For example, if 80 of the organization’s employees work in one function and there are a total of 100 employees, then 80% of the organization’s expenses are to support that function. First, your financial statements will now need to present a matrix showing all expenses incurred by the functional (program v. support activities) and natural categories (supplies, payroll, training, maintenance, depreciation, etc.) Cost Allocation & Functional Reporting Presented by: Matt Krehe, CPA Direct Costs Tracking • To efficiently track direct expenditures, general ledger account structure should be set up so each program or supporting service has own unique identifier • For example, salary expense … in one place either on the face of the Statement of Activities, a separate Statement of Functional Expenses, or footnote disclosure. Examples of cost objects are products, product lines, customers, sales regions, and subsidiaries. An expense allocation occurs when indirect costs are assigned to cost objects.Expense allocations are required by several accounting frameworks in order to report the full cost of inventory in the financial statements.. A cost object is anything for which a cost is compiled. Expenses may be similarly reported for cash or income tax bases of accounting. Internal controls are financial management rules designed to deter the misuse of funds. Create internal controls. ASU 2016-14 focuses on the five main areas listed below, but this blog will provide information and implementation examples solely related to functional expense reporting. Functional expense reporting, when done accurately and consistently, can provide a realistic picture of the total cost of operating an organization. Functional Expenses 1. We covered functional expenses in depth in What is Nonprofit Functional Accounting and Why it Matters and in Why Nonprofits Need to Understand Direct Cost Allocations. Since it is common for an employee to spend their work week in different areas of your organization, it is critical that their salary expenses reflect the areas they worked. Therefore, if the entity is reporting functional expense for the first time, management will need to ensure it has appropriate data for classification. The basis of allocation of expenses likely will include data retrieval or discovery. This footnote should include the basis of allocation. Functional expenses allocation: what to include. They also prove to the IRS and your donors that your nonprofit has a system of checks and balances to stay in compliance. As many of you may know, the Financial Accounting Standards Board (FASB) issued a new standard ASU 2016-14, Presentation of Financial Statements.One effect this standard has is that it creates consistency on how expenses are presented in the financial statements for all nonprofit organizations. principle (GAAP) financial statements as a statement of functional expense or footnote analysis of expenses by their nature and function, and/or on the face of the statement of activities.