Understanding Functional Expenses for Nonprofits

Natural expenditure here tells us about where the money went in respect to what in return. The division of functional expenses tells the stakeholders in an organization that its natural expenditures continue to sustain the organization’s activities and resources. It’s important for the organization to consider each section of expenses, and I recommend developing a written policy that exhibits the intended allocation methods. This should be applied consistently with few exceptions and variations because the new guidance requires disclosure in the footnotes of the methods used for allocating expenses for functional classification. If you want to report your functional expenses properly AND  always have audit-ready financial reports at your disposal, an experienced nonprofit accountant can help. Because you’re required to report functional expenses to complete your IRS 990 and maintain nonprofit status.

• Specifically, the statement demonstrates the extent to which the organization’s programs and activities generate and use money.
• This includes understanding how to allocate functional expenses into classifications to build a functional expense report.
• Thus, when working on the allocation of functional expenses, an organization must have a thorough understanding of the correct methodology and processes in place.
• The results of a carefully prepared SOFE are often enlightening and can drive decision-making.
• One key change brought about by this ASU relates to the presentation of a nonprofit’s expenses.
• The costs of salaries of employees working on raising funds go into this account.
• However, indirect costs are those that apply to more than one category or would be too cumbersome to allocate directly.

Create your own with our Statement of Functional Expenses Template

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Those who know me, know I enjoy spending time in nature – mostly hiking and camping. And while I’d love to write more about that, this month you get to learn about a different kind of nature and function. But non-profits need to classify their expenses according to both nature and function. Citrin Cooperman has announced that it has entered into an agreement to acquire substantially all the assets of Teplitzky & Company P.C.

• The fundraising cost is the sponsorship of expenditures related to a charitable support or cash support call for an organization.
• For example, a fraternal organization may choose to break out its program service activities between categories such as chapter services, conferences and conventions, housing programs, etc.
• Specific to categorization, organizations can require employees to categorize and tag every expense before submitting an expense report.
• The donors, funders, and stakeholders of the nonprofit organization are interested in understanding if their funds are spent in the right order to meet the greater goal and aim of the organization in favor of the community.

What Nonprofits Should Know About Functional Expense Reporting

• The key to tracking functional expenses is setting up processes and being disciplined with your bookkeeping.
• The information contained within this article is provided for informational purposes only and is current as of the date published.
• Ideally, this category would be the most robust on the Statement of Functional Expenses, as donors and investors prefer that nonprofits direct most of their funds towards achieving their stated mission.
• There are different principles in nonprofit accounting and surrounding function expenses.
• Many of your expenses (like salary, rent, and utilities) contribute directly to the execution of multiple functions.
• Nonprofit organizations have several options regarding how they allocate expenses in a functional expense reporting system.

If you are new to nonprofit accounting, your first step is to understand the basic principles and needs of statements of functional expenses. This includes understanding how to allocate functional expenses into classifications to build a functional expense report. Ultimately, it is both the not-for-profit’s requirement and benefit to accurately report its functional expenses. These modifications to the nonprofit financial statements are intended to provide more meaningful information to the users of the financial statements. Different users desire different information regarding the breakdown of expenses. The Statement of Functional Expenses (SOFE) is included as part of the audited financial statements.

What Are Operating Costs?

• PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network.
• Courtney provides audit and review services for not-for-profit organizations and financial services companies.
• However, nonprofit-friendly accounting software can help you make creating your Statement of Functional Expenses fairly easy.
• Our experienced team can help you navigate complex accounting systems & practices, from outsourced accounting to client advisory services.
• Nonprofits often have unique expense categories based on their specific programs and activities.

The new standard changes expense reporting in a few ways for not-for-profits. These expenses for all three accounts should be recorded in weekly or monthly timesheets. The timesheet helps in sorting different needs and in deeply analyzing the allocation of the funds. The statement of activities is close to the dilemma of the company’s income statement.

Presenting normal balance this information as supplementary information doesn’t meet the requirements of the standard. Not-for-profit entities currently report expenses under the FASB Accounting Standards Codification (ASC) Topic 958, Not-for-Profit Entities. Under current guidance, voluntary health and welfare entities have an additional requirement to present a statement of functional expenses.

In some situations, fundraising costs should be categorized under Programs rather than Fundraising. Management and general expenses support spending related to financing the organization’s daily operations. Such expenses don’t apply to the non-profit mission, which typically includes costs such as administration, bookkeeping, and governance.

Direct Costs

The accounting specifications for both kinds of organizations are set to be different. One of mandatory accounting reporting for a nonprofit is to analyze the natural expenses based on their function. This analysis is mostly done through the Statement of Functional Expenses (SOFE.) SOEF is a very efficient method of maintaining the accounting equation statement of functional expenses as well as this valuable information. The information is not only a requirement but is also super informative and valuable for the organization to track the expenses.

Understanding Functional Expenses for Nonprofits

For established nonprofits, program expenses often make up the majority of their overall costs. Entities must present the relationship between the functional classification and the natural classification of expenses in an analysis that disaggregates the functional expenses by natural classification. The cost that goes into the arrangement of these programs is recorded under the Program Category. This helps the organization to keep a record of the allocation of the money. It also helps the board in analyzing that the money is allocated in fair Accounting for Churches and required activities. The record helps the trustees, the board, and the organization in keeping track to achieve the greater mission and purpose.

Functional expense reporting enables nonprofits to demonstrate that they are using their resources responsibly. Direct costs are those that relate to only one classification such as meals provided for an after-school program or rent for a building that is solely used for providing a specific program. However, indirect costs are those that apply to more than one category or would be too cumbersome to allocate directly.