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On August 18, 2016, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) 2016-14 entitled Presentation of Financial Statements of Not-for-Profit Entities. The Update will change the way all nonprofit organizations present their financial statements and is intended to improve comparability between organizations, and provide more useful information for users. In our 2017 2nd Quarter Not-For-Profit Newsletter, we addressed the new requirements for disclosing liquidity and availability of resources.
We will now turn our attention to the updated requirements for presenting expenses by both their natural classifications, i.e., salaries, employee benefits, occupancy, etc., and their functional classifications, which are generally program services and supporting services such as management and general, fundraising, and membership development. In addition, an analysis of these expenses must be presented either on the face of the statement of activities, as a separate statement, or in the notes to the financial statements. Finally, a supplemental disclosure describing the organization’s methodology in allocating expenses between functions will also be required.
Tracking expenses by natural category is usually simple and straightforward. Tracking expenses by functional classification is more subjective, and can be more challenging for organizations that operate multiple programs. Expenses that benefit more than one function should be allocated. For example, let’s assume the executive director of an organization primarily runs program services, but also out of necessity must perform management and general duties, and devotes a fair amount of time to fundraising. Salary expense for the executive director should then be allocated between the functions that he or she performs based on the amount of time spent performing each function.
How do we allocate expenses between functions? Let’s start with a reminder of what each function generally includes. Program services are those activities that fulfill the purpose or mission of the organization. The definition of management and general activities has been modified by the Update to include “supporting activities that are not directly identifiable with one or more program, fundraising, or membership development activities.” Fundraising activities are those that induce potential donors to make financial contributions to support the organization’s mission. Finally, membership development activities seek to increase and maintain membership.
Many organizations are already capturing most of this information for use on their Form 990, specifically for Part III, the Statement of Program Service Accomplishments, and Part IX, the Statement of Functional Expenses, but this may not be reflected on their financial statements. In addition to the enhanced reporting for expenses, the Update will now require supplemental disclosures regarding how allocations between functions were determined. Examples of disclosure notes for allocation of expenses can be found in the ASU at section 958-720-55-176.