A few months ago we discussed the key financial statements required in nonprofit fund accounting (you can read this article here). We’ve already discussed the Statement of Financial Position in a previous article (you can read this article here) and are moving on to the Statement of Activities. A Statement of Activities is similar to a Statement of Revenue and Expenses (in the for-profit world). However, because nonprofits have a purpose other than making a profit, the terms “statement of activities” and “change in net assets” are used in place of income statement and net income. Similar to the revenue statement, the statement of activities reports on the changes in net assets over a selected period of time.
Nonprofit organizations receive a major source of their funding from private and public donors, and these donors often impose restrictions on the use of these funds. The donated funds may be unrestricted, permanently restricted (such as an endowment fund), or temporarily restricted (such as a building fund). FASB Statement 117 requires that an organization report the change in net assets based on the restriction categories of permanently, temporarily, or unrestricted.
The Format of the Statement of Activities
The statement of activities needs to have a heading, a body, and a bottom line. The revenue section and expense section should be included in the body, and the report should be formatted in multiple columns to present the increases and decreases in net assets according to the intent of the donor with column headings for unrestricted, temporarily restricted, and permanently restricted.
What Type of Expenses are Included?
An important distinction on the statement of activities is how expenses are classified. Nonprofits use two important classifications of expenses: natural and functional. Natural classifications are used by the for-profit world also and indicate the type of expense incurred. Examples of the natural classification of expenses are utilities, rent, office supplies, and salary expenses. Functional classification indicates on what activity (the function) the expense was incurred. There are three principal functional classifications: program expenses, management and administrative expenses, and fund-raising expenses.
A statement of activities with the functional expense classification would list the programs under the expense section. The expenses for each program would include salaries, office supplies, utilities, and other expenses for that specific program.
A statement of activities with the natural classification would simply list all the expense types: Salaries, utilities, office supplies, and other expenses.
FASB Statement 117 allows most nonprofits to present the functional information in the notes of the financial statements but functional expenses may also be presented on the face of the statement.
Statement of Functional Expenses
Voluntary health and welfare organizations are required to present the expenses in a matrix which includes both the natural and the functional expense by program. (See FASB Statement 117 C for the specific definitions.)
Direct or Indirect Expenses?
Some expenses are easily matched to the program activity. Other expenses support more than one program. Expenses related to more than one program must be allocated to the appropriate functions. A building may be shared by several programs. The building rent must be allocated to the programs utilizing the building using an objective method of allocation if possible. Note there is special guidance on allocating costs related to an activity that combines fund-raising with elements of another function. These types of costs are referred to as joint activities.
Statements produced by nonprofit organizations must be useful to donors and contributors so that decisions about the allocation of resources can be made. Statements are useful in assessing the services provided by the organization and its ability to continue those services and statements may also offer insight when assessing how managers have performed their stewardship responsibilities.
While FASB Statement 117 establishes minimum standards for financial reporting, organizations have flexibility in how items are sequenced on a report allowing the reporting standards to meet the needs of different organizations.
Stay tuned to our blog for more clarification on the necessary reports for nonprofit fund accounting. If you have any questions about your system’s capability for creating these reports, give us a call today.