At its March 2, 2016 meeting, the Financial Accounting Standards Board (FASB) was advised by its staff that not-for-profits (NFPs) are not complying with GAAP.
FASB staff observed that, in practice, some NFPs that choose to report an intermediate measure of operations are improperly excluding gains and losses on the disposal of long-lived assets from their self-defined operating measure.
This is in direct conflict with FASB Accounting Standards Codification (ASC) 958-225-44-11, which states:
Some limitations on an NFP’s use of an intermediate measure of operations are imposed by other Subtopics. If a subtotal such as income from operations is presented, it shall include the following amounts:
- An impairment loss recognized for a long-lived asset (asset group) to be held and used, pursuant to paragraph FASB ASC 360-10-45-4
- Costs associated with an exit or disposal activity that does not involve a discontinued operation, pursuant to paragraph FASB ASC 420-10-45-3
- A gain or loss recognized on the sale of a long-lived asset (disposal group) that is not a component of an entity, pursuant to paragraph FASB ASC 360-10-45-5
FASB staff noted that some NFPs disclose their policy to classify these gains and losses as non-operating and made clear that excluding such gains and losses from the operating measure is a violation of GAAP, unless such instances are immaterial. (View this meeting on YouTube).
NFPs are afforded a great deal of flexibility in financial statement presentation under today’s standards. There is a strong case for this flexibility given the diversity of constituencies in the growing nonprofit sector. Few disagree that readers of the financial statements of a food bank, educational institution and credit union have different reporting needs.
Current reporting standards permit, but do not require, an NFP to present an operating measure on their statements of activities (their income statement-esque equivalent). For the majority of NFPs today, the change in unrestricted net assets, which measures whether an organization has maintained the part of its net assets that is fully available to support services, ostensibly serves that purpose. But some NFPs opt to additionally display a self-defined measure of operations, such as operating revenues over operating expenses, to highlight current period operating results. The intermediate measure is a separate subtotal that is somewhat akin to for-profit businesses’ net income performance measure. Because this is subject to management’s interpretation, composition of the measure varies widely.
For entities that opt to report an intermediate operating measure, many of the same items that a for-profit business entity would report as part of other comprehensive income (OCI) are reported outside of the intermediate measure, such as foreign currency adjustments and pension adjustments. Because NFPs follow the guidance in all effective provisions of the FASB ASC unless the specific provision explicitly exempts NFPs (or the subject matter of the provision precludes such applicability), there are limitations on an NFP’s use of a self-defined operating measure that are imposed by other standards.
NFP Industry-specific Guidance
The industry-specific guidance for NFPs hasn’t changed in over two decades. FASB ASC 958-225-45-9 (formerly paragraph 23 of SFAS No. 117), states the following:
Classifying revenues, expenses, gains, and losses within classes of net assets does not preclude incorporating additional classifications within a statement of activities. For example, within a class or classes of changes in net assets, an NFP may classify items as follows:
a. Operating and nonoperating
b. Expendable and nonexpendable
c. Earned and unearned
d. Recurring and nonrecurring
e. In other ways.
FASB ASC 958-225-45-10 states:
This Subtopic neither encourages nor discourages those further classifications. However, because terms such as operating income, operating profit, operating surplus, operating deficit, and results of operations are used with different meanings, if an intermediate measure of operations (for example, excess or deficit of operating revenues over expenses) is reported, it shall be in a financial statement that, at a minimum, reports the change in unrestricted net assets for the period.
Further, FASB ASC 958-225-50-1(a) says that "if an NFP's use of the term operations is not apparent from the details provided on the face of the statement, a note to financial statements is required to describe the nature of the reported measure of operations or the items excluded from operations. NFPs are not currently required to present any other disclosures about their reported intermediate measure of operations."
The FASB is considering a proposal that would significantly alter the existing financial reporting model for NFPs. One of the aims of FASB is to provide for consistent classification of information across the spectrum of NFPs that would make financial statements more useful and comparable.
The AICPA Not-for-Profit Section will continue to publish news updates as they become available.
Common Financial Statement Errors in Not-for-Profit Entities (PDF)
This reference tool was developed by the AICPA Not-for-Profit Section and contains a series a lists that serves as a non-authoritative illustration of some errors commonly found in NFP financial statements.
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