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3.4 Applicability of certain sub-totals and captions
Publication date: 27 May 2020
us NFP guide
As discussed in NP 3.3.1, the statement of operations prepared by an NFP HCO reports a performance indicator (earnings measure) that is analogous to income from continuing operations of a business enterprise. Other NFPs may voluntarily choose to report this measure in a statement of operations.
NFPs that present a performance indicator apply the reporting concepts for other comprehensive income (OCI) in a manner similar to business entities. In income statements of business entities, OCI is a separate category of comprehensive income that is used to report certain gains, losses or other non-owner changes in equity during the period that are not included in net income. Amounts initially reported in OCI typically arise from unrealized remeasurement gains and losses that are reclassified to net income in a subsequent period, generally when realized. See ASC 220-10-45-10A and FSP 4.3 for a list of the items that qualify to be reported in this manner.
An NFP HCO would report items a business entity would classify as OCI in the change in net assets outside of the performance indicator in the period in which they arise and subsequently reclassify them into the performance indicator depending on the nature of the item.
As discussed in NP 2, an NFP HCO’s net assets without donor restrictions inherently includes the accumulated other comprehensive income amounts that will be reclassified to the performance indicator in future periods. As discussed in ASC 954-815-45-1, NFP HCOs are neither required to separately present a category of net assets called “accumulated other comprehensive income” on the face of the balance sheet nor disclose changes (remeasurements or reclassifications) in these amounts.
Excerpt from ASC 954-815-45-1
The absence of a requirement to report a separate component of equity in the balance sheet of a not-for-profit, business-oriented health care entity shall not preclude those entities from using comprehensive income reporting… Although accumulated other comprehensive income will inherently be carried forward in a not-for-profit health care entity's net assets, there is no compelling need for it to be reported separately in the balance sheet.
3.4.1 OCI for entities not reporting a performance indicator
With the exception of NFPs that report a performance indicator (as defined), NFPs are not required to distinguish between the categories of income (i.e., net income and other comprehensive income) in their financial reporting.
For NFPs, the statement of activities reports the total change in net assets during a period, which is analogous to comprehensive income for a business enterprise. Because NFPs are not required to report an earnings measure, they cannot apply the other comprehensive income accounting concepts by reporting certain items outside of an earnings measure in the period in which they occur and subsequently reclassifying them into earnings. This has some practical consequences for financial reporting by NFPs. For example, it precludes most non-healthcare NFPs from using cash flow hedge accounting for derivatives.
In one area of GAAP, the FASB has prescribed special “OCI-like” reporting requirements for NFPs, as illustrated in Figure NP 3-2, which shows the presentation of a separate line item for the “other components” of net periodic benefit cost.
Figure NP 3-2
Display of pension-related amounts in statement of activities with intermediate measure of operations
Display of pension-related amounts in statement of activities with intermediate measure of operations
Net assets
|
|||
Without donor restrictions
|
With donor restrictions
|
Total
|
|
Operating:
|
|||
Revenues, gains, and other support
|
$ 10,000
|
$ 5,000
|
$ 15,000
|
Expenses, including pension service cost
|
7,500
|
7,500
|
|
Increase in net assets from operating activities
|
2,500
|
2,500
|
|
Nonoperating:
Other components of net periodic pension cost
|
|||
(100)
|
(100)
|
||
Pension-related changes other than net periodic pension cost
|
50
|
50
|
|
Increase in net assets
|
2,450
|
5,000
|
7,450
|
Net assets beginning of year
|
105,000
|
52,000
|
157,000
|
Net assets end of year
|
$107,450
|
$57,000
|
$164,450
|
All entities are required to report the service cost component of net periodic benefit cost separate from the other components of net benefit cost (which include amortization of the remeasurement adjustments previously recognized apart from expenses). ASC 958-715-45-3 prohibits NFPs from reporting the “other components of net benefit cost” in the same line as the OCI-type items because that line item is, by definition, classified outside of expenses and the “other components” are expenses. If the “other components” are shown as a separate line item, the caption should appropriately differentiate that line from the OCI-type amounts. If the NFP reports an intermediate measure of operations (which may or may not meet the definition of a performance indicator), ASC 958-715-45-1 imposes a new requirement that the OCI-type amounts be reflected as nonoperating (consistent with the requirement for reporting the other components of net benefit cost). In that circumstance, the annual reclassification out of the OCI-type amounts and into net periodic benefit cost would occur entirely within nonoperating activity.
3.4.2 Operating/nonoperating distinctions
Some NFPs may choose to report an intermediate measure of operations (that is, to classify revenues, expenses, gains and losses reported in net assets without donor restrictions as operating or nonoperating) in the statement of activities or statement of operations. This measure is considered intermediate in relation to the required sub-total of “change in net assets without donor restrictions,” and, according to ASC 958-220-45-10, must be presented in the statement that reports the change in net assets without donor restrictions. For NFP HCOs, this “operating” measure refers to an optional intermediate subtotal that is reported above the required performance indicator.
Excerpt from ASC 958-220-45-10
Because terms such as operating income, operating profit, operating surplus, operating deficit, and results of operations are used with different meanings, if an intermediate measure of operations (for example, excess or deficit of operating revenues over expenses) is reported, it shall be in a financial statement that, at a minimum, reports the change in net assets without donor restrictions for the period.
ASC 958-220-55-5 through ASC 958-220-55-6 provide an example of a statement of activities that distinguishes between operating and nonoperating activities.
Like business entities, an NFP is allowed to self-define an intermediate subtotal that is appropriate for the organization, but ASC 958-220-45-14 requires that there be sufficient clarity (either on the face of the statement or in the notes) about how the organization defines “operations.” In particular, if an NFP reports internal transfers between operating and nonoperating categories, it must clearly and transparently disclose the effects of internal transfers on the intermediate subtotal.
Excerpt from ASC 958-220-45-14
Pursuant to paragraph 958-220-50-1, if an NFP’s use of the term operations is not apparent from the details provided on the face of the statement, a note to financial statements shall describe the nature of the reported measure of operations or the items excluded from operations.
Figure NP 3-3 illustrates a footnote disclosure describing operations when not apparent from the face of the statement.
Figure NP 3-3
Disclosure of composition of intermediate measure of operations
Disclosure of composition of intermediate measure of operations
Measure of operations. NFP A’s operating revenues in excess of expenses and transfers include all operating revenues and expenses that are an integral part of its programs and supporting activities, net assets released from donor restrictions to support operating expenditures, and transfers from Board-designated and other nonoperating funds to support current operating activities. The measure of operations includes support for operating activities from both donor-restricted net assets and net assets without donor restrictions designated for long-term investment (the donor-restricted and quasi-endowment) according to NFP A’s spending policy, which is detailed in Note X. The measure of operations excludes investment return in excess of (less than) amounts made available for current support, gains and losses on extinguishment of debt, and changes in fair value of the interest rate swap.
ASC 958-220-55-16 through ASC 958-220-55-19 provide additional information and examples.
Despite the flexibility to self-define a measure of operations in most respects, ASC 958-220-45-11 requires certain items to be included in or excluded from that measure, if it is presented.
Some limitations on an NFP’s use of an intermediate measure of operations are imposed by other Subtopics. If a subtotal such as income from operations is presented, it shall include the following amounts:
- An impairment loss recognized for a long-lived asset (asset group) to be held and used, pursuant to paragraph 360-10-45-4
- Costs associated with an exit or disposal activity that does not involve a discontinued operation, pursuant to paragraph 420-10-45-3
- A gain or loss recognized on the sale of a long-lived asset (disposal group) that is not a component of an entity that qualified for discontinued operations treatment, as defined in Subtopic 205-20, and pursuant to paragraph 360-10-45-5
In addition, the subtotal such as income from operations shall exclude the components of net periodic pension cost and net periodic postretirement benefit cost other than the service cost component, pursuant to paragraph 958-715-45-3.
Question NP 3-1 discusses the appropriate presentation of OCI items in an intermediate measure of operations.
Question NP 3-1
Can an NFP that does not report a performance indicator include items in its measure of operations that are treated as OCI items by business enterprises?
Can an NFP that does not report a performance indicator include items in its measure of operations that are treated as OCI items by business enterprises?
PwC response
Yes, with one exception. NFPs that do not report a performance indicator (as defined, see NP 3.3.1.1) have the flexibility to include OCI items in an intermediate measure of operations with the exception of certain OCI items related to pension and OPEB costs, which must be reported outside a measure of operations (consistent with the requirement for reporting the other components of net benefit cost).
3.4.3 Reclassifications between categories of net assets
The ASC Master Glossary defines a “reclassification of net assets” as follows:
Excerpt from ASC Master Glossary
Reclassification of net assets: Simultaneous increase of one class of net assets and decrease of another. A reclassification of net assets usually results from a donor-imposed restriction (donors include other types of contributors, including makers of certain grants) being satisfied or otherwise lapsing.
When the donor's stipulation has been satisfied (e.g., the equipment has been placed in service, the program activities have been carried out, the stipulated time period has elapsed), a reclassification is made from net assets with donor restrictions to net assets without donor restrictions to reflect the expiration of the restriction (see NP 6.7.2).
Reclassifications of net assets are not revenues, expenses, gains, or losses. Rather, they are a special category of transaction unique to NFPs. In accordance with ASC 958-220-45-3, they are reported as a separate line or lines on the face of the statement of activities using a caption such as “net assets released from restriction.” Because releases of restriction are not considered revenue, financial statement captions that include increases of net assets associated with releases of restriction typically refer to those amounts as “support” (for example, total revenues and support).
NFP HCOs must tailor their presentation of reclassifications in light of the additional reporting requirements associated with their reporting model. As discussed in NP 3.3, HCOs typically report their activities in two statements: a statement of operations and a statement of changes in net assets. When a donor restriction is satisfied, the decrease in donor-restricted net assets is reflected as a separate line in the statement of changes in net assets, and the increase in net assets without donor restrictions appears as a separate line in the statement of operations. In the statement of operations, the reclassification is reported above the performance indicator unless the restriction pertained to the purchase of long-lived assets (see NP 6.7.3).
For more information regarding reclassifications, see NP 6.7.2
3.4.4 NFP presentation of discontinued operations
NFPs apply the same guidance as business entities with respect to determining whether disposal of a component meets the conditions for reporting as a discontinued operation. See FSP 27 for information on those requirements. ASC 205-20-45-3 describes in which period such component should be presented as discontinued operations.
The statement in which net income of a business entity is reported or the statement of activities of a not-for-profit entity (NFP) for current and prior periods shall report the results of operations of the discontinued operation, including any gain or loss recognized in accordance with paragraph 205-20-45-3C, in the period in which a discontinued operation either has been disposed of or is classified as held for sale.
NFP and business entity reporting models differ with respect to where the effects of discontinued operations are presented. For business entities, discontinued operations are included in net income. Not-for-profit entities must report the results of discontinued operations as a separate component of the change in net assets for the appropriate net asset class (or classes). Display of an appropriately labeled subtotal (for example, “change in net assets before discontinued operations”) prior to the effects of the discontinued operations is required by ASC 958-220-55-6 and ASC 958-220-55-7.
Figure NP 3-4 illustrates the presentation of discontinued operations for an NFP.
Figure NP 3-4
Presentation of discontinued operations in statement of activities
Presentation of discontinued operations in statement of activities
Net assets
|
||
Without donor restrictions
|
With donor restrictions
|
|
Change in net assets before discontinued operations
|
$XXX,XXX
|
$XX,XXX
|
Discontinued operations (including loss on disposal of $XX)
|
XXX
|
–
|
Change in net assets
|
$XXX,XXX
|
$XX,XXX
|
The NFP-specific presentation requirements for discontinued operations also apply to NFP HCOs that report a performance indicator. The sequencing of discontinued operations is the primary structural difference between the performance indicator for an NFP HCO and net income of a business entity. In an NFP HCO’s statement of operations, discontinued operations must be reported below the performance indicator, just prior to the change in net assets. NFP HCOs cannot report discontinued operations in the same manner as a business entity (that is, include discontinued operations within the performance indicator) in order to appear more comparable to their for-profit business entity counterparts.
3.4.5 Presentations of cumulative effect of accounting changes
The cumulative effect of a change in accounting principle associated with issuance of a new standard must be reflected in current period activity, rather than by adjusting the opening balance of net assets. As explained in AAG-HCO 3.22, the effect of these changes would be displayed similar to discontinued operations.
AAG-HCO 3.22
Normally, a FASB Accounting Standards Update (ASU) will provide specific transition requirements. If a newly issued standard requires that the effect of an accounting change be reported as a cumulative-effect adjustment to the change in net assets of the period of the change, rather than by retrospective application, that amount would be displayed similar to discontinued operations, unless the transition requirements provided otherwise.
As discussed in FSP 27.4.2, if a financial reporting period includes both a cumulative effect accounting change and a discontinued operation, the statement of activities should present the discontinued operation prior to reporting the cumulative effect of the change in accounting principle.
3.4.6 Accounting changes and error corrections
Changes in accounting necessitated by a newly-issued FASB standard are subject to the transition provisions of each particular standard. Changes in accounting principle can also be voluntary.
ASC 250-10 requires retrospective application for voluntary changes in accounting principle. Retrospective application requires that the cumulative effect of the change to all prior periods be reported as an adjustment to the opening balance of net assets as of the earliest period presented in the comparative financial statements.
Figure NP 3-5 illustrates the reporting of a voluntary change in accounting principle through retrospective application.
Figure NP 3-5
Retrospective application of a change in accounting principle
Retrospective application of a change in accounting principle
Change in net assets
|
$ XXX,XXX
|
Net assets, beginning of year, as originally reported
|
XXX,XXX
|
Adjustment for retrospective application of new accounting principle (Note X)
|
XXX
|
Net assets, beginning of year, as adjusted
|
XXX,XXX
|
Net assets, end of year
|
$ XXX,XXX
|
Prior periods may also be restated due to the need to correct a material error. Figure NP 3-6 illustrates the reporting of the correction of an error.
Figure NP 3-6
Correction of an error
Correction of an error
Change in net assets
|
$ XXX,XXX
|
Net assets, beginning of year, as originally reported
|
XXX,XXX
|
Restatement (Note X)
|
XXX
|
Net assets, beginning of year, as restated
|
XXX,XXX
|
Net assets, end of year
|
$ XXX,XXX
|
3.4.7 Board designations, appropriations, and similar actions
Some NFPs that report a self-defined operating measure (see NP 3.4.2) will choose to display the effects of internal board designations, appropriations, and similar actions—hereafter referred to as “internal transfers”—on the face of the statement of activities. Entities that apply this practice are able to increase or decrease the amount of operating income reported in a given year, based on decisions made by their governing boards to spend, or not spend, certain resources during the year.
For example, an NFP might receive a larger-than-normal bequest that the governing board decides not to use in current period operations. An NFP that chooses to report internal transfers on the face of the statement of activities would report a transfer out of operating activity for that amount along with a corresponding transfer into nonoperating activity. In the period that the board decides to use the funds in operations, the statements would reflect a decrease in nonoperating income and an increase in operating income to “transfer” the resources back into the operating classification. The bottom line “change in net assets” for the period is unaffected, only the income from operations subtotal will change.
Other common situations when internal transfers might be reported are:
- Contributions designated by the board for capital projects
- Investment returns appropriated from a quasi-endowment
- Establishing or adding to a board-designated endowment fund (quasi-endowment, funds functioning as endowment)
NFPs that choose to display internal transfers in the statement of activities are required to clearly and transparently present those transfers, appropriately disaggregated and described by type, so that users of the financial statements can determine their effect on the operating measure. This information can be provided either on the face of the statement of activities or in the notes.
Excerpt from ASC 958-220-45-14
If an NFP presents internal board designations, appropriations, and similar actions on the face of the financial statements, a note to financial statements shall provide an appropriate disaggregation and description by type of these actions if not provided on the face of the financial statements.
ASC 958-220-55-17 illustrates a statement showing internal transfers that are appropriately disaggregated and described by type on the face (that is, each type of transfer appears separately in both the operating and nonoperating section). ASC 958-220-55-18 illustrates a statement when internal transfers are aggregated and reported net in a single line item in the operating and nonoperating sections of the statement. In the latter case, the entity must provide disclosure in the notes to the financial statements of the disaggregated information required by GAAP.
3.4.8 Equity transfers and equity transactions among affiliates
There are two special types of related party transactions that are unique to NFPs: equity transfers and equity transactions, as articulated in ASC 958-20-55-2B.
An equity transaction differs from an equity transfer in that an equity transaction, as described in paragraph 958-20-25-4, involves a financially interrelated party either as a third party in a transfer from an entity to one of its affiliates or as a counterparty in a transfer from an entity to itself. In addition, an equity transaction, unlike an equity transfer, is reciprocal; the NFP or its affiliate named as the beneficiary receives an ongoing economic interest in the assets held by the recipient entity. See paragraph 954-220-45-2 for guidance on how to present equity transfers for not-for-profit, business-oriented health care entities that present a performance indicator.
3.4.8.1 Equity transfers
As defined in the ASC Master Glossary, an equity transfer is a nonreciprocal transfer of resources between entities that are members of the same NFP consolidated financial reporting entity. In some ways, they are the not-for-profit counterpart of transfers of capital that occur between a business entity and its owners (for example, additional paid-in capital or payment of dividends).
Excerpt from ASC Master Glossary
Equity Transfer: An equity transfer is nonreciprocal. An equity transfer is a transaction directly between a transferor and a transferee. Equity transfers are similar to ownership transactions between a for-profit parent and its owned subsidiary (for example, additional paid-in capital or dividends). However, equity transfers can occur only between related not-for-profit entities (NFPs) if one controls the other or both are under common control. An equity transfer embodies no expectation of repayment, nor does the transferor receive anything of immediate economic value (such as a financial interest or ownership).
Because these transfers occur between members of the same financial reporting entity, they eliminate in consolidation. However, when separate financial statements are issued for a subsidiary that makes or receives an equity transfer, the transfer must be displayed.
Equity transfers must be reported as a separate line item (or items) in a statement of activities. In an NFP HCO’s statement of operations, that separate line item must be displayed outside of (that is, below) the performance indicator. Flexibility is provided in how these line items can be captioned, as long as the captions are appropriately descriptive (for example, “grant from affiliate”). See ASC 954-220-45-2 for additional guidance on the reporting of equity transfers for NFPs and NFP HCOs.
While these transactions often involve transfers of financial resources, they also can take other forms, such as the transfer of tangible assets. Such transfers are reported at the carrying amount of the underlying asset and do not result in a step-up to fair value. For example, if a nonreciprocal transfer of equipment occurs between affiliates, the recipient would reflect the capital asset at its carryover basis (that is, the value at which it was carried on the books of the transferring entity).
Equity transfers can also take the form of services provided. See NP 7.5.2 for further information about personnel services donated by an affiliated organization.
3.4.8.2 Equity transactions
Equity transactions are reciprocal transfers that occur between NFP affiliates in certain specific circumstances. In accordance with ASC 958-20-45-1 and ASC 958-20-45-2, both the recipient and donor NFP must reported affiliate equity transactions as a separate line item. ASC 958-20-25-4 through ASC 958-20-25-7 describe circumstances involving equity transfers with other NFPs that are financially-interrelated (see NP 8).
Excerpt from ASC 958-20-45-1
A recipient entity shall report an equity transaction as a separate line item in its statement of activities. Paragraph 958-20-55-2B describes the difference between an equity transfer and an equity transaction.
A resource provider shall report an equity transaction as a separate line in its statement of activities if it specifies an affiliate as beneficiary. See paragraph 958-20-25-4 for the conditions that determine if a transfer is an equity transaction.
Equity transactions also are used for reporting share transactions between an NFP parent and noncontrolling shareholders. ASC 958-810-55-21(c) states that shares purchased by an NFP parent from noncontrolling shareholders, or shares sold by an NFP parent to noncontrolling shareholders, are reported as equity transactions within net assets without donor restrictions. This reporting is illustrated in ASC 958-810-55-24.
* Amortization of prior service cost and other gains/losses recognized in changes in net assets but not included in net periodic pension cost when they arose
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