New financial reporting standards for nonprofit organizations (ASU 2016-14) are effective for their calendar year end 2018 financial statements. Are you ready for the changes?
Changes to the basic financial statements are straightforward, reducing the number of net asset classes from three to two (With Donor Restrictions and Without Donor Restriction). More complicated, however, are changes required by ASU 2016-14 that will impact disclosures in the notes to the financial statements.
One enhanced note disclosures involves functional expense allocations. The FASB wants clarity regarding the types of expenses considered to be management and general and the methods of allocating those expenses used by a nonprofit organizations.
The example note disclosure below was adapted from the AICPA’s ASU 2016-14 toolkit:
Note 3 – Functional expenses
The costs of providing program and other activities have been summarized on a functional basis in the statements of activities. Accordingly, certain costs have been allocated among program services and supporting services benefited. Such allocations are determined by management on an equitable basis.
Expenses that are allocated include the following:
|Expense||Method of Allocation|
|Grants||Time and Effort|
|Salaries and benefits||Time and Effort|
|Occupancy costs||Square footage|
|Professional services||Time and Effort|
|Information Technology||Full time Equivalents|
|Travel-related costs||Time and Effort|
Organizations have flexibility in how they allocate expenses. In practice, most organizations use either an indirect cost rate to allocate shared expenses or they utilize the direct allocation method. An indirect cost rate is computed by pooling management and general expenses and occupancy costs into homogeneous cost pools and allocating such costs over an applicable base.
If you need guidance on how to pool an allocate costs, reference can be made to the cost principles included in the Uniform Guidance (Appendix IV to Part 200—Indirect (F&A) Costs Identification and Assignment, and Rate Determination for Nonprofit Organizations).
The direct allocation method is also discussed in depth in the Uniform Guidance. As the name suggests, the direct allocation method involves allocating expenses directly to those functions benefited by the related cost. Joint costs (costs benefiting more than one function) should be allocated using a base most appropriate to the cost being allocated. Occupancy costs for instance are generally allocated based on square footage used by a particular function.
To prepare for the upcoming change please feel free to contact us. Substantially all of our auditors and accountants have significant expertise in this area and we would be more than happy to recommend appropriate policies. Please reach out to your trusted advisor at Rubino & Company 301-564-3636. You can also contact Patrick by email firstname.lastname@example.org or call him directly at 301-214-4177.