FASB ASU 2016-14: Expense Reporting Information
ASU 2016-14 will require nonprofits to report expenses by nature and function in a single location. Functional classifications of expenses include major classes of program services and supporting activities (management and general, fundraising, cost of direct benefits to donors). Natural classifications include salaries, benefits, rent, utilities, interest expense, supplies, depreciation, grants to others, and professional fees.
The presentation of expenses by nature and function could be presented in one of three ways:
- On the statement of activities,
- As a schedule in the notes to the financial statements, or
- In a separate financial statement, often referred to as the statement of functional expenses.
While a separate statement of functional expenses is not required, it may be the most effective presentation option for nonprofit organizations with more than one program.
Previously, voluntary health and welfare organizations were required to include the statement of functional expenses as part of a complete set of financial statements. Voluntary health and welfare organizations will have the same three options to present expenses by function and nature.
The presentation of expenses includes expenses that are in cost of goods sold, special events, and cost of direct benefits to donors by their natural classification. Items excluded from the presentation include investment expenses netted against investment returns, gains and losses, and certain other items such as foreign currency translation and pension and post-retirement prior service costs.
ASU 2016-14 also provided a new definition of Supporting Activities:
“Supporting activities – those that are not directly identifiable with one or more program, fundraising, or membership development activities.”
Therefore, activities that represent direct conduct or direct supervision of program or other supporting activities will require allocation from management and general activities.
Furthermore, the ASU will also require a description of the methods used to allocate costs among program and support functions. An example of such a note is:
Note X. Methods Used for Allocation of Expenses from Management and General Activities
The financial statements report certain categories of expenses that are attributable to one or more program or supporting function. Therefore, these expenses require allocation on a reasonable basis that is consistently applied. Expenses that are allocated include depreciation and occupancy, salaries and benefits, and information technology department. Depreciation and occupancy are both allocated based on square footage, salaries and benefits are allocated based on estimates of time and effort, and the information technology department is allocated based on estimates of time and costs of specific technology utilized.
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