With the issuance of ASU 2016-14 “Presentation of Financial Statements of Not-for-Profit Entities,” all nonprofit entities must report expenses by both function and nature in one location. This can be presented on the statement of activities, a schedule in the notes, or, most commonly, as a statement of functional expenses. This standard is effective for fiscal years beginning after December 15, 2017. Before this standard went into place, the Functional Expense Schedule was required only for health and welfare organizations. It has also been required for organizations who complete tax Form 990, which is filed by many organizations exempt from income tax. The schedule helps financial statement users see where the expenses are coming from. It breaks down each expense by nature and assigns it to the appropriate organizational program.
As shown in the example above, the top row of the Functional Expense Schedule has column headers for each of the major organizational programs to which expenses are assigned. The schedule may include an “other programs” category if there are several small programs. There are also column headers for total program expenses, general and administrative, fundraising, and total expenses. This shows what proportion of expenses are related directly to programs as opposed to overhead. The Functional Expense Schedule is important because it is required for tax purposes. Additionally, the schedule shows donors how much of their money goes to fund specific programs. Donors want to feel confident that their money is going to help the programs carry out the organization’s main mission and not just to cover overhead costs.
Vertically on the first column, there is a listing of natural expenses describing the type of expense that occurred for each corresponding row. Depending on the nature of the organization, these expenses may include salaries, rent, depreciation supplies, sub-awards, contractors, travel, and other types of expenses. Users of the statement can see the distribution of resources to each natural expense for each program or overhead category.
Creators of functional expense schedules will need to allocate all of their organization’s expenses to each of their major programs and overhead categories based on actual usage. Under the new standard, the disclosure method must be disclosed. For some natural expenses, such as benefits, it is difficult to determine actual amounts being used. Therefore, it would be best to allocate them based on another factor such as hours being charged to each program. There may also be some costs that seem to be both fundraising and program costs, such as an informative mailing supporting the organization’s mission that also has a request for money. These are called “joint costs” and should be both allocated on the schedule and disclosed separately.
For more information about Functional Expense Schedules, please contact Dan Kelley or one of our nonprofit specialists at 301.231.6200.