Reporting Nonoperating Results
Situation
Business Officer Blake Allen of Teachum University has been reviewing annual financial reports of other universities. Some of the reports display operating and nonoperating activities on the statement of activities while others do not. Mr. Allen also notes that there is no consistency among the financial reports on what is reported as nonoperating. He would like to know what might be considered as nonoperating at a college and university.
Response
Paragraph 23 of SFAS 117 Financial Statement of Not-for-Profit Organizations leaves to the discretion of each organization whether to present a subtotal of operating results in the statement of activities. Paragraph 23 also allows each organization to determine what it considers to be operating versus nonoperating items. If it is not obvious from the display on the face of the statement of activities what items are included or excluded in the operating subtotal, footnote disclosures of that distinction must be presented.
The following are some items that might be considered by Business Officer Allen as nonoperating. The list is not intended to all-inclusive, express any preferences, or limit the type of item which any college or university might report of nonoperating. Rather the list is various types of items that might be considered.
- Extraordinary items
- Cumulative effect of accounting changes
- Corrections of prior period errors
- Prior period adjustments
- Results of discontinued
The following are items that are considered as nonoperating by most colleges and universities.
- Contributions that are considered as unusual as defined by the IRS Regulation 1.509(a)3(c)(3).
- Items which meet some, but not all, of the criteria in APB 30 Reporting the Results of Operations and SFAS 4 Reporting Gains and Losses From Extinguishment of Debt for extraordinary items and SFAS 16 Prior Period Adjustment for adjustment.
- For colleges and universities that use the total return method for reporting net appreciation on endowments, the portion of the total return that is equivalent to the stated spending rate would be displayed as operating while any remaining portion would be reported as a nonoperating item. Some business officers believe that in years when the total return is less than the payout rate, the institution should report zero operating income and record the entire consumption as a nonoperating item.
- Bequests, new endowment gifts, deferred gifts and split-income gifts such as annuities and life income gifts.
- Contributions having the characteristics of an initial capital contribution.
- Sales of goods and services that although are not considered unrelated under the IRS Code are nevertheless peripheral to the university's major activities.
- Auxiliary activities peripheral to the university's activities.
- Revenues and expenses that are directly related to the transactions reported in the financing and investing sections of the statement of cash flows. These include such items as investment income not available for operating purposes, interest expense, write-offs of loans receivable, nonexpendable gifts, and adjustment to annuity liabilities.
After reviewing this list, Business Office Allen should compare the items on the list to activities conducted at Teachum University. It is possible that other nonoperating activities occur at Teachum University and should reported as nonoperating if the financial report statement of activities is displayed accordingly.