The work of the FASB and the GASB during 2011 included little in the way of implementation. But, behind the scenes, the standard-setting bodies were deep in discussion. Chief concerns: The FASB considered how to reconstruct the reporting model for independent institutions, while the GASB continued to address accountability by proposing measurement and reporting changes.
By Sue Menditto
- Also see, “Custom Design,” by Karen Craig
There is always something to say about the state of higher education accounting and reporting. That’s not surprising, since accounting standard-setting boards—the Financial Accounting Standards Board (FASB), which sets standards for independent institutions, and the Governmental Accounting Standards Board (GASB), which sets standards for public institutions—often develop technical agendas that mirror current events, such as the global financial crisis.
Over the past decade, the GASB has been focused on building a foundation that supports accountability—through increased disclosures, supplemental information, analysis of service efforts and accomplishments, and the reporting of financial elements never before recognized in the external general purpose statements of governments.
Meanwhile, the FASB has concentrated on international accounting convergence, principles-based concepts, and enhanced disclosures; and shining a light on leverage, market risk, and asset valuation.
Through their respective projects, both boards are responding to a climate that demands increased accountability as a result of confusing capital market products, technology escalation, global growth, demographic shifts, life expectancy changes, economic uncertainty, and international debt concerns.
Like the seasons, the technical agendas of the FASB and the GASB have certain rhythms. Sometimes they produce extremes—or in the accounting sense, demanding new standards, implementation challenges, and lengthy complicated disclosures. Other times, they appear to remain dormant; the memory of an extreme event fades, and it's hard to imagine what could possibly be building up next.
Although 2011 was a slow implementation year, the standard setters remained busy on projects that could lead to sweeping change in the future. Even though the GASB and the FASB appear quiet when external financial statements have few substantial changes, business officers must keep an eye out for possible extreme conditions ahead.
Accountability and the GASB
Several projects fall under the GASB's recent accountability efforts.
Economic condition reporting. Over the past two years the GASB has been wrestling with the construct of fiscal sustainability and how governments ought to communicate their economic state of affairs. The objectives of the economic condition reporting project are to:
- Identify the information that users need to assess a government's economic condition and fiscal sustainability.
- Compare what is needed with the information users currently receive in the comprehensive annual financial report (CAFR) and other sources.
- Evaluate whether authoritative guidance (such as an accounting standard) or guidelines (voluntary guidance for governments that wish to report their economic condition) is appropriate for this type of additional financial information.
The project comprises three phases: (1) a thorough literature review on the topic; (2) development of GASB Statement No. 44, “Economic Condition Reporting: The Statistical Section,” which was released in 2004; and (3) the discussion that has been taking place over the past two years between the staff and board, on whether additional information—necessary for assessing a government's economic condition—should be provided in the general purpose external financial statements.
The Financial Accounting Foundation has commissioned an academic study to assess the role that the GASB should play in relation to accountability.
The GASB has concluded that information that helps users understand a government's economic condition should be included in general purpose external financial statements. Such information would include financial projections informed by historical information and known future events based upon current policy. Further, annual projections of cash inflows, cash outflows, and financial obligations should be applied for a minimum period of five years and be communicated as required supplementary information. These conclusions are presented in a due process proposal known as a “Preliminary Views” (PV) document, which was released on Dec. 6, 2011.
Although the board believes that economic condition information is necessary and supports the concept of accountability, the role that the GASB should play in the accountability arena remains controversial. Many constituents believe that there is no place in authoritative accounting standards for qualitative assessments of accomplishment or predictions about future economic condition. Although the GASB set precedence for guidelines, rather than an authoritative accounting standard, for service efforts and accomplishments, higher education institutions can let the GASB know if economic condition reporting guidelines are more appropriate than an authoritative standard by writing a comment letter in response to GASB's PV on this topic. Comments are due March 16, 2012.
Independent research to address accountability. In a related vein, the Financial Accounting Foundation (FAF), the organization responsible for establishing and improving financial accounting and reporting standards through the GASB and the FASB, has commissioned an academic study to assess the role that the GASB should play in relation to accountability. The comprehensive research effort will explore the scope of the GASB's work, and will include examination of constituent views on topics such as service efforts and accomplishments and economic condition reporting. (For more about FAF, see the Terri Polley interview on page 17.)
Regarding economic condition reporting, NACUBO's position is that the board begin with guidelines; over the past decade GASB standards have resulted in a comprehensive financial reporting model with required disclosures and supplemental information that are sufficient to allow users of external general purpose financial statements to assess the financial condition of governments. The GASB has done a remarkable of job of bringing assets, liabilities, accruals, disclosures, and component unit information into the financial statements.
Government pension transparency and accountability. In 2011, the GASB concluded constituent due process on a four-year body of work on pension plans. The project involved extensive research, issuance of three separate documents for public comment, many public roundtables, quite a few discussions with the Governmental Accounting Standards Advisory Council, and numerous deliberations by the board. By bringing little-understood information about an employer's promise of pension benefits onto the balance sheet, the pension endeavor is a prime example of the GASB's effort to improve accountability.
Employees of governmental entities often receive two types of compensation in return for their labor—current compensation and deferred compensation in the form of post-employment benefits such as pensions. Because the promise of a pension after employment is considered an exchange for current work performed, the GASB believes that the government has a current obligation.
The Exposure Draft “Accounting and Financial Reporting for Pensions,” proposed that governments be required to report in their statement of financial position a “net pension liability,” which is the difference between the total pension liability and net assets (primarily investments reported at fair value) set aside in a qualified trust to pay benefits to current employees, retirees, and their beneficiaries.
For public institutions, the pension draft contains two significant positions that would affect: (1) multiple-employer, cost-sharing pension plans and (2) component units that participate in a primary government's pension plan.
Multiple-employer, cost-sharing pension plans. For the hundreds of public institutions that participate in such plans, the employer typically makes an annual contractually required contribution determined by state law. When unfunded pension liabilities exist for such plans, the GASB believes that there is a collective liability of which each employer shares a piece. Because GASB concepts define a liability as “a present obligation, duty, or responsibility to sacrifice resources that the government has little or no discretion to avoid,” NACUBO believes that a cost-sharing employer's allocated portion of a collective liability does not meet the definition of a liability.
This is because public institution cost-sharing employers do not have a legal obligation beyond the contractual contribution based upon state law. Further, the public institution employer would have no reasonable way of relieving the liability, because the state controls the factors that comprise the total liability. It is difficult to imagine how any entity can be required to recognize and report a liability that it has no ability to influence or remove.
Finally, regarding the employment exchange, when public institution employers participate in a multiple-employer, cost-sharing plan, the promise that the public institution makes to its employees is access to the state's public employee retirement system. If a public retirement system were to have an asset crisis that affected its ability to pay benefits, the accountability buck would stop at the state rather than the public institution employer. Requiring cost-sharing employers to record a proportionate share of a total liability could profoundly affect key financial ratios and bond ratings.
Component units. The pension proposal would also require component units participating in the primary government's single- or agent-employer pension plan to report a proportionate share of the total pension liability. In certain states, employees working at a component-unit public higher education institution are considered employees of the state. In these cases the employment exchange is between the employee and the state; there does not appear to be a legal or accounting basis for a component-unit public institution carrying a net pension liability in these situations.
The GASB received hundreds of comments to its final pension proposal and will be deliberating over the next four months the issues raised by constituents. Multiple-employer issues will be discussed during the March 2012 board meeting—so public institutions may want to listen to this Web broadcast meeting (details to come from NACUBO and the GASB on accessing the event).
Accountability and Other FASB Priorities
While the FASB also addressed accountability issues, its interests expanded to several other areas.
Defining a “public entity.” In January 2011, NACUBO's Accounting Principles Council (APC) met with FASB staff and board members to discuss the impact that many accounting proposals will have on independent higher education institutions. Virtually all higher education comments to the FASB in 2010 noted that independent institutions were being swept into a breadth of guidance intended for publicly traded companies, because of the way the FASB defines “public entities”—as those with public or conduit debt.
The FASB heard these higher education concerns and requested that NACUBO help the board understand the type of information bondholders expect and how these expectations might differ from the information needs of investors in publicly traded companies.
APC research helped the board appreciate that although college and university bondholders have high accountability expectations, the largest difference between public company investors and higher education bondholders (and other stakeholders) relates to ownership. That is, higher education stakeholders—customers, bondholders, trustees, congressional committees, state attorneys general, federal agencies, and so forth—do not have a personal ownership interest in financial performance in the way that owners of public companies do.
Much of the external debt for a university is by its nature longer term than equity shares of a publicly traded company, and donors anticipate investing in perpetuity. Users of an institution's financial statements will often be taking a longer-term view than do the financial statement users of a public company. The user of the university's financial statements is less concerned about annual changes that drive financial profitability, and more concerned about the choices the institution is making to ensure multiyear financial success.
Issues of disclosures obscuring condition. Although NACUBO acknowledged to the FASB that higher education investors and stakeholders have high accountability expectations, higher education leaders tried to convey that there are also “degrees” of public among not-for-profit organizations. In other words, the business model of complex not-for-profit entities, such as colleges and universities, is different enough from publicly traded companies that varying disclosure requirements—based upon the significance of a financial statement element to the reporting entity—could be a solution to “one size fits all” lengthy disclosures not written with our industry in mind.
NACUBO also pointed out that the proliferation of disclosures aimed at financial institutions, investment companies, and pension plans is not providing decision-useful information to higher education stakeholders. In support of higher education's position, comment letters and public testimony by a variety of not-for-profits and private companies have consistently let the FASB know that many fair value disclosures are irrelevant to the decision making of their financial statement users.
Independent institutions have a duty of accountability to funding-source stakeholders. Extensive pages of meaningless disclosures can confuse financial statement users rather than shine a light on truly important information. Because meaningful financial statement information reinforces accountability, the FASB promised to address higher education concerns through an advisory committee established for not-for-profit entities.
The FASB formed such a committee—the Not-for-Profit Advisory Committee (NAC)—in late 2010. The group is composed of members with expertise and knowledge of financial accounting and reporting matters affecting the not-for-profit sector and FASB staff facilitators with similar proficiency. The committee, charged with providing input on existing guidance, technical agenda projects, and longer term financial reporting matters, did a huge amount of work in 2011. Committee members suggested that the not-for-profit financial reporting model be revisited with a view toward improving its usefulness and an organization's related external communications.
As a result, the NAC formed three working groups to study:
- Reporting financial performance—ways to improve the reporting of financial performance via the statement of activities. The team was charged with studying the need for and definition of an operating metric; the need for a separate operating statement; net asset classification; ways that changes in net assets are presented; and how to improve the cash flow statement, including its interrelationship with the statement of activities.
- Telling the story—potential communication improvements beyond the statement of activities and statement of cash flows. The subgroup was tasked with assessing the need for a management's discussion and analysis type of standard, segment reporting, a statement of functional expenses, and summarized financial statements.
- Liquidity and financial health—potential improvements that could be made to the balance sheet and the notes. The goal would be to better reflect liquidity or other key measures of financial health.
The efforts of the three subcommittees resulted in four areas that the NAC thought could make improvements to the existing not-for-profit reporting model.
- Improve the current net asset classification scheme, in conjunction with improving how liquidity is portrayed in the statement of financial position and related notes.
- Improve the statements of activities and cash flows to more clearly communicate financial performance.
- Develop a framework for commentary and analysis about an entity's financial health, operations, and liquidity.
- Review existing disclosure requirements that are specific to not-for-profit entities to streamline and improve their relevance and understandability.
The FASB staff presented NAC recommendations and analysis to the board at its November 2011 meeting. Staff helped the board see that NAC recommendations are consistent with the FASB mission of providing decision-useful information to users of financial reports. After all, since the 1990s—when the current not-for-profit financial reporting model was established—many significant accounting and disclosure standards have not been issued with not-for-profit entities in mind.
The FASB responds. By December 2011, the FASB took several steps toward changing and clarifying the direction of financial reporting for independent institutions. In November, two projects were added to improve not-for-profit financial reporting, and one project was added to address appropriate disclosures.
- A standard-setting project will focus on financial statements and related notes that are unique to not-for-profit entities. The project will emphasize better ways of communicating financial performance and will consider operating and nonoperating changes to net assets. To that end, the effort will reexamine whether:
- The current three types of net asset classes (unrestricted, temporarily restricted, and permanently restricted) are necessary.
- Financial performance should be presented in a separate statement or within the statement of activities.
- Operating, investing, and financing distinctions can be distinguished between types of statements and net asset classes.
- A research project will assess how not-for-profit entities might improve communication about their overall financial well-being. This effort will consider communicating information that is in addition to the basic financial statements—similar to a management's discussion and analysis section in the financial statements.
- A fair value measurement disclosure requirement project will assess the feasibility of reducing or eliminating certain fair value measurement disclosures. The project will evaluate fair value measurement disclosures that are categorized within Level 3 of the fair value hierarchy. Alternative investments are an example of a Level 3 asset, as many unobservable inputs are used to arrive at a fair value.
The Blue-Ribbon Panel on Standard Setting for Private Companies. In 2011, NACUBO staff and the Accounting Principles Council also kept an eye on the work of this committee established to evaluate the unique reporting needs of private companies. The panel was formed by FAF trustees because of constituent concerns about the cost and complexity of accounting standards written with public or publicly traded companies in mind. Since higher education is already a split industry—with public institutions following the GASB and independent institutions following the FASB—NACUBO was concerned that smaller nonpublic colleges (with no conduit debt) might end up following the accounting pronouncements of a third accounting standard setter.
Fortunately, a comment document issued in October 2011 by the FAF explicitly excludes all not-for-profit entities from the scope of the blue-ribbon panel's recommendations. The document notes that accountability expectations cause not-for-profits to have more in common with publicly traded companies than with privately held companies. The proposal states that the needs of not-for-profit financial statement users differ substantially from the needs of private company financial statement users, and that not-for-profit entities will fall under the purview of issues addressed by the NAC rather than the work of the blue-ribbon panel.
On the Horizon
The Not-for-Profit Advisory Committee suggested that the financial reporting model be revisitied with a view toward improving its usefulness and an organization's related external communications.
Accountability is the acknowledgement and assumption of responsibility for actions, decisions, policies, and results. While this is obviously critical to providing accurate and transparent reporting to stakeholders, there are various ways of going about it. Keeping an eye on the standard-setters' work behind the scenes provides great insight into where the boards are going in this and related areas.
Although many don't relish the thought of a new season of standards activity, NACUBO volunteers and staff think it better to explain our industry to the standard setters rather than be surprised by change that doesn't make sense. We will continue the quest and ask that business officers follow industry efforts in 2012—and feel free to share their ideas and opinions with us.
SUE MENDITTO is director of accounting policy at NACUBO.
- Also see, "Custom Design," by Karen Craig