Non-profit organizations are required to report expenses by functional classification. The allocation of expenses is presented within the Statement of Activities or related notes to the financial statements. The functional expense reporting gives the donors more information about the types of programs and activities the organization has completed during the year to fulfill their mission.
The functional expense classifications are listed below:
- Program Services – expenses relating to goods and services being distributed to beneficiaries, customers or members that fulfill the mission of the organization.
- Management and General – expenses relating to the essential day-to-day administration and oversight of the organization. Examples include business management, budgeting, annual reporting, financing, etc.
- Fundraising – expenses relating to publicizing and conducting fundraising events or other activities involving soliciting contributions from the public or outside sources.
Most organizations have expenses that relate to more than one functional classification. Those expenses can be allocated based on either financial or non-financial data. Management should have a written policy pertaining to the allocation of expenses. It should be reviewed by management on an annual basis and necessary revisions noted. There is no specific GAAP standard that defines which methods to use when allocating expenses but expenses should be allocated consistently and objectively from year-to-year.
Here are some examples of how to allocate expenses that relate to more than one functional classification:
- Salaries and Wages – allocate based on timesheets as a percentage of time spent on each function by employee and department
- Employee Benefits and Payroll Taxes – allocate based on salaries and wages allocation
- Rent – allocate based on square footage of the organization by each function or department
- Utilities and Building Maintenance – allocate based on rent allocation
The functional expense allocation provides the user of the financial statements a view at how the organization has achieved their mission in the past. By providing this allocation on a consistent and objective basis, the organization can continue to provide the donors with useful and valuable information.