Not-for-Profit Financial Reporting

Chapter 3Expenses

Learning objectives

• Identify how to report an analysis of expenses by function and nature.
• Identify the criteria used to determine whether joint costs can be allocated.
• Identify how to report reclassifications.

Introduction

Prior to the implementation of Accounting Standards Update (ASU) No. 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, there were inconsistencies in the types of information provided about expenses — for example, some, but not all, not-for-profits (NFPs) provided information about expenses by both nature and function. Also, only certain types of NFPs (voluntary health and welfare organizations) were required to include a statement of functional expenses. Now, all NFPs are to report amounts of expenses by both their natural classification and their functional classifications in one location, on the face of the statement of activities, as a separate statement, or in the notes to financial statements.

Expenses versus losses

An important determination in financial reporting for NFPs is whether an item is an expense or a loss. Consider the differences between expenses and losses:

• Expenses are outflows of or other ways of using up assets or incurrences of liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations.
• Losses are different from expenses. Losses result from activities that ...