Functional expenses allocation: what to include

The latest view on not-for-profit accounting issues

As many of you may know, the Financial Accounting Standards Board (FASB) issued a new standard ASU 2016-14, Presentation of Financial Statements. One effect this standard has is that it creates consistency on how expenses are presented in the financial statements for all nonprofit organizations. Functional expenses can be disclosed in three different ways:

1. In the footnotes
2. On the Statement of Activities (SOA)
3. As a separate Statement of Functional Expenses (SOFE)

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Read this blog for more on the benefits of spending time on the SOFE

As a nonprofit, you are required to report expenses by functional classification and the SOFE does a great job of showing expenses by nature (the green rows) and function (the pink columns). This example shows expenses split between Program Services and Supporting Services. The new standard requires both detail as to which types of expenses are allocated and detail on what methodology was used to allocate them. In this blog we will focus on the types of expenses allocated.

What do I need to look out for?

functional expense allocation, expenses, nonprofit, accounting, financial statementsWhen allocating expenses, it can be tricky figuring out which expenses to put where—which brings us back to the title of this blog. Below is a general guide of what should be included in each expense function.

Program Services – These are expenses that are carried out to fulfill the mission of the organization and they can include both direct and indirect expenses.

Supporting Services – These expenses are broken down further into two basic types of expenses (as shown above): Management & General (M&G) and Fundraising expenses.

  • M&G expenses relate to the overall direction of the organization. These are not identifiable with a specific program and include oversight, business management, record keeping, budgeting and financing. Here are some examples:
    • Expenses relating to board and committee meetings
    • Planning and direction provided by the executive director (direct supervision of programs can be allocated OUT of M&G)
    • Fees for accounting, auditing, budgeting and financial reporting
    • Preparation of the annual report
    • Cost of advertising for admissions or ticket sales (i.e. performing arts organizations, zoo, museum tickets, etc.)
  • Fundraising expenses are costs incurred for the sole-purpose of obtaining contributions whether it be cash, noncash items, services or time. Here are some examples:
    • Conducting special events, fundraising campaigns or solicitations
    • Recruiting volunteers (even when no revenue is recognized)
    • Preparing/distributing fundraising materials
    • Maintaining donor lists

Allocating your expenses is this first step but you shouldn’t stop there. It is also important to be aware that your organization’s activities and situations can change from year to year and it is recommended that you check these changes and reallocate your expenses accordingly. If you forget to make these changes, your programs may not be presented properly, your fundraising expenses could be misallocated or certain new expenses may not be allocated at all!

Organizations often want to limit their supporting services expenses but accurately allocating your expenses on your financial statements is beneficial beyond just meeting compliance requirements. Readers of the financial statements, such as grantors and donors, want to see that the money they are giving your organization is effectively meeting the purpose of your organization. Allocating your expenses correctly will also help management make informed and better decisions and can help the long-term growth of your organization.

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Still confused? Henry+Horne has a plethora of experience in serving Nonprofits and we would love to answer any questions you may have. Feel free to contact a Henry+Horne professional.

Jason Mollerup