In the world of nonprofit accounting, there are several nonprofit financial statements that organizations should master. Near the top of the list is a statement of activities. This report is similar to a statement of revenue and expenses in the for-profit world. However, because nonprofits are guided by their missions instead of profits, the terms “statement of activities” and “change in net assets” are used instead of “income statement” and “net income.” Like a revenue statement, however, a statement of activities reports changes in net assets over time.
Tracking changes in net assets is important for many reasons, including compliance with nonprofit accounting standards. Since donors are a major source of funding for nonprofits, they may also impose restrictions on the use of funds. The funds may be unrestricted, permanently restricted (such as an endowment fund), or temporarily restricted (such as a building fund). Financial Accounting Standards Board (FASB) Statement 117 requires that an organization report changes in net assets based on the restriction categories of permanently, temporarily, or unrestricted.
A nonprofit statement of activities example will have a heading, body, and bottom line. There will be revenue and expense sections in the body. A multi-columnar format will be 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 classifications of expenses: natural and functional. Natural classifications are used by the for-profit world as well and indicate the type of expenses incurred. Examples are utilities, rent, office supplies, and salary expenses. Functional expenses indicate on what activity the expense (function) was incurred. There are three principal functional expenses: program, management and administrative, and fundraising expenses.
A nonprofit statement of activities with functional expenses will list all the programs under the expense section. Expenses might include salaries, office supplies, utilities, and other costs for each program.
Conversely, a statement of activities with natural classification would only list the expense types, such as salaries, utilities, office supplies, etc.
FASB Statement 117 allows most nonprofits to present their functional expenses in the notes of their financial statements, but these expenses may also be presented on the face of the statement.
Statement of Functional Expenses
Voluntary health and welfare organizations have the additional requirement of presenting the expenses in a matrix, which includes both the natural and functional expenses by program. (See FASB Statement 117 C for the specific definitions.)
Direct or Indirect
Some expenses are easily matched to the program activity. Others support more than one program and must be allocated to the appropriate functions. If a building is shared by several programs, for example, the rent must be allocated using an objective method. Note, there is special guidance on allocating costs related to an activity that combines fundraising with elements of another function. These costs are referred to as joint activities.
Nonprofit financial statements must be useful to donors and contributors so that resources can be efficiently allocated. Statements of activities are useful in assessing the services provided by the organization, its ability to continue those services, and how managers have performed their stewardship responsibilities.
While FASB Statement 117 establishes minimum standards for nonprofit statements of activities, organizations still have some flexibility in how items are sequenced on their reports, which allows for nonprofit reporting standards to meet the needs of different organizations.