Industry Insights

The Impact of Intermediate Measures of Operations on NFPs

May 2016
Author:  Daniel Waninger

Daniel Waninger



Not-for-Profit & Government

201 N. Illinois Street, Suite 700
P.O. Box 44998
Indianapolis, IN 46244-0998 (46204)


Current reporting requirements for not-for-profit (NFP) organizations lack a stipulation to present an operating measure in the statement of activities, which leads to diversity in practice and reporting. In April 2015, The Financial Accounting Standards Board’s (FASB) proposed Accounting Standards Update, Presentation of Financial Statements of Not-for-Profit Entities, focused on this diversity in practice and has proposed two intermediate measures of operations:

  1. Operating revenue, support, expenses, gains and losses absent of donor restriction and before internal transfers
  2. The effect of internal transfers that make resources available, or unavailable, for current operations

Comment letters on this provision of the exposure draft included concerns about the inherent confusion in reporting two levels of operations—namely, continued diversity in practice and how NFPs conclude which revenue, support, expenses, gains and losses are operating versus nonoperating in nature.

As NFPs start to incorporate these proposed changes and prepare for their effects, they should consider the items below and work to better define them.

Educate the Board of Directors on Changes

It’s common for members of an NFP’s board of directors to come from a for-profit world and mindset. The introduction of the two operating measures could continue to move an NFP’s statement of activities further from a for-profit presentation. Therefore, it’ll be important for board members to understand how to draw meaningful insights from the measures to gauge their effect on the organization.

First Operating Measure – Defining the Operating Activity

In adopting these proposed reporting frameworks, it’s important to define operating versus nonoperating activity. Organizations will want to have conversations with stakeholders—senior staff, program service personnel, donors, funders, the board and community representatives—to help understand how they view the organization and its core purposes and activities. Similar to the hard conversations that occurred during the Great Recession, organizations may need to redefine and cleanse their mission to clearly outline their purpose. A core question that will need to be answered is, “How do we as an organization measure our impact and further our mission and how can we share that story financially?” The answer should be the crux of operating activities. It may even be helpful to redefine operating activities as mission-related activities to assist in this evaluation.

Some other questions and conversations may include:

  • What public benefit are we providing—and if we ceased to exist, what would be the effect on our community?
  • What public benefit would those providing support—government agencies, grantors and foundations—say we provide? Is this definition different from ours? Would our definition of individual donors be different?
  • Who are our constituents?
  • What activities, if any, are we doing outside our mission? Are these activities appropriate, or are we risking mission creep?
  • Are our programs and resources allocated and balanced to ensure dedication to our core mission?
  • Why do we have nonoperating items if they don’t further our mission?

These questions may lead those responsible for financial reporting to change the chart of accounts and processes for recording transactions to ensure detailed information is captured to report operating versus nonoperating activities. Projects to revamp chart of accounts and processes can be time-consuming, but they shouldn’t be neglected.

Second Operating Measure – Transfers

A potential benefit of the operating measures is the clarity—to the board and other constituents—of the internal action and transfer effects on the organization’s operating activities. Board members being uninformed about how their organization manages liquidity and funds its current activities isn’t unusual. Is the organization borrowing long-term resources of one program to fund the short-term needs of another? If so, are plans in place to make each program self-sustaining? If not, is there a need to analyze these programs to ensure a self-sustaining future? Many of these questions and conversations will lead to focusing on and cleansing the organization’s mission and proper stewardship of entrusted resources. This operating measure will help the organization accurately define and track funds. To capture and report internal transfers, the organization may need to consider its account chart and the process for tracking and obtaining information.

Although daunting, the proposed framework changes focus on operating measures and presents opportunities for NFPs to have healthy and necessary conversations about their mission and its impact. Instead of ignoring these conversations, it’s time to add these to staff, finance committee, program committee, board and community meeting agendas to allow organizations to more clearly see the impact they have on their communities and further their mission.

BKD will continue to track FASB’s progress on this project, and we invite you to subscribe to BKD Thoughtware® to stay apprised of the latest developments. Please contact your BKD advisor with any questions or concerns.

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