Should You Have a Statement of Functional Expenses?

Posted on Wednesday, July 12, 2017

All nonprofit organizations are required to report information about expenses by their functional classification on their financial statements in either the statement of activities or in the notes to the financial statements.  Organizations that are considered voluntary health and welfare organizations are required to present this information in a statement of functional expenses in the financial statements.  The statement of functional expenses presents an organization’s expenses by both nature and function. 

What if your organization is not considered a voluntary health and welfare organization?  Should you include a schedule of functional expenses as a supplementary schedule to your financial statements?

The AICPA encourages those organizations that are not voluntary health and welfare organizations that receive at least 30% of their total support from contributions to include a schedule of functional expenses as part of their financial statements.  Other organizations may also include a schedule but are not required. 

Information provided in a schedule of functional expenses would most likely benefit the readers of your financial statements, as it provides additional detail on how your organization uses its resources.  In addition, the IRS requires all 501(c)(3) and 501(c)(4) to report expenses by both function and nature (basically a schedule of functional expenses) on the annual Form 990.  Reporting this information in your organization’s financial statements will make it easier to prepare your 990. 

The biggest reason to include your functional expenses as a supplementary schedule to your financial statements is that ALL nonprofits will be required to include information of expenses by both function and nature in one place in their financial statements when the new Accounting Standards Update 2016-14: Not-for-Profit Entities (Topic 958), Presentation of Financial Statements of Not-for-profit Entities goes into effect.  The presentation may be on the face of the Statement of Activities, in a separate statement (Statement of Functional Expenses) or in the footnotes.  The new standards will be required for annual financial statements issued for fiscal years beginning after December 15, 2017.  Once these new standards go into effect, the statement of functional expenses in some form will be required for all nonprofits.  Why not prepare your organization for the new requirement now?

To find out other requirements of the new nonprofit standard, see our previous post, Nonprofit Financial Statement Changes.

Posted by: Carrie Minnich, CPA

Posted in Mission Minded Nonprofits

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

"Bruner Dental has been with DWD for well over 15 years. The entire team at DWD has been helpful in many ways. From simple questions day to day, to audits, payroll needs, and much more; they…"

Rondell Nelson

Bruner Dental