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Business and Policy Areas
Business and Policy Areas

NACUBO Responds to FASB's NFP Proposal

August 25, 2015

NACUBO's August 20 comments to the Financial Accounting Standards Board (FASB) on the proposed Accounting Standards Update, "Presentation of Financial Statements of Not-for-Profit Entities," agreed with FASB on eliminating temporarily restricted net assets, revisions to underwater endowment accounting and reporting, natural and functional expense analysis, release of restrictions for long-lived assets using a "placed in service" approach, and direct method cash flow reporting. However, the majority of comments expressed concern over proposed changes that go well beyond the project's originally defined scope.

Proposed operating measures

Although NACUBO has always been in favor of an intermediate operating measure that would promote consistency across the sector and comparability among higher education institutions, NACUBO strongly disagreed with FASB's two proposed operating measures. In FASB's first proposed measure, its definitions of "mission" and "availability" would exclude from operations certain critical unrestricted investing resources, such as quasi endowment spending, and financing activities, such as interest expense. Equally troubling, FASB's proposed definition of operations would include the aggregate value of contributions that fund a long-lived asset placed in service.  A second proposed operating measure would reflect board actions (or board-approved policies) via a "transfer section" in the Statement of Activities (SoA) between the two measures.

NACUBO noted that:

  • Two measures were unnecessarily confusing, left room for entities to manipulate their second operating measure, and resulted in a cluttered and complex SoA.
  • One operating measure would offer the best alternative for consistency and comparability among NFPs.
  • The concept of "availability" could be expanded to include both external restrictions and internal actions-there is no need to show an audit trail of the outcome of internal decisions directly on the SoA, but rather details about decisions impacting availability belong in the notes.
  • Long-lived assets should not flow through the SoA as available operating resources with a requirement to present a transfer from operating activities to non-operating activities. By definition, long-lived assets are never fully available for consumption in one reporting period and should not be recognized as an operating resource.

Investing and financing activities

NACUBO questioned the Board's conclusion that investing and financing activities are not related to an NFP's mission and therefore should be excluded from its proposed operating measures. Further, the proposed exclusion from operations and new definitions of operating, investing, and financing activities is reminiscent of the Financial Reporting Project which the Board removed from its agenda in 2011.

NACUBO commented that:

  •  Investing and financing activities are tools and methods by which many NFPs optimize resources and there is no obvious reason why they should be excluded from mission related operating activities.
  • As an alternative, separately identifying investing and financing activities within the operating measure could improve users' understanding of such activities and enrich the representation of how an NFP financially carried out its mission in the current reporting period.
  • The Board's decisions about operating, investing, and financing activities would change the composition of Statement of Cash Flow (SoCF) categories as defined in ASC 230; such changes will result in confusion on the part of financial statement users familiar with a for-profit entity's SoCF. 

Reporting investment income net of external and direct internal investment expenses

FASB addressed the presentation of investment expenses because there has been confusion concerning the type of related expenses that should be disclosed.  Although the Board addressed whether investment return could be presented net of fees, the proposal would allow a net presentation with no disclosure for externally managed portfolios, but would allow only "direct" internal investment expenses to be netted-with a required disclosure of salaries and benefits.

NACUBO explained that: 

  • Current GAAP allows related investment expenses to be netted against investment return for internally managed portfolios. The proposed ASU changes "related" expenses to "direct" expenses.
  • No codified cost accounting rules exist for direct expenses, and FASB staff have indicated that certain internal costs, such as those for investment accounting staff would be excluded from netting because such costs are not related to investment management or strategy.
  • There has never been an issue, of which NACUBO is aware, with the type of expenses that are currently netted against investment returns. Each NFP is likely to have unique expenses that are netted based on their investment management structure and the costs that are actually funded by the investment returns.
  • Many of the indirect internal costs incurred by NFPs that manage their investments internally are included in the fees that are charged by third-party managers. As a result, an NFP that outsources its investment management activities will net those expenses against their returns and inconsistency will be created where none exists today.
  • It is unclear why the amount of internal salaries and benefits expenses netted against investment returns would be relevant to users of the financial statements. In fact, it may lead to confusion because NFPs that manage their investments internally will have a large expense disclosed, but those that outsource their investment management will have a much smaller expense.


The proposed ASU would require certain quantitative and qualitative disclosures to communicate information about how an NFP manages its liquidity.

NACUBO questions whether:

  • Proposed underwater endowment disclosures (amounts) or spending policies, would reveal worthwhile information about liquidity.
  • The self-defined time horizon related to quantitative disclosure would be of value to users.

NACUBO's comments contain several pages of illustrative examples intended to support higher education's observation and suggestions. Recent comment letters are available on NACUBO's website.


Sue Menditto
Director, Accounting Policy