New Nonprofit GAAP – ready for functional expense reporting?

Joan M. Renner, CPA, CGMA, Director 501(c)(fit!)

You can’t put it off any longer.  The year has come when you’ll have to implement the new nonprofit financial reporting GAAP.  While it’s true that you may not be putting together the financial statements for your audit until this time next year, you don’t want to wait to find out what’s involved.  There are a few areas where you will benefit from advance planning.  One of them is functional expense reporting.    

All Nonprofits Must Now Report Expenses by Function.

While voluntary health and welfare charities have been reporting expenses by function for years, associations and other nonprofits have been able to list expenses by natural classification.  Now, all nonprofits will need to report expenses broken down by functional categories like programs, management and general and fundraising/membership development. 

Classifying direct costs is relatively easy.

Most nonprofits have some kind of cost center reporting, such as using classes in QuickBooks.  If a cost is directly associated with a particular program, you just charge it to the cost center or class for that activity.  The direct costs of management and general activities and the direct costs of fundraising activities should be direct charged to the appropriate cost center for those activities.  Direct costs should be direct charged whenever possible.

Overhead needs to be allocated.

If you haven’t had to present expenses by function in the past, you may not have allocated your overhead.  Those are the costs like rent, employee benefits, IT, etc. that benefit multiple activities but are not specifically tied to any one activity.  In the past, you may have charged these to a cost center called management and general, and left it at that. 

Under the new standard, you can’t just leave overhead in its own cost center, you must allocate it among your other activities.  If functional expense reporting is new for you, you’ll want to be sure you are properly identifying and accumulating overhead costs throughout the year in your accounting system.  You’ll also want to determine how you are going to allocate your overhead costs among your activities, so you can be ready with the right information by the end of the year.   

Management costs are not overhead

The new standard clarifies that management costs such as accounting, payroll processing, grant billing and executive oversight are not allocable as overhead.  They must be direct charged to the management and general cost center. 

New disclosure will describe overhead costs

You’ll need to disclose the components of overhead in the notes to your financial statements, along with your basis for allocating the overhead to your programs and other activities.

What can we learn?

The new GAAP for nonprofit financial reporting is ASU 2016-14, and it’s required for calendar years ending December 31, 2018 and fiscal years ending June 30, 2019.

Review your costs and how they are coded.  Be sure you are accurately identifying overhead costs and accumulating them separately for allocation. 

Review the basis for your overhead allocation.  Are you allocating overhead based on how people in your organization spend their time?  When was the last time you updated your salary allocation?

Give this your attention now, at the beginning of the year.  You don’t want to have to go back and reclassify costs after year-end.

Use this information to show what your activities really cost.  Show your Board and Committees the full cost of the programs you carry out.  Evaluate whether your program income is adequate.

There’s a helpful session in our financial leadership seminar, Financial Leadership Training for Emerging Nonprofit Professionals called Remodeling Your Financials—how new financial reporting GAAP will affect YOU! It’s designed to help nonprofit leaders plan to implement the new financial reporting standard.

For the accountant responsible for applying the new GAAP in your organization, we’ve put together an in-depth seminar called Financial Intensive Training on the New Financial Reporting GAAP—Remodel Your Financials—an in-depth look. 

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