On December 18, the Financial Accounting Standards Board (FASB) continued deliberations and tentatively decided to require all Not-For-Profit (NFP) entities to report expenses by functional and natural classification within their financial statements. Currently, all NFPs are required to report expenses by functional classification, but not by nature (salaries, benefits, repairs, etc.).
Initially, this requirement was not expected to apply to institutions of higher education, where the majority of their revenue comes from tuition, grants, and endowment returns rather than support in the form of contributions from the general public. The majority of college and university financial statements that were reviewed during deliberations presented only expenses by function. This added natural expense reporting will require some additional effort which should be limited since most manage their operations by natural expense already. A related issue facing colleges and universities today is the outdated National Association of College and University Business Officers (NACUBO) functional expense definitions which make consistent categorization across institutions difficult. NACUBO is currently reviewing these definitions and considering updates. The following are the tentative decisions made by FASB for reporting expenses by all NFPs:
- NFPs would now be required to report their expenses by nature in addition to function.
- NFPs would be allowed flexibility to present expenses by function, nature, or both on the statement of activities or within the notes.
- NFPs would be required to provide an analysis of all expenses by function and by nature in one of the following locations: in the statement of activities, in the statement of functional expenses, or in the notes to the statements. That analysis of expenses would include both operating and non-operating expenses, but would neither require nor preclude reporting non-operating expenses (such as interest expense) by function.
An exposure draft is expected to be issued in the first half of 2014.
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