FASB Update AAA GNP Section Midyear Meeting March 3, 2012 Jeff Mechanick Assistant Director Financial Accounting St

1. FASB Update AAA GNP Section Midyear Meeting March 3, 2012 Jeff Mechanick Assistant Director Financial Accounting Standards Board Tele: 203-956-5301 Email: jdmechanick@fasb.org

2. 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.

3. Agenda • 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

4. Convergence/ 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?

5. 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)

6. 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])

7. 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

8. 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.

9. 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)

10. 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

11. 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

12. ASUs 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

13. ASUs 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

14. Fair 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)

15. Fair 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.

16. 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

17. Goodwill 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

18. Goodwill 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

19. Multiemployer 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”)

20. Multiemployer 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.

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

22. Leases Project: Lessees • 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”

23. Leases Project: Lessors • 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)

24. Leases Project: Timeframe • 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

25. Revenue 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

26. Revenue Recognition Project: Timeframe • 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

27. Financial 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

28. Financial 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?

29. 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

30. 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

31. 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

32. 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

33. 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)

34. 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

35. 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

36. 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.

37. 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

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

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

40. 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)

41. Questions?