By Robert Looney, CPA
It seems fitting with the increased demand for all-natural products that financial statements should follow suit. The FASB’s ASU 2016-14 indicates that, starting with fiscal years beginning after December 15, 2017, all not-for-profit financial statements will be required to present, in one place, an analysis of functional expenses disaggregated by natural categories. Voluntary health and welfare organizations have been subject to this for a number of years with their requirement to present a Statement of Functional Expenses. To provide more consistency in reporting, and improve the decision-making usefulness of the information being presented, FASB has broadened this requirement to all not-for-profit financial statements. The ASU also enhances the disclosure requirements around the methods used to allocate costs among the functional categories to provide more useful information about the effects of these methods.
What does this mean for your organization?
First, your financial statements will now need to present a matrix showing all expenses incurred by the functional (program v. support activities) and natural categories (supplies, payroll, training, maintenance, depreciation, etc.) in one place either on the face of the Statement of Activities, a separate Statement of Functional Expenses, or footnote disclosure. If your organization has already been presenting a Statement of Functional Expenses, this should meet the presentation requirements. However, what we often see is a Statement of Activities presented by natural categories, and a footnote disclosure presenting expenses by functional categories, with no real cross section of the two. This would not meet the presentation requirements; a financial statement that has been presented this way in the past will now need to include a matrix showing the cross between the two types of expense categories in one place.
Second, if your not-for-profit organization is presenting a financial statement, you will be required to disclose the methodology used to allocate costs among program and support functions as a footnote to the analysis of functional expenses by natural categories previously discussed. In particular, the new standard requires disclosure of the specific base used to allocate costs for each natural category that is allocated among program and support functions. For example, if payroll is allocated to program and management & general functional categories based on specific identification (e.g., time sheet tracking), the disclosure may be as follows:
“The financial statements report certain categories of expenses that are attributable to more than one program or support function. Therefore these expenses require allocation on a reasonable basis that is consistently applied. The expenses that are allocated include payroll costs, which are allocated using specific identification of time spent on program and support activities.”
FASB has acknowledged that these new requirements will increase the burden on not-for-profit organizations that present financial statements, as they will now need to make sure that allocation methods used for the different natural categories are consistently applied across periods, and may need to increase efforts around documentation. However, since the ASU reduces other reporting requirements (e.g., the change in net asset restriction requirements), FASB feels that the benefits of this enhanced expense disclosure outweigh the costs.
The analysis of functional expenses by natural categories must be presented for each year covered by the financial statements, which may complicate application of the new requirement. Early implementation of the new standard is allowed, but the best timing may vary based on your organization’s situation. Contact your Clark Schaefer Hackett advisor to discuss your organization’s situation and how you may be affected by this new standard.
