In some financial statements, a Statement of Functional Expenses is presented. This statement presents expenses of the organization in a matrix format by both the functional basis (that is, programs such as membership, conferences, and supporting services such as general and administrative) and on a natural basis (that is, salaries or rent). Before the adoption of ASU 2016-14, this statement was required to be presented only by voluntary health and welfare organizations. All other nonprofit organizations currently have the option to present this statement, and they have the option of presenting this as a basic statement or as a supplemental schedule to the basic financial statements.
As noted previously, after the adoption of ASU 2016-14, an analysis of expenses by nature and function will be required by all nonprofit organizations. Under ASU 2016-14, the entity has a choice in how to present this information. An entity can choose to present this information as part of its Statement of Activities, in the footnotes to the financial statements, or as a separate basic financial statement. Under ASU 2016-14, this required information cannot be presented in a supplemental schedule. Larger, more complex organizations may choose to present this analysis in a separate statement rather than try to include this in the Statement of Activities because of the volume of information if there are multiple programs and supporting services.
As part of the ASU 2016-14 implementation process, entities should evaluate their current classification of major programs and supporting services. They should examine whether there are activities that should be combined into one program or supporting service to streamline the presentation of activities in the financial statements.
In addition to the analysis of expenses, the ASU requires that entities disclose their expense allocation methodology in the footnotes. The adoption of the new ASU is a good time for entities to reexamine their cost-allocation methodologies.
Use the Statement of Functional Expenses to analyze the categories of expenses incurred by the organization. This analysis will show the significant expenses incurred for all programs and supporting services and allows you to see how resources are being deployed. When this statement is presented on a comparative basis, it can be used to analyze the components of significant expenses from one year to the next.