpose In other words, unlike with net asset classification for UMIFA endowments, the �deemed spent� rule does not apply here & there is no reclassification to URNA for financial reporting purposes

60. Five Step Program Step IV: Board approves funding from the endowment for next year�s budget No effect on either the fund balance or net asset classification until next year is reached

61. Five Step Program Step V: Next year is reached & amounts approved are now available for spending Fund balance is reduced by that amount, even if cash is not yet transferred: in effect cash is due to the corresponding non-endowment fund where it will be spent (operating fund, plant fund, etc.) Alternative treatment: in a corresponding board-designated endowment fund until cash is moved The UPMIFA time restriction for accounting purpose expires because appropriation for accounting purposes is now deemed to be complete

62. Five Step Program Step V, cont�d: If the fund has no purpose restriction (beyond being an endowment), there is a reclassification of those amounts from TRNA to URNA Very important: Such net assets are no longer associated with the donor endowment. Remember, only URNA amounts associated with donor endowments are negative URNA (�deficits�) when fund is underwater. If fund has a purpose restriction, the reclassification would not occur until amounts are spent or deemed spent for that purpose Without the time restriction, such amounts are now available for spending & deemed spent rule would apply.

63. Common Implementation Questions Difference between Board designated endowment & long-term reserve How is fund invested & spent? How is fund publicly characterized? If no legal obligation to restore underwater endowments, misleading to charge UR?

64. Common Implementation Questions Should these be included in tabular disclosures? Pledges receivable Split-interest investments pooled with endowment funds Perpetual trusts Answer to all is generally no, but judgment call What if institution does not maintain separate funds?

65. FASB/GASB Project Updates

66. Overview FASB website, easy to keep current www.fasb.org FASB Leases GASB Postemployment benefits Reporting entity Service efforts & accomplishments

67. FASB Current Technical Plan & Project Updates 2010 2011 JOINT FASB/IASB PROJECTS: 1Q 2Q 3Q 4Q Conceptual Framework Project:(Updated as of December 24, 2009) Objective and Qualitative Characteristics F Reporting Entity E F Measurement DP Elements and Recognition DP � 2010 2011 Standards Projects: 1Q 2Q 3Q 4Q Statement of Comprehensive Income� (Updated February 5, 2010) E F Accounting for Financial Instruments� (Updated February 5, 2010) E R F Reporting Discontinued Operations (Updated January 7, 2010) E F Fair Value Measurement (Updated February 2, 2010) E R,F Consolidations: Policy and Procedures� (Updated February 1, 2010) E R F Financial Instruments with Characteristics of Equity (Updated January 28, 2010) E R F Codes:� DP � Discussion Paper � E � Exposure Draft� F � Final Document� R � Roundtable Discussion

68. FASB Current Technical Plan & Project Updates (Continued) 2010 2011 1Q 2Q 3Q 4Q Financial Statement Presentation�(Updated February 1, 2010) E R F Leases�(Updated December 30, 2009) E R F Revenue Recognition(Updated February 5, 2010) E R F Emissions Trading Schemes(Updated October 30, 2009) E F Insurance Contracts�(Updated December 30, 2009) E,R F Codes: DP � Discussion Paper �E � Exposure Draft� F � Final Document� R � Roundtable Discussion

69. Project on Lease Accounting Joint Project of FASB & IASB

70. Objective To create common standard on lease accounting to ensure assets & liabilities arising from lease contracts are recognized in statement of financial position Focuses on significant components of accounting model for lessees

71. Criticisms of Existing Standards Failing to meet needs of users Assets & liabilities under operating leases not being recognized Similar transactions accounted differently Opportunities to structure transactions to achieve desired accounting result Reduced comparability for users

72. Criticisms of Existing Standards Complexity of existing standards Difficult to define dividing line between capital & operating leases Conceptually flawed Rights & obligations not recognized under operating lease

73. Rights & Obligations Board concluded Right to used leased items � asset Obligation to make payments � liability Obligation to return leased item at end of lease term is not liability

74. Initial Measurement Asset � At cost Cost = PV of lease payments discounted using lessee�s incremental borrowing rate Liability � PV of lease payments discounted using lessee�s incremental borrowing rate

75. Subsequent Measurement of Obligation Amortized cost-based approach Advantages over FV measurement Measured consistently with other non-derivative financial liabilities Consistent with initial measurement decision Simpler & less costly for preparers

76. Accounting for Changes in Estimated Cash Flows Catch-up approach � Carrying amount of obligation to pay rentals (liability) is adjusted to PV of revised estimated cash flows, discounted at original effective interest rate

77. Subsequent Measurement of Right-to-Use Asset Amortized cost-based approach Shorter of lease term & economic life of asset Advantages over FV measurement Consistent with treatment of other non-financial assets Consistent with initial cost basis measurement decision Easier & less costly for preparers

78. Right-to-Use Asset Impairment Decision reached during June meeting Follow FAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets Determine whether right-to-use assets is impaired & recognize loss

79. Leases with Options Term options � Right to extend/terminate lease Purchase options

80. Accounting Treatment for Leases with Options Do not recognize options as separate assets Recording obligation to pay rentals � include if option is likely to be exercised Assessment of lease term � based on determination of most likely outcome

81. Determine most likely outcome Consider contractual, noncontractual & business factors Reassessment of option at each reporting period on basis of any new facts or circumstances Changes in obligation due to reassessment result in adjustment in carrying amount of right-to-use asset

82. Additional Considerations Contingent rentals & residual value guarantees Assets & liabilities by lessee should reflect obligation to make contingent rental payments

83. Other Lessee Issues Sale & leaseback transactions Seller/lessee determine whether transaction qualifies as sale Derecognize leased item Recognize right-to-use asset & obligation to make rental payments for leaseback

84. Transition Recognize obligation to pay rentals & right-to-use asset for all outstanding leases at transition date Measured at PV of lease payments, discounted using lessee�s incremental borrowing rate on transition date

85. Status July 17, 2009 � Discussion paper comment period ended 2010 � Exposure draft of new standard Mid-2011 � Revised standard for lessees Subject to change!

86. GASB Postemployment Benefits GASB 25/27 on pensions GASB 43/45 on OPEBs Can/should existing model be improved? Accountability & transparency Usefulness

87. GASB Postemployment Benefits Topics for discussion Should liability for future benefits be recognized? If so, when & how? Should actuarial parameters be better defined? Should additional disclosures be required? Timeline � TBD

88. GASB Reporting Entity GASB 14/39 Can/should existing model be improved? Fiduciary activities Is determination of in/out of reporting entity appropriate? Blending vs. discrete presentation Fiscal dependency criterion

89. GASB Reporting Entity Timeline ED � 1Q 2010 Final � 1Q 2011

90. GASB Service Efforts & Accomplishments Fairly new concept Controversial Voluntary reporting to help users understand Goals & objectives of SLG services Specific nonfinancial performance measures Standards of, or benchmarks for, service performance

91. GASB Service Efforts & Accomplishments Timeline ED � 2Q 2009 Final � 2Q 2010

92. ASC 855 (FAS 165)Subsequent Events

93. Purpose Emphasize management�s responsibility Not auditor�s Applies to all statements

94. Scope Accounting & disclosure of subsequent events not addressed in other GAAP

95. Key Terms Subsequent events Recognized subsequent events (Type I) Nonrecognized subsequent events (Type II)

96. Key Terms Financial statements are issued Financial statements are available to be issued

97. Evaluation Public entities (including FSP 126-1) evaluate through date financial statements issued Includes all entities who widely distribute their financial statements, those with conduit debt All other entities evaluate through date financial statements are available to be issued

98. Recognition & Disclosure Same rules as AU 560 Record recognized subsequent events & disclose nonrecognized subsequent events

99. New Disclosure Requirement Management must disclose date through which they have evaluated subsequent events

100. Impact on Audit Reports Nonpublic companies Date available to be issued generally same as report date under SAS 103 Report cannot be dated earlier than date available to be issued Be careful when BOD or audit committee have substantive approval authority

101. Impact on Audit Reports Public companies (including FSP 126-1) Date issued should be report release date Conduit bond obligors deemed to be public companies

102. Auditing Subsequent Events No change to auditors� responsibility in AU 560

103. Effective Date Effective for periods ending on or after 6/15/09

104. A-133 Changes

105. Guidance Has Now Been Issued New chapter in December 2009 AICPA Audit Guide: Government Auditing Standards Circular A-133 Audits Made public in late January 2010 Effective upon release When practical, most firms will apply to 3/31/10 year ends, some firms with 12/31/09 year ends Not a new standard, but �revised interpretation of existing requirements� Requires Internal control testing to map to COSO, (Committee of Sponsoring Organizations of the Treadway Commission) Sampling addressed

106. Audit Impact What your auditor may need from you may change or increase Sample sizes could increase More exceptions may be noted

107. Communications Don�t assume, same as last year Discuss with your auditors

108. Recovery Act, Stimulus Funding Recovery Act Dollars Generally makes a �Type A Program� high risk May be testing more programs Discuss with your auditor early

109. Questions & Discussion