Best Practices for Creating a Statement of Functional Expenses
Under ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, all nonprofit organizations are required to present an analysis of expenses by their function and natural
expense classifications in one location. This information can be presented within the statement of activities, as a schedule in the notes to the financial statements or in a statement of functional expenses (SFE).
Functional expense classification refers to the purpose for which the expenses were incurred, such as program activities and support services. The SFE reports expenses by their function (programs, management and general, fundraising) and by the nature or type of expense (salaries, rent). Natural expense classification is grouping expenses according to economic benefits received, such as salaries and wages, rents, space cost, and professional services.