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New Reporting Standards for Nonprofits: Classification of Expenses

May 26, 2017

The old way of reporting expenses (by functional classification, not by nature) will soon be replaced by the Financial Accounting Standards Board.

Has your organization caught up on impending changes to financial reporting? It’s a good idea to start planning if you haven’t already—many changes are coming for nonprofits, including changes with the classification of expenses.

Current reporting method

Currently, all NFPs are required to report expenses by functional classification, not by nature.

What does this exactly mean?

Well, ‘function’ refers to the activity for which the expenses were incurred, so for a not-for-profit organization, the reporting of expenses by function means the statement of activities will report expenses according to the following functional classifications:

  1. Each of its major programs, and
  2. The supporting services (i.e....)
    • Management and general,
    • Fundraising, and
    • Membership development.

Meanwhile reporting by ‘nature’ is defined in the codification as “a method of grouping expenses according to the kinds of economic benefits received in incurring those expenses. Examples of natural expense classifications include salaries and wages, employer benefits, supplies, rent and utilities.”

What will change?

All organizations will be required to submit an analysis of expenses by both function and natural classification on either a separate statement, on the face of the statement of activities, or in the footnotes. Submitting a separate statement of functional expenses may be the most effective presentation option for nonprofits with more than one program.

Bear in mind that investment expenses that have been netted against investment return are not allowed to be included in the analysis. If you use specific methodologies to allocate costs among program and support functions, additional disclosures will be required also.

Effective dates

ASU 2016-14 is effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Stay tuned for the next part of our series, “New Financial Reporting Standards for Nonprofits: 2017 Update.”

Questions? Contact any member of our Not-for-Profit Services Team.

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