Beginning in the calendar year 2018, and fiscal years ending in 2019, nonprofit organizations will be required to present expenses both by their functional and natural classification, in a manner similar to a statement of functional expenses. While the standard does not specifically require a statement of functional expenses, the language in ASC 958-720-45-15 is substantially equivalent to that type of presentation. Functions are redefined as having two primary components and three subcomponents:
- Program services
- Management and general
- Supporting services, comprised of one or more of the following
- Membership development
The new standard provides guidance on activities included within the classification of “management and general.” This list of activities for “management and general” includes numerous tasks and functions, which are required of any organization.
The new standard also requires the notes to financial statements to describe the methods used for allocating all direct and indirect expenses across functions. The standard lists “time and effort” as an example allocation method for indirect expenses.
The following items would be beneficial for nonprofits to consider in preparation for the new standard:
- If a statement of functional expenses is not currently being presented, consider adding one. Ultimately, it can save administrative time. As mentioned, equivalent information is required either in the statements or in the notes. Nonprofits that have to file a Form 990 are also required to present this information. By including a statement of functional expenses in the basic financials, the new reporting requirements are met and the work for the 990 is significantly reduced.
- Although the redefined functions are similar to the current functions, there are some changes. This can present a reasonable cause for nonprofits to revisit how expenses are allocated across functions.
- The allocation of expenses can be critical to how nonprofits are “rated” by various internet sites that evaluate financial information.
- Although these ratings may be devoid of context, they can significantly impact fundraising. Individual donors and their financial advisors use these sites to determine which nonprofits will receive donations and at what amounts.
- Similarly, these ratings can impact grant funding from foundations that have benchmark requirements for various financial metrics.
- Regardless of the individual positions organizations may have on these types of websites, it is important to know the percentage of expenses classified as program services is a component of most rating scales
- The standard provides time and effort as an example of an allocation method, but other methods may more accurately reflect the expense allocation for your organization.
If you would like to discuss these changes, please contact your Blue & Co. service team member or local office.