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Business and Policy Areas
Business and Policy Areas

Financial Instruments and FASB

October 8, 2010

In May 2010 FASB issued a complex and controversial exposure draft, “Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities—Financial Instruments.” Although the proposal is specifically intended for banks and credit unions, independent colleges and universities have not been scoped out. NACUBO’s comments to the Board focus on 1) the applicability of the ASU to not-for-profit organizations 2) the measurement of liabilities at fair value, 3) the exception provided for measuring liabilities at amortized cost, 4) measurement of loans receivable at fair value, and 5) the impracticality of the model for recognizing credit losses.

The FASB will be holding a roundtable on October 12, 2010, that will focus on not-for-profit organizations and private companies. NACUBO will be participating and discussing in greater detail the objections and concerns raised in our comment letter. The Board has received over 1,800 comment letters, and a protracted deliberation is expected. The proposed Accounting Standards Update (ASU) is a result of a joint project between the FASB and the International Accounting Standards board.

The Board’s objective in issuing the proposed guidance for financial instruments is to increase transparency and reduce complexity in the accounting for those instruments. This would require organizations to present both amortized cost and fair value information about financial instruments held for collection or payment of cash flows. According to FASB, the global economic crisis highlighted the ongoing concern that the current accounting model for financial instruments is inadequate for today’s complex economic environment. Consequently, the proposal is specifically aimed at financial institutions and credit unions involved in asset-liability management. Although written for banks and credit unions, FASB’s educational materials note that all entities with financial instruments will be affected. Even though the Board attempted to make sure that the largest banks are initially impacted, hundreds of independent institutions that are conduit debt obligors and/or have over $1 billion in assets would be required to implement the standard four years earlier than the majority of small banks and credit unions.

The proposed guidance would have the greatest affect on debt, split-interest liabilities, and loans receivable held by independent colleges and universities. Debt is the most prevalent of financial liabilities that could be impacted. The amount of debt owed, rather than its fair value that would be measured in a way that only makes sense for financial institutions, is what users of higher education financial statements want to know. Unfortunately, colleges and universities with significant endowments (relative to their asset base) would likely be excluded from an exception that would allow long-term debt to be measured at amortized cost. For these institutions endowments are already measured at fair value and can represent greater than fifty percent of all noncash assets.

NACUBO encourages independent institutions to pay attention to all proposals, regardless of FASB’s intended constituency. NACUBO will continue to monitor this proposed guidance and other projects that may be unintentionally and negatively impacting higher education.


Sue Menditto
Director, Accounting Policy