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Business and Policy Areas
Business and Policy Areas

Advisory Report

March 31, 2011

Defining an Operating Measure for Independent Colleges and Universities- Revised March 2011

(originally issued January 5, 2007)

The complete Advisory Guidance document can be viewed here.

In January 2007, NACUBO's Accounting Principle Council (APC) published this position paper in an effort to provide recommendations to independent colleges and universities on items that should be classified as nonoperating. These items arise from other than the mission-related activities of the institution and, as a result, would best be reflected outside of the operating activity of the entity. In addition, the activity will likely be presented in either the investing or financing sections of the Statement of Cash Flows.

With the codification of accounting standards by the Financial Accounting Standards Board (FASB) and new issuances and updates to those standards, NACUBO has revised the recommendations as follows:

  • "Gains and losses on sale of long-lived plant assets that are incidental or peripheral to central operations" has been removed. Because this type of transaction does not meet the criteria to be considered a discontinued operation it, therefore, should be included in income/loss from continuing operations.
  • "Cumulative effect of a change in an accounting principle & prior period adjustments and corrections of errors of prior periods" has been removed as subsequent FASB pronouncements have changed the way in which these items are presented in the financial statements. See further discussion about this change on page XX, Accounting Changes and Error Corrections.
  • References to specific FASB pronouncements have been updated to reflect the relevant sections in the Accounting Standards Codification (ASC).

A substantial percentage of independent colleges and universities voluntarily report an intermediate operating measure on their statement of activities, as permitted under generally accepted accounting principles (GAAP). However, there has been no standardized definition of operations for higher education. For independent institutions that provide an operating measure, the APC recommends that the following items be classified as nonoperating. In other words, these transactions or events should normally be separately reported within the changes in Unrestricted Net Assets.

  1. Investment gains or income in excess of the institution's spending policy.
  2. Net assets released from restrictions related to capital additions or acquisition of long-lived assets [contingent on Net Asset Release policy, see below].*
  3. Gifts restricted by donors for capital purposes (acquisition of long-lived assets) if the institution's policy is to record gifts as UNA when expended within same fiscal period.
  4. Changes in value of split-interest agreements reported in UNA.
  5. Change in value of derivatives that are not part of the investment portfolio e.g., interest rate hedges or swap contracts related to institutional debt.
  6. Gains & losses associated with the issuance, restructuring, and extinguishment of debt.
  7. Changes in net assets related to pension and other postretirement benefits other than net periodic costs (as reported under ASC 958-715)
  8. Extraordinary gains and losses from unusual or infrequently occurring events.
  9. Result of discontinued operations & impairment of long-lived assets that are part of a discontinued operation.

This is not intended to be an exhaustive list nor is complete consensus anticipated. For example, some institutions exclude unrestricted estate gifts from operating since their internal board policy would designate these for capital or future endeavors. The same rationale that is used to defer unrestricted undistributed investment income to nonoperating can be used to say these bequests are nonoperating. However, arguments for including these transactions are also prevalent, e.g., the gift was the result of operating activities, i.e., fundraising. Moody's and S&P both classify unrestricted estate or bequests as operating since they consider it "available" for operating and is a result of management's value adding activities. In either case, if these are reported as nonoperating then disclosure within the footnotes would be appropriate.

This report is organized as follows:

  1. Illustrative example of a statement of activities with an intermediate operating measure
  2. Tables for each transaction or event which include examples and an expanded discussion
  3. Background for the project
  4. Theoretical discussion of the basis for our conclusions


The complete Advisory Guidance document can be viewed here.