The program expense ratio is widely used as a measure of nonprofit (NP) performance. It can be derived from either GAAP financial statements or IRS Form 990. However, these sources have conflicting disclosure requirements that can significantly affect the ratio. The FASB has consolidation requirements for GAAP financial statements, but allows wide latitude in how program-specific functional expenses are disclosed. The IRS requires disclosure of functional expenses on Form 990, but allows wide latitude in how the reporting entity is defined. Thus, the program ratio can vary significantly based on the accounting choices of management. We examine the association of program ratios and consolidation choices in NP hospitals using Form 990 data. We find that hospitals receiving support from unconsolidated affiliates realize significantly higher program ratios. The IRS and FASB should consider this finding when evaluating the latitude in reporting requirements for NP hospitals.

JEL Classifications: G1; G3; G18; G38; L3; L30; L31; L38; M4; M41; M48.

Data Availability: All data are from publicly available sources quoted in the text.

Keywords:
program ratio, Form 990, consolidation discretion, nonprofit, hospitals, disclosure management
2018
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