In order to help donors, creditors, and others in assessing a not-for-profit’s (NFPs) service efforts, including the costs of its services and how it uses resources, current expense reporting requirements mandate that a statement of activities or notes to financial statements provide information about expenses reported by their functional classification, such as major classes of program services and supporting activities, for example:
- Program services
- Supporting activities, which often include one or more of the following:
- Management and general activities
- Fundraising activities
- Membership development activities
Currently, only voluntary health and welfare entities are required to report information about expenses by their functional classification as well as information about expenses by their natural expense classification, such as salaries, rent, electricity, interest expense, depreciation, awards and grants to others, and professional fees, in a matrix format in a separate financial statement – the statement of functional expenses (SOFE).
However, effective for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018, all NFPs will be required to report all expenses (other than netted investment expenses) by function and nature in one location. That information can be reported on the face of the statement of activities, in a separate statement (a SOFE), or in the notes to the financial statements. In reporting its expenses, an NFP would be required to show the relationship between its functional and natural classification by disaggregating its functional categories by their natural classification. Reporting expenses by nature and function is useful in associating expenses with service efforts and accomplishments of NFPs.
Feel free to contact us with any questions related to the new reporting requirements discussed above. We’re happy to assist with any accounting related questions you may have, so that you can focus on the important stuff – accomplishing your organization’s mission!
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