functional expense classification

This Subtopic governs how not-for-profit, business-oriented health care entities present their statement of operations and statement of changes in net assets. Its central requirement is a clearly labeled "performance indicator" (e.g., revenues over expenses) reported in a statement that also shows total changes in net assets without donor restrictions, with a specified list of items — such as equity transfers, donor-restricted contributions, other comprehensive income items, and unrealized gains/losses on non-trading debt securities — required to be reported outside that indicator.

This Subtopic addresses how a not-for-profit entity accounts for its own liabilities, principally unconditional promises to give (grants/pledges the NFP makes to others). It fixes the discount rate used in a present-value measurement at initial recognition (no revision unless the fair value option under 825-10 is elected), requires discount amortization to be reported in the same functional expense classification as the original promise, and requires a maturity schedule disclosure. It also cross-references guidance for donated assets transferred to intermediaries/agents and for refundable membership interests of social and country clubs.

ASC 720-958 (cross-referenced as 958-720) governs how not-for-profit entities report expenses: by functional classification (program services and supporting activities such as management and general, fundraising, and membership development) and by natural classification, with a required analysis linking the two. It also sets the purpose/audience/content criteria that must all be met before joint costs of an activity that includes fundraising may be allocated to program or management and general rather than charged entirely to fundraising, and requires a recipient NFP to recognize services received from personnel of an affiliate that the affiliate does not charge for.