A Financial Statements Series
A Statement of Activities is similar to a Statement of Revenue and Expenses. Because nonprofits have an operating purpose other than making a profit, the terms “statement of activities” and “change in net assets” are used instead of income statement and net income. Like the revenue statement, the statement of activities reports the changes in net assets over a period of time.
Because a major source of funding for nonprofits may come from donors, donors may also impose restrictions on the use of those funds. The funds may be unrestricted, permanently restricted (such as an endowment fund), or temporarily restricted (such as a building fund). FASB Statement 117 requires that an organization report the change in net assets based on the restriction categories of permanently, temporarily, or unrestricted.
Like the statement presented in Understanding the Statement of Revenue and Expenses , the statement of activities will have a heading, a body, and a bottom line. There will be a revenue section and an expense section in the body. A multi-columnar format is used to present the increases and decreases in net assets according to the intent of the donor with column headings for unrestricted, temporarily restricted, and permanently restricted.
Types of Expenses
An important distinction on the statement of activities is how expenses are classified. Nonprofits use two important classifications of expenses: natural and functional. Natural classifications are used by the for-profit world also and indicate the type of expense incurred. Examples of the natural classification of expenses are utilities, rent, office supplies, and salary expenses. Functional classification indicates on what activity (the function) the expense was incurred. There are three principal functional classifications: program expenses, management and administrative expenses, and fund-raising expenses.
A statement of activities with functional expense classification would list the programs under the expense section. The expenses for each program would include salaries, office supplies, utilities, and other expenses for that specific program.
A statement of activities with natural classification would simply list all the expense types: Salaries, utilities, office supplies, and other expenses.
FASB Statement 117 allows most nonprofits to present the functional information in the notes of the financial statements but functional expenses may also be presented on the face of the statement.
Statement of Functional Expenses
Voluntary health and welfare organization have the additional requirement of presenting the expenses in a matrix which includes both the natural and the functional expense by program. (See FASB Statement 117 C for the specific definitions.)
Direct or Indirect
Some expenses are easily matched to the program activity. Other expenses support more than one program. Expenses related to more than one program must be allocated to the appropriate functions. A building may be shared by several programs. The building rent must be allocated to the programs utilizing the building using an objective method of allocation if possible. Note there is special guidance on allocating costs related to an activity that combines fund-raising with elements of another function. These types of costs are referred to as joint activities.
Statements produced by nonprofits must be useful to donors and contributors so that decisions about the allocation of resources can be made. Statements are useful in assessing the services provided by the organization and its ability to continue those services and statements may also offer insight when assessing how managers have performed their stewardship responsibilities.
While FASB Statement 117 establishes minimum standards for financial reporting, organizations have flexibility in how items are sequenced on a report allowing the reporting standards to meet the needs of different organizations.
Next time: A look at the Balance Sheet