The Statement of Activities presents revenues and gains and then expenses and losses as two separate major categories.
Revenues are inflows of assets that result from the entity's ongoing major or central operations and activities. Revenues are shown by type, and then totaled. Revenues are usually grouped by type or service. Not all nonprofit organizations have the same sources of revenue or the sources may be grouped differently based on their relative importance. Gains are increases in net assets resulting from an entity's peripheral or incidental transactions and other events and circumstances affecting the entity other than those that result from revenues. Peripheral or incidental transactions are those that are not an integral part of the entity's usual activities or those not significant to the annual budget. Gains can result from the change in the value of assets held, as well as transactions such as a sale of a building or a favorable outcome from a lawsuit.
Expenses are outflows of assets or incurrences of liabilities that result from an entity's ongoing major or central operations and activities. Expenses are often shown by program type, and then totaled.
The difference between revenue and expenses is the change in net assets. The change in net assets is also referred to by some as the bottom line.
Losses are decreases in net assets from an entity's peripheral or incidental transactions and other events or circumstances affecting the entity other than those that result from expenses. Losses can result from a decrease in the value of assets held as well as transactions such as natural disasters or the sale of a building or loss of a lawsuit. All said, revenue, expenses, gains and losses should be grouped by homogenous categories. Items that are substantially different should be shown separately.
The change in net assets or bottom-line figure is added to the beginning net assets to arrive at the ending net assets. This is often shown at the bottom of the Statement of Activities. When this format is used, you should make sure that the net assets reported on the Statement of Activities agree with the net assets on the Statement of Financial Position. Other times, this can be presented separately in a Statement of Changes in Net Assets. In this case be sure the net assets reported here agree with the Statement of Financial Position and that the bottom line also agrees with the Statement of Activities. It is also wise to trace the opening net assets of the current year's statements to the ending net assets of the prior year's financial statements. These are measures to test that the financial statements are constructed correctly.
The Statement of Activities also provides information about the revenue received and expenditures made with donor-imposed restrictions. The presentation of the receipt and disbursement of restricted net assets can be made in one of two ways, either a columnar or layered format on the Statement of Activities. A columnar format presents each class of net assets in a separate column. The layered format presents each class of net assets in a separate section of the statement as you work your way down the page.
Making matters even more complex is the fact that expenditures are required to be presented as decreases in unrestricted net assets (or after implementation of ASU 2016-14, net assets without donor restrictions). Since expenditures are shown as decreases in unrestricted net assets, when an entity uses restricted resources to fund activities, there needs to be a movement of restricted funds to offset these expenses. As a result, when expenditures are made with restricted resources, an amount equal to the amount of the expenditure is presented as a simultaneous decrease in temporarily restricted net assets (or after implementation of ASU 2016-14, net assets with donor restrictions) and an increase in unrestricted net assets (net assets without donor restrictions), with the description “net assets released from restriction.” This reclassification mechanism is how the restricted resources are moved to the unrestricted column to offset the expenses. The net effect is that unrestricted net assets (net assets without donor restriction) are increased and decreased by the same amount, while the restricted assets simply are reduced.
The Statement of Activities frequently summarizes detailed information that is available by department, or program, within the organization. Most organizations split their activities into departments or divisions based on their programs. Separate departmental statements may be presented in internal financial statements for internal management purposes.
The Statement of Activities offers valuable information about an organization's operating results. Compare this period's bottom line to the prior period. Then consider the various items that have affected the bottom line. Have the gross revenues and support gone up or down? Have the sources of revenue changed? What are the key sources of revenue, and have they gone up or down? What about expenses? Have total expenses gone up or down? How does the change in expenses relate to the change in revenue? Which individual expenses have changed significantly?
Some organizations choose to present operating and nonoperating sections on their Statement of Activities. The entity will define what activities are deemed to be part of operations and those that are deemed to be nonoperating based on the nature of the activities. If an organization chooses to present an operating measure, then the organization is required to disclose in the footnotes how the organization defines operating and nonoperating if this isn't clearly outlined in the Statement of Activities. The operating section would contain all activities an organization carries out as part of their mission or main purpose. The nonoperating section would contain those sources of revenue, expenses, gains, and losses that are not considered directly related to the organization's mission and are often activities that cannot be directly controlled by the organization.
If an organization chooses to segregate operating and nonoperating items, one section of the Statement of Activities will include all the income and expenses that are considered as being from operations, with a subtotal of excess revenue over expenses (surplus) or excess expenses over revenue (deficit) from operations. Following that subtotal will be a second section titled “Nonoperating.” This section will include revenue, expenses, gains, and losses that the organization does not consider part of the operations of the organization. Nonprofit organizations are prohibited from using language such as net income or operating income. Many organizations will consider all or part of the investment return nonoperating and report this separately in this section in the Statement of Activities. The effect of this presentation is to eliminate such things as investment return fluctuations or other items that cause volatility in the Statement of Activities, which are not within the control of management, from operating results.
After adoption of ASU 2016-14, if an organization presents an operating measure and shows governing board designations, appropriations, and similar actions in the nonoperating section, the entity will be required to report these types of transactions appropriately disaggregated and described by type either on the face of the financial statements or in the footnotes. The addition of this information will aid readers in understanding how these types of transactions affected the entity's financial position during the period covered in the financial statements.