FASB Takes Preliminary Steps to Define NFP Operating Measure
November 14, 2013
As part of its project to improve financial reporting for not-for-profit (NFP) entities, such as independent colleges and universities, the Financial Accounting Standards Board (FASB) is addressing the definition and presentation of a measure of operations. In addition, the Board is considering changes to the presentation of the statement of activities. The following discussion details the preliminary decisions that the FASB has made to date in this area.
One of many drivers behind the Board's proposal to define a measure of operations has been the request for comparability among not-for-profit entities' financial statements. A measure of operations allows an NFP to better tell its story by clearly presenting amounts available and used for current operations versus those held for longer-term purposes, either through donor or legal restriction, board designation, or other circumstances.
The Board considered a number of possible characteristics that might determine whether a transaction would be considered operating or non-operating, including:
- Core versus noncore activities
- Ongoing and central versus peripheral and incidental activities
- Recurring versus nonrecurring transactions
- Direct mission versus nonmission activities
- Unrestricted versus restricted
- Available for current use versus not currently available
Several of these characteristics are also considered in NACUBO's advisory guidance, "Defining an Operating Measure for Independent Colleges and Universities (revised March 2011)." That guidance provides recommendations on items that should be classified as nonoperating—specifically, items arising from other than the mission-related activities of the institution that would best be reflected outside of the entity's operating activity.
Defining a Measure of Operations
The Board tentatively defined an intermediate operating measure on the basis of two key dimensions:
1. A mission dimension
An NFP's mission is key to the structure, management, and governance of the organization; critical to its ability to obtain and retain its tax-exempt status; and vital to its ability to attract funding. As a result, the Board felt a measure of operations should encompass the idea of mission-related activities.
Based on the Board's discussions, any activity that uses an NFP's resources or incurs expenses directly related to carrying out its mission would be considered mission related. This would include all contributions, income from the sale of goods and services to stakeholders, as well as sponsorships and royalties related to lending the use of the NFP's name. On the other hand, nonmission-related or "mission blind" activities would be those that an NFP engages in primarily to meet its fiduciary duty to preserve and protect its resources. This would include earnings on investment activities that an NFP undertakes that are aimed at preserving the purchasing power of its resources.
2. An availability dimension
In order for a resource to be used for operations, it must be available. The Board considered whether to base availability solely on external factors (such as donor-imposed restriction), solely on internal factors (such as amounts designated for a specific use by the NFP's board), or both. The FASB noted that many stakeholders suggested that in order for an NFP to communicate financial performance and demonstrate how the entity operates, it must be able to reflect how its governing board is using resources currently as well as how it is preserving them for future use. The Board also noted that auditors had expressed concerns about allowing internal decisions to bear on whether a resource is considered available. That concern stems from the fact that the same authority can restrict and then subsequently reverse or modify its decision, allowing for manipulation of the operating measure.
After weighing all of the input received, the FASB board tentatively decided that the notion of availability would reflect both external limitations and internal actions of an NFP's governing board.
Although the Board has made tentative decisions about what should be included in a measure of operations, it has not yet decided whether the presentation of an intermediate operating measure would be required, permitted, or encouraged. The NFP sector is large and extremely diverse, which makes it difficult to create one-size-fits-all accounting and reporting guidance.
Statement of Activities Presentation
In addition to defining what would be included in a measure of operations, the Board also considered how that information should be presented in a statement of activities. After discussing four alternative presentations, the Board tentatively decided to support a statement of activities format that would present all legally available mission-related revenues on a gross basis. Amounts designated by the governing board for use in future periods would then be shown as reductions. In addition, the presentation would include amounts of previously unavailable resources that the governing board made available for use in the current period.
Impact on Higher Education
Many independent institutions already provide an intermediate measure of operations in their statement of activities. That operating measure typically follows NACUBO's advisory guidance. The preliminary decisions of the FASB in this area are not likely to significantly impact independent college and university financial statements.
The potential for significant change, however, arises in the presentation of the statement of activities. The Board's current preference to show all revenues and support coming in to operations—and subsequently being transferred to nonoperating for donor restrictions, board designations and nonmission-related activities—would look much different than the current statement of activities.
NACUBO staff and members of its Accounting Principles Council will continue advising the Board on this project, remaining in close contact with FASB staff. NACUBO will enhance its accounting webpage to provide more project details and gather membership feedback in preparation for an industry response to proposed changes when an exposure draft is issued for comment.
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