How does FASB require not-for-profit organizations to report expenses?

• A. Natural classification only
• B. Functional classification only
• C. Both natural classification and functional classification must be reported
• D. Neither classification is required

Answer: (C)

Not-for-profit financial reporting requires expenses to be shown in two dimensions: by function and by nature. Function shows how resources were used—typically program services versus supporting services such as fundraising and administration—while nature shows the type of expense, like salaries, rent, or supplies. Presenting both classifications gives a complete view of how much of the organization’s resources are spent on its programs and what those costs consist of. Depending on the presentation format, the two classifications can appear on the face of the statement of activities or in a separate statement of functional expenses, with any method used to allocate costs between functions disclosed. This dual requirement is why both classifications are reported. A natural-only or functional-only presentation would omit essential information about either what the costs were for or what the costs consisted of.