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3.3 NFP HCOs–statement of operations and changes in net assets
Publication date: 27 May 2020
us NFP guide
ASC 954 modifies the core NFP reporting model in ASC 958 to establish a framework regarded as the NFP equivalent of reporting by commercial enterprises. Its use is required for NFP HCOs, but other NFPs can voluntarily apply it if desired. The principal difference from the core NFP model is a requirement to report a defined performance indicator that is the NFP equivalent of net income of a commercial enterprise (or income from continuing operations, if discontinued operations are present). Because of the requirement to report a performance indicator and the desire to more closely parallel business entity reporting, NFP HCOs do not present the statement of activities described in NP 3.2. Instead, they present a statement of operations (which includes the performance indicator) and a statement of changes in net assets, as required by ASC 954-205-45-1.
The basic financial statements of health care entities consist of a balance sheet, a statement of operations, a statement of changes in equity (or net assets), a statement of cash flows, and notes to the financial statements.
The statement of operations (discussed in NP 3.3.1) focuses on changes in net assets without donor restrictions, and closely resembles a single-statement format statement of comprehensive income presented by some business enterprises. The statement of changes in net assets reports changes in net assets both with and without donor restrictions, with summary amounts from the statement of operations reported for the “without donor restrictions” class (similar to the approach described in ASC 958-205-55-10(c) for other NFP entities).
Figure NP 3-1 illustrates the two-statement format for an NFP HCO. Line items in red bold are subtotals required by GAAP.
Figure NP 3-1
Two-statement format for NFP HCO performance reporting
Two-statement format for NFP HCO performance reporting
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In accordance with ASC 954-220-45-1, an NFP HCO can combine the statement of operations and the statement of changes in net assets into a single statement. To maintain the analogy to business entity reporting and emphasize the inclusion of the performance indicator, a combined statement is referred to as a statement of operations and changes in net assets, to differentiate it from a statement of activities prepared under the core model.
For not-for-profit, business-oriented health care entities, the statement of operations may be combined with the statement of changes in equity (net assets).
Some NFP HCOs that choose to present a combined statement use a “two page” format, with a page break inserted after the performance indicator subtotal in order to more closely approximate the presentation of a separate income statement by a business enterprise. When this approach is used, the NFP HCO must ensure that it complies with the requirement of ASC 954-220-45-5 that the performance indicator be reported in a statement that also presents the total changes in net assets without donor restrictions. To accomplish this, the word “continued” should appear at the bottom of the page that reports the performance indicator and in the heading of the second page of the statement. In addition, the performance indicator subtotal cannot be double underscored as if it were a bottom-line measure.
3.3.1 NFP HCO statement of operations
A statement of operations focuses solely on reporting the changes in net assets without donor restrictions that occurred during the reporting period and displays the required performance indicator (earnings measure) that is analogous to income from continuing operations of a business enterprise as required by ASC 954-220-45-5. Below that measure, the statement displays all items that a business enterprise would report in other comprehensive income, along with other changes in net assets without donor restrictions. In the statement of operations, the performance indicator is simply an intermediate measure, not the bottom line. The bottom line of the statement is change in net assets without donor restrictions.
The statement of operations for not-for-profit, business-oriented health care entities shall include a performance indicator. Because of the importance of the performance indicator, it shall be clearly labeled with a descriptive term such as revenues over expenses, revenues and gains over expenses and losses, recognized income, or performance earnings. Not-for-profit, business-oriented health care entities shall report the performance indicator in a statement that also presents the total changes in net assets without donor restrictions. Other changes in net assets may be presented separately or in the same statement.
If desired, an operating/nonoperating distinction can be made above the performance indicator (see NP 3.4.2.)
If discontinued operations are present, their results are reported just above the change in net assets without donor restrictions, preceded by appropriate subtotals (see NP 3.4.4).
If noncontrolling interests are present, there is no requirement to reflect the apportionment of earnings between the parent and the noncontrolling interests on the face of the statement, as would be required for a business entity. Instead, disclosure of the apportionment of the performance indicator and changes in net assets between the controlling and noncontrolling interests is provided through a reconciliation of the beginning and ending balances of net assets, described further in NP 3.6.
3.3.1.1 NFP HCO performance indicator
HCOs are the only NFPs that are required to report an earnings measure. For other NFPs, doing so is permitted but not required. This earnings measure is referred to as the performance indicator.
The performance indicator is a standardized measure defined in the ASC Master Glossary, which is analogous to income from continuing operations of a for-profit entity. It should contain the same elements of income and expense that a business entity would include in income from continuing operations.
Definition from ASC Master Glossary
Performance indicator: A performance indicator reports results of operations. A performance indicator and the income from continuing operations reported by for-profit health care entities generally are consistent, except for transactions that clearly are not applicable to one kind of entity (for example, for-profit health care entities typically would not receive contributions, and not-for-profit health care entities would not award stock compensation). That is, a performance indicator is analogous to income from continuing operations of a for-profit entity.
The performance indicator must be clearly identified using a descriptive caption such as "excess of revenues over expenses," "revenues and gains over expenses and losses," "recognized income," or "performance earnings." The term “net income” is not appropriate due to differences in the requirements for reporting discontinued operations and, when explicitly provided for in the transition provisions of newly issued FASB standards, the cumulative effect of changes in accounting principle. Similar to business entities, which generally exclude those items from income from continuing operations, NFP HCOs are required to exclude those items from the performance indicator (see NP 3.4.4 and NP 3.4.5). Business entities include those amounts in net income; NFP HCOs include them in change in net assets without donor restrictions.
In accordance with ASC 954-220-45-8, the following changes in net assets without donor restrictions must be excluded from (that is, reported below) the performance indicator:
- Transactions with owners acting in that capacity
- Equity transfers involving other entities that control the reporting entity, are controlled by the reporting entity, or are under common control with the reporting entity
- Contributions of (and assets released from donor restrictions related to) long-lived assets
- Unrealized gains and losses on other than trading debt securities
- Other items that are required to be reported in or reclassified from other comprehensive income by a business entity, such as (a) actuarial or experience gains and losses of pension or OPEB plans, as well as prior service costs or credits and transition assets or obligations for those plans; (b) the gain or loss on derivative instruments designated as and qualifying as cash flow hedging instruments; and (c) foreign currency translation adjustments.
ASC 954-220-50-1 requires note disclosure of the nature and composition of the performance indicator.
3.3.2 NFP HCO statement of changes in net assets
The statement of changes in net assets presents all changes in net assets that occurred during the reporting period disaggregated between the two classes of net assets. It displays the three measures required by ASC 958-220-45-1: the change in donor restricted net assets, the change in net assets without donor restrictions, and the change in net assets for the entity as a whole.
- Net assets without donor restrictions
When the two-statement format is used, the activity reported for the changes in net assets without donor restrictions typically begins with the performance indicator and details all other changes in net assets without donor restrictions that were reported below the performance indicator in the statement of operations.
- Net assets with donor restrictions
The activity reported for the changes in net assets with donor restrictions generally includes donor-restricted contributions, donor-restricted investment return (net of investment expenses), and changes in the value of split-interest agreements. As donor restrictions are satisfied, reclassifications are made from donor-restricted net assets to net assets without donor restrictions (see NP 3.4.3). If the HCO recognized an inherent contribution in connection with a business combination that occurred during the period (see NP 5.5.3.1), any portion that is donor-restricted would be included in this category.As discussed in NP 3.2, the only expenses that may be included in the activity associated within donor-restricted net assets are investment expenses that have been netted against investment return. The reporting of certain losses within this class (e.g., impairment losses associated with uncollectible donor-restricted pledges) is, however, permissible.
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