My final post about the new FASB guidance for nonprofit financial statements will cover a couple additional or enhanced disclosures that will be required. These disclosures are (a) presenting expenses both by functional classification and by natural classification, and (b) methods you use to allocate costs between program and support functions.
The change to expense classification is an expansion of, and slight amendment to, the statement of functional expenses. Presenting this type of information will be familiar to voluntary health and welfare organizations, who are already required to file a statement of functional expenses. Going forward, all nonprofits will be required to present their expenses by their function and nature. The amendment part of it comes from the flexibility in where the classification can be presented. As long as all the information is in one place, it can be on the face of the statement of activities, as a schedule in the notes to the financial statements, or in a separate financial statement.
Requiring this classification scheme of all nonprofits won’t be much of a change to organizations that file a Form 990 with the IRS, which already requires a statement of functional expenses. It will be new to organizations that only file a Form 990-EZ or 990-N postcard. The report comes in the form of a matrix, with columns for program expenses, fundraising expenses, and management and general expenses. You can find an example of the statement here (pages 4-5), and the 990 equivalent on page 10 here. One slight difference is that the Form 990 puts all program expenses together in one column, while an organization can breakout individual programs or groups of programs for their own reporting. FASB’s goal in using both functional and natural classification is to help “associat[e] expenses with service efforts and accomplishments (page 26 of this document).” It helps donors, funders, and other users of your financial statements evaluate how resources are being used.
For expenses that are split between multiple functions in the above reporting, FASB will also require disclosure of how you allocate costs between program and support functions. Examples include the salaries of executive directors or senior-level staff that spend some of their time on program work, and some on management and general work, or expenses for a publication that partially accomplishes a mission program and also serves fundraising efforts. Nonprofit organizations are already required to use allocation methods that are rational and systematic, in accordance with FASB ASC 958-720-55, but will now be expected to disclose the allocation methods being used. The Journal of Accountancy and accounting firm Maxwell Locke & Ritter go into more detail about methods to use, and examples of criteria to consider, in their articles here and here.