By Vanessa Munoz
In an effort to improve financial reporting for nonprofits, the Financial Accounting Standards Board (FASB) is implementing various changes. Among these changes are how expenses are being reported.
When it comes to financial reporting, many nonprofit organizations are only required to provide expenses by their nature (i.e. salaries, travel, rent, etc.).
However, voluntary health and welfare organizations are also required to present a statement of functional expenses. A statement of functional expenses is essentially a matrix that provides a breakdown of expenses by both natural and functional classifications.
What Are Functional Expense Classifications?
Functional Expenses group expenses according to their purpose. Functional expenses typically fall under two classifications:
- Program Services – Pertains to the activities that carry out the organization’s programs or services that fulfill the organization’s defined mission.
- Supporting Services – Pertains to management and general (administrative), fundraising, and membership development activities. These expenses relate to the day-to-day activities and cannot be directly allocated to a particular program. Supporting services typically include expenses such as audit fees, bookkeeping services, and human resources.
Note that activities that involve the direct supervision or conduct or program services or other supporting services must be allocated between both program and supporting services.
New Guidance (effective for fiscal years beginning after December 15, 2017)
FASB ASU 2016-14 will require all nonprofit organizations to provide an analysis of expenses by both natural and functional expenses. This analysis can be presented on the statement of activities, a separate statement of functional expenses, or in a table in the footnote disclosures. A disclosure is also required to explain the methodology used to allocate the costs between program and support functions.
Implementing These Changes
It is a good idea for nonprofit organizations to start preparing for these changes and come up with a policy to allocate expenses.
- Document the methodology behind the allocations – If the policy is in writing, it is easier to communicate to the board, auditors, and bookkeepers. It also enables consistency.
- Identify expenses that fall into both program and supporting services – Payroll expenses, insurance, rent, and legal fees are examples of expenses that may need to be allocated. Consider what allocation method will be best.
- Incorporate timesheets – There will be employees that do both program and supporting services. Timesheets will facilitate the proper allocations for payroll-related expenses.
- Consider the square-footage of the office space – It may be a good idea to allocate occupancy costs (i.e. rent, utilities, property taxes, etc.) according to the square-footage.
- Review the allocation policy – Organizations will go through changes and it is good practice to revisit the policies in place and adjust accordingly.
To stay informed with all of the coming FASB updates for nonprofits, visit our past blog on changes in nonprofit reporting.
Vanessa Munoz is an Audit Supervisor at Wiss & Company. If you would like to speak with Vanessa, you may reach her at firstname.lastname@example.org or at 973.994.9400.