What Is Functional Expense Reporting?
A plain-English guide to functional expense reporting: the three functional categories, how to allocate shared costs, and how it connects to Form 990.
Definition
Functional expense reporting classifies a nonprofit's expenses by function (program services, management and general, and fundraising) and by nature, such as salaries, rent, and supplies.
Donors, foundations, and watchdog groups want to know how much of every dollar goes to the mission. Functional expense reporting answers that question. It shows each type of expense, such as salaries or rent, split across what the organization actually does with it.
Under current U.S. nonprofit reporting standards (ASU 2016-14), every nonprofit must present expenses by both function and nature in one place: on the face of the statements, in the notes, or in a separate statement of functional expenses.
The three functional categories
- Program services: activities that deliver the mission, such as running a shelter, a school program, or a clinic.
- Management and general: oversight and administration, such as finance, HR, the board, and general office costs.
- Fundraising: soliciting gifts and grants, including events, campaigns, and grant writing.
Some organizations also report membership development as a separate category.
Allocation methods for shared costs
Many costs support more than one function. An executive director runs programs, manages staff, and meets donors. Rent covers program space and administrative offices. These shared costs have to be allocated using a reasonable, consistent method, for example:
- Time: salaries split by time sheets or time studies.
- Square footage: rent, utilities, and maintenance split by space used.
- Headcount: IT, insurance, or HR costs split by staff in each function.
- Direct usage: costs charged to the function that actually used them.
The method should be documented and applied the same way every period, because auditors will test it.
Connection to Form 990
Most larger U.S. nonprofits file IRS Form 990, which includes a Statement of Functional Expenses (Part IX). It uses the same three columns: program services, management and general, and fundraising. When the general ledger already tracks expenses by function, Form 990 preparation becomes much faster, and the numbers match the audited statements.
Automating allocations
Allocating shared costs in spreadsheets each month is slow and easy to get wrong. A dimensional general ledger tags expenses by function and program as they are recorded. Systems such as Sage Intacct can then run allocations automatically based on time, space, or headcount, so the statement of functional expenses is always current.
See how Acumen supports nonprofit finance teams.
Example: allocating rent
A nonprofit pays $10,000 a month in rent. Program space takes up 70% of the building, administrative offices take 20%, and the development team uses 10%.
Each month, rent is allocated $7,000 to program services, $2,000 to management and general, and $1,000 to fundraising. Set up once as an automated allocation, the split posts every month without manual entries, and the same rule supports the audit and Form 990.
Key takeaways
- Functional expense reporting splits expenses by function and by nature.
- The three main functions are program, management and general, and fundraising.
- Shared costs need a documented, consistent allocation method.
- Automated allocations keep statements and Form 990 aligned.
Rebuilding allocations every month?
Acumen helps nonprofits automate functional expense allocations in Sage Intacct.
Frequently asked questions
Do all nonprofits need to report functional expenses?
Under ASU 2016-14, nonprofits following U.S. GAAP must present expenses by both function and nature, either on the statements, in the notes, or in a separate statement.
What is a good program expense ratio?
There is no single standard. Many evaluators look for a majority of spending on programs, but the right ratio depends on the organization's size and mission.
How should salaries be allocated?
Usually by time, based on time sheets or periodic time studies that show how staff split their work across functions.
Is the statement of functional expenses the same as Form 990 Part IX?
They use the same three functional categories, but Form 990 follows IRS line items. The amounts should reconcile to the audited statements.
Can Sage Intacct automate allocations?
Yes. Sage Intacct can allocate shared costs by rules such as time, square footage, or headcount and post them automatically.
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