Perspective and Issues

Concepts, Rules, and Examples

Functional Classifications

Program services

Supporting services

Support to affiliated organizations

Classification of expenses related to more than one function

Functional category of cost of sales of contributed inventory


Disclosure Requirements


Not-for-profit organizations are required to report information about expenses by functional classification either by segregating these amounts in the statement of activities or by disclosing the amounts in the notes to the financial statements. The reporting of expenses provides information about the cost of services provided and how the organization used its support; that is, how much of its funds went to program activity, and how much went to general and administrative and fundraising expenses. This is one of the primary objectives for readers of the financial statements of not-for-profit organizations.

Voluntary health and welfare organizations have an additional reporting requirement in that they must report expense information by both functional and natural classification. A separate matrix statement is generally provided to meet the natural expense classification requirement.

The functional classification of expenses involves grouping expenses by major classes of program activities and supporting services. Supporting services activities are composed of general and administrative activities, fundraising, and membership development. ...

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