Definition
Under ASC 958-205 and ASC 958-720, a not-for-profit entity reports expenses by function, meaning program services, management and general, and fundraising, and provides an analysis of expenses by natural classification (salaries, rent, supplies) and function in one location. Costs that benefit more than one function, such as salaries, occupancy, and depreciation, are allocated using a reasonable method like time records or square footage. The entity discloses the methods used. Joint activities with a fundraising appeal have specific criteria for allocating cost to program.
Why it matters in an audit or review
Donors, regulators, and rating services compare program and fundraising ratios, and Form 990 uses the same split. Auditors test the allocation basis, and the consistency of year-to-year methods.
Example
(Illustrative) Rent is $120,000. Square footage is 70% programs, 20% administration, and 10% fundraising. Allocation: $84,000 program, $24,000 management and general, $12,000 fundraising.
Common mistakes
- Using a fixed percentage for years without updating.
- Allocating all shared costs to management and general.
Sources
- FASB ASC 958-205, Not-for-Profit Entities, Presentation of Financial Statements (expenses by function and nature, ASU 2016-14)
- FASB ASC 958-720, Not-for-Profit Entities, Other Expenses (allocation, joint costs)
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error