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Prior to ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, only voluntary health and welfare organizations were required to report expenses by both natural classification and functional classification in their financial statements. FASB’s ASU 2016-14 expands this requirement to apply to all nonprofit organizations. Our four-part series on ASU 2016-14 concludes with this article highlighting the additional requirements of reporting expenses of nonprofit entities.

ASU 2016-14, requires all nonprofit organizations to analyze and report expenses by both function and nature in one location which can be on the face of the financial statements, in the notes to the financial statements, or as a separate financial statement. Expenses shall be presented in an analysis that disaggregates by function (i.e. program, management and general, and fundraising) and within each functional classification, further disaggregated by their natural expense classification (i.e. salaries and wages, professional services, rent, utilities, and depreciation).

Additionally, a description of the methods used to allocate costs among program and support functions is required to be disclosed in the notes to the financial statements. FASB advises that salaries and benefit costs of performing activities such as operations management and oversight, recordkeeping and payroll, budgeting, and grant reporting represent supporting functions and should be reported as management and general activities. FASB also advises that the salaries and benefit costs of conducting or supervising program activities should be allocated among those functions.

Management should develop a written policy for cost allocation and should review the policy at least annually to verify that it properly reflects the organization’s current year operations. To develop a cost allocation policy, Management should consider a policy that most accurately reflects the organization in a feasible manner. As organizations typically have expenses that relate to more than one functional expense classification, the most accurate cost allocation method is directly identifying specific expenses to a function. However, in many cases, direct identification is not feasible, therefore, allocation of expenses based on either financial or non-financial data is appropriate.

This new guidance provides for an enhanced understanding of the relationship between the functional classification and natural classification for a nonprofit’s expenses. The reporting of expenses, however, is just one component of the changes resulting from ASU 2016-14. Please refer to previous articles from July, August, and September 2018 discussing other significant changes required by the adoption of ASU 2016-14.

Effective Dates:

Nonprofit organizations are required to adopt the changes for fiscal years beginning after December 15, 2017.

For general questions or additional support about implementation, feel free to contact Kristi Yanover, Audit Partner, at, or any member of our Accounting & Assurance Team.

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