FASB Wants Not-for-Profits to Correct Improper Exclusions From Their Operating Measures

By: Tim McCutcheonTimMccutcheon

Current U.S. Generally Accepted Accounting Principles (GAAP) permit, but do not require not-for-profit organizations (NFPs) to present a measure of operations. Paragraph 958-225-45-9 of the FASB Accounting Standards Codification (ASC) provides examples of the ways NFPs could present such a measure.

ASC 958-225-45-9

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:

  1. Operating and nonoperating
  2. Expendable and nonexpendable
  3. Earned and unearned
  4. Recurring and nonrecurring
  5. In other ways. Entities choosing to report an operating measure also must follow ASC 958-225-45-12, which refers to ASC 958-225-50-1, which in turn provides 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.
  6. ASC 958-225-45-10 goes on to state that those further classifications are neither encouraged nor discouraged. However, because the terms commonly used by NFPs, such as “operating income”, “operating profit”, “operating surplus”, “operating deficit”, or “results of operations”, are used with different meanings, NFPs reporting an intermediate measure of operations (for example, Excess or deficit of operating revenues over expenses) may only do so in a financial statement that, at a minimum, reports the Change in unrestricted net assets for the period. Example 1 in ASC 958-225-55-5 provides an illustration of such a presentation.

NFPs are not required to present any other disclosures about their reported intermediate measure of operations.

In its March 2, 2016 meeting, the Financial Accounting Standards Board (FASB) was briefed by FASB staff on a compliance issue it has observed in practice regarding the exclusion of the following items from an NFP’s self-defined operating measure:

  1. An impairment loss recognized for a long-lived asset (asset group) to be held and used, pursuant to paragraph 360-10-45-4
  2. Costs associated with an exit or disposal activity that does not involve a discontinued operation, pursuant to paragraph 420-10-45-3
  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 360-10-45-5[1]

Noting that some NFPs include a footnote disclosure of their policy to classify these gains and losses as nonoperating, staff made clear that excluding such gains and losses from the operating measure is a violation of GAAP, unless such instances are immaterial.


[1] The amendments in the proposed FASB Accounting Standards Update, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, would require entities to report the service cost component of pensions in operations (as a compensation cost) and any other components of net benefit cost outside a subtotal of income from operations. This new requirement, if finalized, would apply to NFPs that choose to present a self-defined operating measure, adding to the above list of specific items that must be included in the measure of operations, if presented.

Joint Employers May Be Liable for Wage Violations

1696By: Deb Nelson

New standards were released in late January 2016 by the Department of Labor’s Wage & Hour Division (WHD) regarding joint employment relationships under the Fair Labor Standards Act (FLSA) and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA). These standards could have a significant impact on nonprofit organizations due to varying types of employment structures found within the industry. If you share employees, use a professional employer organization (PEO), or use a management company (just to name a few), you need to review the Administrator’s Interpretation on these standards.

WHD applies a horizontal test and a vertical test to determine if joint employment exists. The horizontal joint employment test reviews relationships where the employee works for two or more employers with economic ties. The vertical joint employment test reviews relationships between the employee and the potential employer, and the economic realities of that relationship. If you are found to be a joint employer, you may be held liable for wage violations of the other employer, for example the PEO or management company violations.

The Department of Labor is seeing a decrease in the traditional employment relationship, and as a result, believes enforcement of employees’ rights and employers’ obligations needs to evolve.

Reminder: New Submission Site for 990-Ns Started February 29th

1696By: Deb Nelson

For organizations required to file the Form 990-N e-Postcard, you now submit this filing through the IRS instead of the Urban Institute’s website. You must complete a short, one-time registration before you will be allowed to submit the filing. Take time to review your address and ensure it is current. The IRS sends reminder notices and if the address is wrong you won’t get this friendly reminder.

The Form 990-N is required for small tax-exempt organizations whose annual gross receipts are normally $50,000 or less. The filing is due annually by the 15th day of the 5th month after the close of your tax year. For organizations with a December 31 year-end, the filing due date is May 15 and for organizations with a June 30 year-end, the filing due date is November 15. Failure to file for three consecutive years will result in automatic revocation of your tax-exempt status.

Have the following information ready when you login to submit your filing:

  • Employer identification number
  • Tax year
  • Legal name and mailing address
  • Any other names the organization uses
  • Name and address of a principal officer
  • Web site address if the organization has one
  • Confirmation that the organization’s annual gross receipts are $50,000 or less
  • If applicable, a statement that the organization has terminated or is terminating