Study guide
23.3 Functional Expenses and Statement Presentation
Uniform CPA Examination Exam
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8 Chapter 36: AUD Workbook - From Risk to Report
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9 Chapter 6: FAR Financial Statements and Reporting Framework
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10 Chapter 7: FAR Balance Sheet Accounts and Rollforwards
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11 Chapter 8: FAR Selected Transactions and Measurement Models
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12 Chapter 32: FAR Revenue, Leases, and Income Taxes Deep Dive
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13 Chapter 31: FAR Financial Instruments, Fair Value, and Derivatives
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14 Chapter 24: FAR Consolidations, Equity Method, and Intercompany Workpapers
24.1 Consolidation Decision and Noncontrolling Interest 24.2 Acquisition-Date Measurement and Goodwill 24.3 Equity Method Income, Dividends, and Impairment 24.4 Intercompany Inventory, Debt, and Fixed Asset Eliminations
15 Chapter 9: FAR Governmental Accounting and Fund Reporting
9.1 Governmental Fund Types and Basis 9.2 Government-Wide Statements and Reconciliations 9.3 Budgetary Accounting and Encumbrances 9.4 Governmental and NFP Comparison Traps
16 Chapter 23: FAR Not-for-Profit and Special Reporting Topics
23.1 Not-for-Profit Net Assets and Restrictions 23.2 Contributions, Conditional Gifts, and Agency Transactions 23.3 Functional Expenses and Statement Presentation 23.4 Interim, Segment, and EPS Reporting Traps
17 Chapter 37: FAR Workbook - Journal Entries, Rollforwards, and Reconciliations
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20 Chapter 12: REG Property Transactions and Entity Taxation
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21 Chapter 25: REG Entity Choice, Basis, and Owner Tax Consequences
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22 Chapter 26: REG Property Tax, Character, and Deferral Transactions
26.1 Capital, Ordinary, and Section 1231 Character 26.2 Depreciation Recapture and Unrecaptured Gain 26.3 Like-Kind Exchanges, Involuntary Conversions, and Installment Sales 26.4 Related-Party, Wash-Sale, and Imputed-Interest Traps
23 Chapter 33: REG Trusts, Estates, Gifts, and Exempt Organizations
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24 Chapter 38: REG Workbook - Tax Return Schedules and Basis Workpapers
38.1 Individual Return Classification Drill 38.2 Property Basis and Character Workpaper 38.3 Pass-through K-1 and Owner Basis Workpaper 38.4 Business Law Issue Spotting Drill
25 Chapter 13: BAR Business Analysis, Economics, and Forecasting
13.1 Financial Statement Analysis and Ratios 13.2 Variance, Forecasting, and Budgeting 13.3 Cost Accounting and Performance Management 13.4 Economics, Finance, and Decision Models
26 Chapter 14: BAR Technical Accounting and Advanced Reporting
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27 Chapter 15: BAR State and Local Government Analysis
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32 Chapter 34: TCP International and Advanced Entity Tax Topics
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35 Chapter 20: CPA Simulations, Retakes, and Final Review
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40.1 BAR Ratio, Variance, and Government Drill 40.2 ISC Control Evidence and SOC Drill 40.3 TCP Basis Planning and Entity Drill 40.4 Discipline Final Mock and Review Log
23.3 Functional Expenses and Statement Presentation
Key Takeaways Explain This Topic AI
ASU 2016-14 requires every nongovernmental NFP to report expenses by BOTH natural classification and functional classification.
The required functional/natural matrix may appear on the face of the statement of activities, in the notes, or in a separate statement of functional expenses.
Natural classification explains WHAT was incurred (salaries, rent); functional classification explains WHY (program, management and general, fundraising).
Allocation methods for shared costs must be reasonable, rational, and consistently applied, and the methods used must be disclosed.
Joint-cost solicitations stay in fundraising unless the purpose, audience, and content criteria of ASC 958-720 are all met.
Last updated: June 2026
Why Functional Expenses Matter
The 2026 FAR Blueprint states candidates may need to report expenses by nature and function in the statement of activities, the notes, or a separate statement of functional expenses for a nongovernmental NFP. This requirement comes from ASU 2016-14 , which mandates an analysis of expenses by both nature and function in one location for every NFP — not just voluntary health and welfare organizations as under the old rules. That breadth makes it a likely simulation topic because it combines classification, allocation, and presentation.
A natural classification describes the type of cost: salaries, rent, supplies, insurance, depreciation, professional fees, utilities. A functional classification describes the mission purpose served: program services , management and general , and fundraising (a fourth, membership development, appears for some entities).
Nature Versus Function
Natural expense Typical functional allocation Exam issue
Salaries and benefits Program, management, fundraising Allocate by time/effort reports or job duties.
Rent and utilities All functions Allocate by square footage or usage.
Printing and postage Program or fundraising Read whether the mailing educates, solicits, or both.
Depreciation Functions using the asset Allocate based on asset use.
Audit and accounting fees Management and general Support overall administration, not a program.
The total expense does not change with functional reporting; only the display changes. A $90,000 salary remains $90,000 of salary expense by nature, but it might be presented as $60,000 program, $20,000 management and general, and $10,000 fundraising by function. The rows (natural) and columns (functional) of the matrix must cross-foot to the same grand total.
Statement Presentation
The statement of activities reports revenues, gains, expenses, losses, and changes in net assets. Expenses are generally shown as decreases in net assets without donor restrictions. When donor-restricted resources fund the intended purpose, the NFP reports a release from restriction and reports the cost in the appropriate functional category. The functional/natural analysis may live in three acceptable places: the face of the statement of activities, a separate statement of functional expenses, or the notes.
Allocation and Joint Costs
Shared costs require a reasonable, rational, and consistently applied allocation method that tracks the cost driver: space by square footage, personnel by time studies, information technology by headcount or usage. ASU 2016-14 also requires disclosing the methods used to allocate costs among functions.
Fundraising deserves special care. Costs of soliciting contributions are fundraising unless a joint activity meets all three ASC 958-720 criteria — purpose, audience, and content — that support allocating part of the cost to a program or management function. A mailer that both educates the public and asks for donations only escapes pure fundraising classification if those criteria are satisfied. When the facts are thin, choose fundraising rather than inventing a program allocation.
Worked Example: Cross-Footing the Matrix
Suppose total expenses are: salaries $200,000, rent $60,000, depreciation $40,000 — $300,000 by nature. Time and space studies allocate 65% program, 25% management and general, 10% fundraising. The functional column totals are $195,000 program, $75,000 management and general, and $30,000 fundraising — also $300,000. If a candidate's functional columns do not sum to the natural total, an allocation error exists.
Simulation Workflow
When the exhibit set includes invoices, payroll data, and allocation percentages:
Build a natural-expense total for each cost category.
Identify direct expenses that clearly belong to one function.
Apply the stated allocation basis to shared expenses.
Tie functional column totals back to natural row totals (cross-foot the matrix).
Confirm expenses reduce net assets without donor restrictions.
Verify the disclosure explains the methods used to allocate costs.
Presentation Traps
Do not treat a cash outflow as a functional expense merely because cash was paid. A capital asset purchase hits the statement of financial position first; depreciation becomes the functional expense later.
Do not create a donor restriction just because management tracks program budgets internally.
Do not report a release from restriction as an expense — the release moves resources between net asset classes; the expense reports the cost of the activity.
Do not allocate fundraising costs to a program unless the purpose, audience, and content joint-cost criteria are all satisfied.
The Joint-Cost Criteria in Detail
Under ASC 958-720, all three tests must pass before any joint-activity cost leaves fundraising. The purpose criterion requires the activity to accomplish a program or management function, judged by whether compensation is tied to contributions raised, whether the same program activity is conducted separately on a similar scale, and other factors. The audience criterion is presumed unmet if the audience was selected based on its likelihood to contribute; it can be rebutted if the audience was chosen for program reasons (its need for the program, or its ability to act on a call to action).
The content criterion requires the activity to call the audience to specific action that helps the mission (program) or to provide genuine management content. If any one test fails, the entire joint cost is reported as fundraising . FAR fact patterns often plant a single failing factor — such as a mailing list chosen purely by donation propensity — that forces the whole cost into fundraising, and the correct simulation entry reflects that all-or-nothing result rather than a partial allocation.