Not-for-profit reporting series: Changes in expense reporting

There are significant new requirements for expense reporting coming for not-for-profit entities with the release of ASU 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities by the Financial Accounting Standards Board (FASB).

In this article, we’ll examine expense reporting and give an overview of how the new requirements change current practices and some related best practices. If you’d like to know more about changes to net asset classifications — another significant change — we give an in-depth overview in the first article in this series on the new standard.

The current 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.

What the standard changes

The new standard changes expense reporting in a few ways for not-for-profits.

Presenting expenses

The new standard requires all not-for-profit entities to concurrently present their expenses by natural and functional classifications. Here’s a closer look at those classifications as defined in the new standard:

• Natural expense classification. This is a method of grouping expenses according to the kinds of economic benefits received in incurring those expenses. Examples of natural expense classifications include salaries and wages, supplies interest expense, rent and utilities, and depreciation.
• Functional expense classification. This is a method of grouping expenses according to the purpose for which costs are incurred. The primary functional classifications of a not-for-profit entity are program services and supporting services.

There’s an added option for voluntary health and welfare entities. Previously, this type of entity was the only one required to present the analysis of expenses by both classifications. While this is still the case, voluntary health and welfare entities now have the option of presenting their information in either a statement of functional expenses or one of the other presentation methods permitted by the new standard. (The methods are described below.)