Functional expense reporting

Unlike public companies, non-profits expenses are reported by their functional classification.  Functional reporting involves grouping expenses by major classes of programs and supporting services.  Additionally, when an organization is a voluntary health and welfare organization, it is required to report in a separate financial statement the statement of functional expenses – a matrix of expenses by both its functional classification and natural classification (salaries, rent, utilities, supplies, etc).  One of the benefits to functional reporting is donors have more meaningful information about the types of programs and activities carried out to fulfill an organization’s mission

A word of caution:  We you analyze functional expenses, there is no “right” answer for how much an organization should spend on program expenses vs. supporting services.  Too much program expense may mean an organization is under investing in technology, personnel support and development, or financial planning and audit services.  Too little program expense may mean an organization is not being as efficient as it should be with donor contributions.  When assessing an organization’s program expenses vs. supporting service expenses, I recommend you compare it with the ratios of similar organizations instead of expecting there is a “right” % which would be expected for all non-profits.

GAAP requirements:  Functional reporting is required for all non-profits, but only voluntary health and welfare organizations are required to report information by both natural classification and functional classification.

Functional classifications include Program services and Supporting services:

Program services – “The activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill the purposes or mission for which the NFP exists.  Those services are the major purpose for and the major output of the NFP and often relate to several major programs.  For example, a large university may have programs for student instruction, research, and patient care, among others.  Similarly, a health and welfare entity may have programs for health or family services, research, disaster relief, and public education, among others.” (FASB ASC 958-720-45-3)

For some organizations, reporting one category of program services may be sufficient to reflect the activities of the organization.  For others, multiple program service categories may be necessary to meaningfully present the services provided by an organization. 

Supporting services – All activities of a NFP other than program services.  Generally, supporting services include the following activities:

  1. Management and General:
    1. Oversight
    2. Business management
    3. General record keeping
    4. Budgeting
    5. Financing, including unallocated interest costs pursuant to paragraph 958-720-45-24
    6. Soliciting funds other than contributions, including exchange transactions (whether program-related or not), such as government contracts, and related administrative activities
    7. Disseminating information to inform the public of the NFP’s stewardship of contributed funds
    8. Announcements concerning appointments
    9. The annual report
    10. Related administrative activities
    11. All management and administration except for direct conduct of program services or fundraising activities (FASB ASC 958-720-45-6 and 45-7)
  2. Fund-raising
    1. Publicizing and conducting fund-raising campaigns
    2. Maintaining donor mailing lists
    3. Conducting special fund-raising events
    4. Preparing and distributing fund-raising manuals, instructions, and other materials
    5. Conducting other activities involving soliciting contributions from individuals, foundations, government agencies, and others (FASB ASC 958-720-45-9)
  3. Membership development activities–
    1. Soliciting for prospective members
    2. Membership relations
    3. Similar activities (FASB ASC 958-720-45-11)

Expenses related to more than one function:   Expenses may relate to one program or supporting service, or they may relate to multiple activities or functions.  Those expenses which relate to multiple activities should be allocated among the applicable functions.  There is no specific GAAP which defines acceptable methodologies for allocating indirect costs, but costs should be allocated consistently and objectively.

Example:  This excel report provides an example of how to functionally allocate various types of expenses, as well as an example of a statement of functional expenses.  Next time, lets talk about joint costs, and the specific GAAP rules which need to be applied when programs or other supporting activities are in part fund-raising activities.


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