Back on the Radar
With little implementation in standard setting during much of 2011 and 2012, the FASB and the GASB are once again visible, issuing a variety of statements and proposals for consideration.
By Sue Menditto
New guidance implementation by the standard-setting boards has been at a somewhat low point, as reported in "Under Construction," the 2011 accounting year in review in the January 2012 issue of Business Officer. The article also cautioned higher education leaders against becoming too comfortable or complacent, as the Governmental Accounting Standards Board (the GASB) and the Financial Accounting Standards Board (the FASB) are always working to improve the state of financial reporting.
The past year is no exception. The GASB continued its accountability quest by studying public pension plans and economic sustainability. The goal: to help citizens understand the financial impact of public pension promises and address adequate ways to communicate the current and future fiscal impact of government policy choices.
The FASB, on the other hand—influenced by international convergence and the need to tackle guidance to mitigate future financial distress—created some unrest among private company and not-for-profit (NFP) constituents. The FASB responded by forming a team to tailor guidance for private companies. The board also realized that NFP financial statement users have different expectations from those of private companies. The next logical question: Do the financial statement users of NFPs defined as "public," because of the way they use debt, have different needs from those of other NFPs (defined as nonpublic)?
Following are further details about each board's activities during the past year.
The FASB Focuses on Several Fronts
In 2012, the work of the Financial Accounting Standards Board (FASB) included issuing:
- One standard that impacts higher education institutions—Accounting Standards Update (ASU) 2012-05, on classifying sale proceeds related to certain donated assets in the statement of cash flows.
- Two proposals that could affect colleges and universities (credit losses, and liquidity and interest rate risk).
- One invitation to comment (the disclosure framework), which may affect all entities that follow FASB guidance.
In addition, two ASUs issued before 2012 are effective in the current fiscal year (FY13) for higher education: ASU 2011-07, on bad debt provisions related to patient service revenue and, more importantly, ASU 2011-04 on fair value measurement. The board also continued to deliberate on proposals covering lease accounting, revenue recognition, and financial instruments.
The work of the FASB's Not-for-Profit Advisory Committee (NAC) also persisted, and the committee formed resource groups to address financial statement presentation (including operating performance and liquidity) and other forms of communication.
More Disclosures for Independent Institutions
As implied by its title, the objective of Accounting Standards Update 2011-04, "Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs," is to achieve alignment between U.S. GAAP and International Financial Reporting Standards (IFRS) for fair value measurements and disclosures.
Consequently, the wording used to describe many of the requirements in U.S. GAAP for measuring the fair value of nonfinancial assets (such as property) has changed—but the methodology for measuring has not. In general, the ASU reinforces already codified definitions of fair value and the related measurement framework, but adds more disclosures.
The new disclosures are likely to have the greatest impact on colleges and universities. However, the new requirements are mandatory only for Level 3 fair value measurements, where the practical expedient provided in ASU 2009-12 is not employed. New disclosures call for:
- Quantitative information about the unobservable inputs used in calculating recurring Level 3 fair value measurements.
- A description of the valuation processes that are used.
- A qualitative discussion about the sensitivity of the measurements to changes in unobservable inputs and interrelationships between the unobservable inputs, if any. (This disclosure is not required for nonpublic entities.)
In addition, regardless of whether or not the practical expedient is used for valuation, public entities (higher education institutions that are debt issuers or conduit debt obligors) must disclose:
- Transfers between Level 1 and Level 2 of the fair value hierarchy on a gross basis and the reasons for those transfers.
- The categorization by level for items that are not presented in the statement of financial position at fair value, but for which disclosure of the fair value is required. (For example, an institution's bonds may be carried at amortized cost on the balance sheet, but their fair value is required to be disclosed in the notes. The fair value of the bonds will now need to be categorized by level within the financial statements.)
Even though such information may not be difficult to obtain and provide, it adds to the already lengthy fair value disclosures. The requirement for public entities to disclose transfers among all levels of the fair value hierarchy-and the reasons for those transfers-will increase administrative burdens for higher education institutions defined as "public," and not necessarily add more value to statement users.
Accounting Standards Update (ASU) 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," affects independent colleges and universities that have hospitals, clinics, or other businesses that provide patient services. Further, such colleges and universities are only affected if they recognize significant amounts of revenue from patient services at the time the services are performed, without assessing the patient's ability to pay.
The ASU changes the display of the provision for bad debts; the new requirement calls for presentation of the bad debt provision as a deduction from patient service revenue on the income statement. The ASU also requires affected entities to provide enhanced disclosures by major payor source of revenue.
NACUBO Responds: Liquidity
Last June, the FASB issued a proposed ASU, "Financial Instruments (Topic 825), Disclosures About Liquidity Risk and Interest Rate Risk." The exposure draft recommends new financial statement disclosures about risks arising from an entity's recorded and unrecorded financial instruments and cash flow obligations. For independent institutions, that would mean providing in table form cash flow obligations segregated by expected maturities, including both recorded liabilities and off-balance sheet obligations such as unfunded investment commitments. Separate tabular disclosures would also be required for available liquid funds, including unencumbered cash, high-quality liquid assets, and borrowing availability. In addition to the quantitative information, institutions would need to provide a narrative discussion about exposure to liquidity risk and explain any significant changes in cash flow obligations from the prior period.
Several GASB statements take effect this year, with standards relative to financial reporting, public-private partnerships, and the financial reporting entity.
NACUBO comments to the FASB noted that, although higher education expected a subsequent proposal—in response to the hundreds of comments that the FASB received in 2010 on the original financial instrument proposal—the thought was that the board had overlooked NFPs in the research conducted to formulate the liquidity and interest rate risk proposal. NACUBO has asked that NFPs be scoped out of this ASU and that the FASB allow the NAC to complete its work on the financial statement project for NFPs, which will include the areas of liquidity and financial health.
NACUBO Responds: Revenue Recognition
Another proposed ASU revises an exposure draft, originally released in June 2010, and addresses a number of issues that were concerns for higher education in the first document. The proposal clarifies the point at which contract revenue can be recognized over time, including partial performance and expectations of full performance related to contract terms.
Additional revisions provide an exception to performance assessments if the purpose of the contract is to provide a social or charitable benefit. While this exception eliminates the need to record a liability for contracts with a cost-sharing component, the larger concern for higher education institutions relates to sponsored research grants.
Although federally sponsored research grants have compliance requirements and ongoing reporting obligations, there is typically no stated expectation of an output with commercial value. Consequently, such research grants do not meet the FASB's definition of a contract with a customer. NACUBO requested that either such grants be excluded from the scope of the proposed ASU or that the FASB clarify its definition of a collaborative arrangement (related to research). A clear definition of a collaborative research arrangement would effectively eliminate sponsored research grants from performance-related revenue recognition requirements.
An Influential NAC
The Not-For-Profit Advisory Committee met face-to-face twice in 2012. NACUBO and the higher education industry are represented by Steve Golding, the chief business officer at the University of Pennsylvania. NACUBO is also connected to NAC efforts through representation on project resource groups and meetings with FASB staff who are liaisons to the NAC.
The committee continued to discuss U.S. GAAP that are applicable to NFPs and ways that the FASB might improve the relevance, complexity, and costs of required guidance. Very much related to these issues is the definition of a "public entity" and whether the needs of debt investors (versus the needs of equity shareholders of publicly traded companies) are fundamentally different. Another related conversation is the construct of public accountability and how it relates to general purpose financial reporting by NFPs.
NAC work is also correlated with a project placed on the agenda in March 2012 that looks to define "nonpublic" entities. The project's objective is to achieve application consistency for definitions of "nonpublic" and "public" that are used in various board projects. The linkage between this project and NFP concerns is the bright line between "public" and "nonpublic" entities that is drawn in authoritative guidance and proposed guidance.
Questioned by many NFP constituents, including NACUBO, is whether NFPs that use publicly traded debt (through issuance or borrowing) should have the same reporting and disclosure requirements as those of publicly traded companies. And, on the flip side, because of public accountability requisites, NFP financial statement users have different expectations and needs from those of private companies—regardless of whether or not the NFP entity uses public debt.
Two other NAC projects continue: (1) financial statement presentation (which covers operating performance, liquidity, and disclosures), and (2) other financial communications (e.g., Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A). Hopefully, these projects will expose issues related to the pervasive distinction between public and nonpublic constraints in U.S. GAAP—and reveal what makes the most sense for NFPs.
The GASB Surfaces With Some New Standards
In 2012, the Governmental Accounting Standards Board issued two standards that affect higher education institutions—No. 68, on pension accounting and reporting; and No. 65, on classifying certain assets and liabilities as either deferred outflows or inflows of resources. In addition, the board issued two Exposure Drafts: one relating to financial guarantees, and the other to government combinations.
Of great concern is the construct of a collective liability. If the pension plan has an unfunded liability, all participating employers in a multiple-employer cost-sharing plan collectively share a portion of the liability.
Several standards issued prior to 2012 are effective in the current fiscal year (FY13): No. 60, on service concession arrangements; No. 61, on the reporting entity; and No. 63, on presenting the new statement of net position. Board deliberations continue on fair value, the GAAP hierarchy, other postemployment benefits (OPEB), and financial guarantees. The board has agreed to suspend a project that would require financial projections in the external general purpose financial statements; the board's preliminary views were opposed by NACUBO and many other constituents in 2012.
On the Screen for 2013
Several GASB statements take effect this year, with standards relative to financial reporting, public-private partnerships, and the financial reporting entity.
A new beginning for financial reporting. GASB Statement No. 63, "Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position," establishes the format for reporting deferred outflows of resources, deferred inflows of resources, and net position. A deferred inflow of resources is an acquisition of net assets that is applicable to a future reporting period, and a deferred outflow of resources is a consumption of net assets that is applicable to a future reporting period.
While deferred outflows of resources are not assets, they have a positive effect on net position that is similar to the effect of assets. Similarly, deferred inflows of resources are not liabilities, but they have a negative effect on net position that is similar to the effect of liabilities. With the addition of such deferrals, balance sheets will expand from three categories to five.
A related statement issued by the GASB in 2012, No. 65, "Items Previously Reported as Assets and Liabilities," provides an inventory of items that qualify as deferred outflows of resources or deferred inflows of resources. What determines whether certain deferrals are considered assets or liabilities, while others are considered to be deferred inflows or outflows of resources? Basically, an asset or liability exists, rather than a deferred outflow or inflow of resources, when a governmental entity is obligated to perform or receive a service.
Time to evaluate public-private partnerships. Statement No. 60, "Accounting and Financial Reporting for Service Concession Arrangements," is effective this year. For decades, public colleges and universities have partnered with expert entities to deliver services to students, faculty, and staff. The GASB's use of the term "service concession arrangements" (SCA) more broadly includes partnerships or arrangements between a transferor (a governmental entity such as a public institution) and an operator (either private sector or governmental). The provisions of this standard apply only when full control of operations—in exchange for consideration—is granted to the operator, in addition to the right to collect fees for the services provided.
The statement gives guidance on whether the transferor or the operator should report the capital asset in its financial statement, when to recognize up-front payments from an operator as revenue or a deferred inflow of resources, and how to evaluate whether a current obligation or a deferred outflow of resources exists. In an SCA agreement, the transferor reports an asset for the consideration it receives, a liability for any obligations it assumes, and a deferred inflow of resources for the difference.
An update on reporting entities. Statement No. 61, "The Financial Reporting Entity: Omnibus," amends the requirements of Statement No. 14, "The Financial Reporting Entity," and No. 34, "Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments." Statement 61 is intended to better meet user needs and address reporting entity issues that have come to light since statements 14 and 34 were issued. Statement 61 raises the bar for inclusion of blended component units and requires that condensed combining information for the blended component unit(s) be disclosed in the notes to the financial statements.
Because the guidance in the standard should be applied retroactively, public institutions that no longer blend certain component units (e.g., those which no longer qualify for blending) will have a prior period adjustment if comparative financial statements are issued.
New Pension Guidance Shines a Light on Promised Benefits
GASB Statement No. 68, "Accounting and Financial Reporting for Pensions," illuminates the promise of pension benefits by governmental employers to their employees. Issued in June 2012, the standard's objectives are to quantify the promise of pension benefits and enhance the public's understanding about resources required to honor pension benefit payments.
The standard is effective in FY15 and addresses single-employer plans; agent multiple-employer plans; and multiple-employer cost-sharing plans. Most public institution defined benefit pension plans are structured as either agent multiple-employer plans or multiple-employer cost-sharing plans—the latter being more prevalent. Of great concern for public colleges and universities is the construct of a collective liability that is introduced in the standard: If the pension plan has an unfunded liability, all participating employers in a multiple-employer cost-sharing plan collectively share a portion of the liability.
Multiple cost-sharing employers should pay attention to special funding situations that arise when nonemployers are legally responsible for making payments directly to the pension plan on behalf of an employer. The employer and the nonemployer can "share" funding responsibility and in such cases the employer's liability is reduced proportionately. All funding contributions from nonemployer entities must be based upon a compensation formula and not some other type of funding arrangement that has no relationship to compensation.
Statement No. 68 also requires footnote disclosures, which vary slightly between single and agent employers and multiple cost-sharing employers. At the high level, all employers will need to disclose information about changes in the net pension liability, significant actuarial inputs, discount rate assumption, and plan characteristics. In addition, required supplemental information will need to cover 10-year deferrals and expense projections, and provide an analytic discussion of factors that contribute to projected changes in the net pension liability.
Other GASB Developments
The GASB continues its work on several ongoing efforts, including:
Fair value. Throughout 2012, the board has been discussing the fair value project. Current authoritative guidance provides a list of investments that can be measured and reported at fair value; there is no provision for reporting investments at fair value that do not have a readily determinable market price. The new project has a more conceptual approach: The board has tentatively defined investments subject to fair value accounting as "securities" or "assets" that a government holds primarily for the purpose of income or profit. Further, the investment's present service capacity is based solely on its ability to generate cash, be sold to generate cash, or procure services for the citizenry.
The GAAP hierarchy. The board is discussing reducing the hierarchy to two levels: authoritative and nonauthoritative. Authoritative is the highest level and must go through due process (e.g., exposure, constituent feedback, and board deliberations). GASB concepts statements would continue to be categorized as nonauthoritative. The FASB Accounting Standards Codification would be included as a source of nonauthoritative "other accounting literature." GASB technical bulletins are currently authoritative pronouncements but may not be issued in the future.
The most interesting debate is the role of the Comprehensive Implementation Guide. There is a strong desire for the CIG to be considered authoritative. Although the board currently approves all additions to the guide, nothing in the CIG has ever gone through due process with constituents. How due process would be implemented will be discussed at future meetings.
In 2013, NACUBO and its Accounting Principles Council will continue working with FASB and GASB staff. Campus volunteers and NACUBO staff will regularly observe NAC meetings and participate in resource groups. NACUBO also plans to work with GASB staff on advisory guidance that makes sense for higher education. Even though FASB and GASB agendas differ, we will keep spotlighting the information that college and university financial statement users find most valuable—and working with standard setters to enhance reporting.
SUE MENDITTO is director, accounting policy, for NACUBO.