The Financial Accounting Standards Board (FASB) has voted to require all nonprofits to present expenses by both functional and natural classifications on their financial statements. Currently, all nonprofits generally must use functional reporting, but only health and welfare organizations must also use reporting by natural category.
FASB’s Accounting Standards Codification® defines natural classification as “a method of grouping expenses according to the kinds of economic benefits received in incurring those expenses.” Rent, salaries and employee benefits are types of classifications used under the natural classification method.
Under the current proposal, not-for-profits could present the information in the statement of activities, in a separate statement of functional expenses, as a narrative discussion or in footnotes in a matrix format.
An exposure draft that details the new requirement and requests comments is expected to be issued later this year.