Financial Responsibility Negotiated Rulemaking Proposal
New Non-profit Requirements (terms and definitions in red emphasize changes)
Ratio and Ratio Terms:
Primary Reserve Ratio = [Expendable Net Assets] / [Total Expenses without Donor Restrictions and Losses without Donor Restrictions]
Equity Ratio = [Modified Net Assets] / [Modified Assets]
Net Income Ratio = [Change in Net Assets without Donor Restrictions] / [Total Revenue without Donor Restrictions and Gains without Donor Restrictions]
Definitions:
Expendable Net Assets = (net assets without donor restrictions) + (net assets with donor restrictions) - (net assets with donor restrictions: restricted in perpetuity)* – (annuities, term endowments and life income funds with donor restrictions)** – (intangible assets) – (net property, plant and equipment)*** + (post-employment and defined benefit pension plan liabilities) + (all long-term debt obtained for long-term purposes, not to exceed total net property, plant and equipment)**** – (unsecured related party transactions)*****
Total Expenses without Donor Restrictions and Losses without Donor Restrictions = All expenses and losses without donor restrictions from the Statement of Activities less any losses without donor restrictions on investments, post-employment and defined benefit pension plans, and annuities. (For institutions that have defined benefit pension and other post-employment plans, total expenses include the nonservice component of net periodic pension and other post-employment plan expenses, and these expenses will be classified as non-operating. Consequently, such expenses will be labeled non-operating or included with “other changes –nonoperating changes—in net assets without donor restrictions” when the Statement of Activities includes an operating measure).
Modified Net Assets = (net assets without donor restrictions) + (net assets with donor restrictions) – (intangible assets) – (unsecured related party receivables)
Modified Assets = (total assets) – (intangible assets) – (unsecured related party receivables)
Change in net assets without donor restrictions is taken directly from the audited financial statements
Total Revenue without Donor Restriction and Gains without Donor Restrictions = total revenue (including amounts released from restriction) plus total gains. (Investment returns are reported as a net amount (interest, dividends, unrealized and realized gains and losses net of external and direct internal investment expense). Institutions that separately report investment spending as operating revenue (e.g. spending from funds functioning as endowment) and remaining net investment return as a non-operating item, will need to aggregate these two amounts to determine if there is a net investment gain or a net investment loss. (net investment gains are included with total gains)).
* Net assets with donor restrictions: restricted in perpetuity is subtracted from total net assets. The amount of net assets with donor restrictions: restricted in perpetuity is disclosed as a line item, part of line item, in a note, or part of a note in the financial statements.
** Annuities, term endowments, and life income funds with donor restrictions is subtracted from total net assets. The amount of annuities, term endowments, and life income funds with donor restrictions is disclosed in as a line item, part of line item, in a note, or part of a note in the financial statements.
***The value of property, plant and equipment includes construction in progress and lease right-of-use assets and is net of accumulated depreciation/amortization.
**** All Debt obtained for long-term purposes, not to exceed total net property, plant and equipment includes lease liabilities for lease right-of-use assets and the short-term portion of the debt, up to the amount of net property, plant and equipment.
If an institution wishes to include the debt, including debt obtained through long-term lines of credit in total debt obtained for long-term purposes, the institution must include a disclosure in the financial statements that the debt, including lines of credit exceeds twelve months and was used to fund capitalized assets (i.e., property, plant and equipment or capitalized expenditures per Generally Accepted Accounting Principles (GAAP)). The disclosures that must be presented for any debt to be included in expendable net assets include the issue date, term, nature of capitalized amounts and amounts capitalized. Institutions that do not include debt in total debt obtained for long-term purposes, including long-term lines of credit, do not need to provide any additional disclosures other than those required by GAAP. The debt obtained for long-term purposes will be limited to only those amounts disclosed in the financial statements that were used to fund capitalized assets. Any debt amounts, including long-term lines of credit, used to fund operations must be excluded from debt obtained for long-term purposes.
*****Unsecured related party receivables as required at 34 C.F.R 668.23(d)
