Explain the difference between operating revenues/expenses and nonoperating revenues/expenses. Why does the GASB require that operating revenues/expenses be reported separately on proprietary statements of revenues, expenses, and changes in fund net position?

Question

What will be an ideal response?

Answer 1

GASB leaves the definition of operating and nonoperating revenues/expenses/income to management. However, guidance indicates that operating revenues and expenses are those related to the primary function or reason for the proprietary fund's existence. The operating revenues generated by a proprietary fund are based on the goods or services provided by the proprietary fund. Consequently, operating expenses are those expenses incurred in provision of the fund's primary goods or services. Nonoperating revenues and expenses are peripheral or incidental in nature to the primary function or objective of the proprietary fund. Generally, nonoperating revenues include such items as interest income, gains on sale of assets, tax revenues, and grants and gifts that can be used for operating activity. One reason for separating operating and nonoperating items is to help assess management performance. Additionally, GASB requires that operating revenues/expenses/income be separately identified on the statement of revenues, expenses and changes in fund net position since the information is necessary for classifying activity as operating, noncapital financing, capital and related financing, or investing on the statement of cash flows.