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.

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