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Expense reporting changes forthcoming for nonprofit organizations

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Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, implements various changes in financial reporting requirements for not-for-profit entities. The objective of the standard is to provide more useful information to donors, grantors and other users of not-for-profit financial statements. This article is the third in a series regarding this new standard, and focuses on the requirements regarding the reporting of expenses.

Investment Expenses

The ASU modifies previous guidance regarding the reporting of investment expenses. Investment return is required to be presented net of external and direct internal investment expenses. In exchange for this additional information, disclosure of the amount of netted expenses is no longer required.

Operating Expenses

Additionally, the ASU requires enhanced reporting requirements for operating expenses within the financial statements. The relationship between functional and natural classification for all expenses shall be presented in an analysis that disaggregates functional expense classifications. Disclosure of the methodology used to allocate costs among functions shall be disclosed in the notes to financial statements as well.

Typically, functional expense classifications are shown as:

  • Program services: Activities that result in goods and services being distributed to beneficiaries, customers or members that fulfill the purpose or mission for which a nonprofit exists;
  • Supporting services, which often includes:
    • Management and general: Activities generally include oversight of the nonprofit and financial management
    • Fundraising: Activities undertaken to induce potential donors to contribute to the organization

Major classes of these functional activities are required to be presented by their natural expense classifications, such as salaries, rent, electricity, supplies, depreciation, postage, printing and professional fees. The ASU has modified the definition of management and general activities. The revised definition is “supporting activities that are not directly identifiable with one or more program, fundraising or membership development activities.” Management and general activities include the following: oversight, business management, general recordkeeping and payroll, budgeting, financing, and soliciting funds other than contributions and membership dues.

Reporting of this information in accordance with ASU 2016-14 may be accomplished through use of any one of the following methods:

  • On the face of the financial statements in the statement of activities
  • In a separate basic statement – statement of functional expenses
  • In a footnote disclosure table

Presenting this information in a supplemental schedule is not in accordance with the ASU.

See Figure 1: Statement of activities

See Figure 2: Separate statement of functional expenses

Effective date

The implementation deadline for ASU 2016-14 is December 31 2018, for calendar year entities, or 2019 for fiscal year entities. Early implementation of the standard is permissible, and retrospective application is required.

What steps to take now

Management and those charged with governance should begin considering the steps needed to implement the new standard as it relates to expense presentation and disclosure. Steps to ensure a smooth implementation include:

  • Identify functional classifications
  • Begin tracking expenses by both natural and functional classifications
  • Review the clarifications in the ASU regarding the allocation of expenses, such as allocating costs associated with employees that spend their time in multiple functional areas
  • Review allocation methodologies to determine if there are any changes necessary to comply with current presentation format
  • Implement methodologies and formal written policies for the classification of expenses into functional categories
  • Discuss presentation preferences that will be most helpful for financial statement users
  • For those organizations previously required to present a statement of functional expenses, determine if an alternative presentation format permitted by the ASU is preferred

With early adoption of the new standard permitted for future year-ends, and the final implementation deadline quickly approaching, we encourage you to begin preparing your organization now for this important transition. Rehmann professionals are ready to help guide you through all aspects of implementing ASU 2016-14.

Additional Resources

  • Net assets and endowment funds
  • Liquidity and availabilty of resources
  • Major changes ahead for not-for-profit financial statements
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