Statement of Functional Expenses: A Nonprofit Guide to ASC 958 and Form 990

A statement of functional expenses is a grid that shows every expense a nonprofit reported for the year twice at once: by its natural class (salaries, rent, depreciation, professional fees) and by its function (program services, management and general, fundraising). Since ASU 2016-14, every not-for-profit that follows US GAAP must present this analysis for all expenses, either on the face of the statement of activities, in the notes, or as a separate statement.

This nonprofit guide to the statement of functional expenses covers what ASC 958-720 requires, how to allocate shared costs with a worked example, how the numbers carry into Form 990 Part IX, how the joint cost rules work for mailings and events that mix education with an appeal, and the errors auditors and IRS reviewers find most often.

What ASU 2016-14 and ASC 958-720 Require

The FASB issued ASU 2016-14 on 18 August 2016, effective for fiscal years beginning after 15 December 2017. Before it, only some not-for-profits had to present a statement of functional expenses. Deloitte's summary of ASU 2016-14 lists the disclosures that came with it, including "amounts of expenses by both their natural classification and their functional classification" and the "method(s) used to allocate costs among program and support functions."

The core rule now sits in ASC 958-720-45-15. It says the relationship between functional and natural classification "for all expenses shall be presented in an analysis that disaggregates functional expense classifications" by natural classes such as salaries, rent, interest and depreciation. PwC's not-for-profit guide adds three practical points:

• The analysis can sit on the face of the statements, in the notes, or in a separate basic financial statement.
• It must include all expenses in the statement of activities, for all periods presented, and any difference from functional totals shown elsewhere has to be explained.
• External and direct internal investment expenses are netted against investment return, so they drop out of the analysis.

Most organizations choose a separate statement, because a full grid rarely fits on the face of a statement of activities. For the ledger structure behind it, see our guide to bookkeeping for nonprofits, fund accounting and grants.

The Three Functional Categories

Program services. These activities carry out the purpose the organization exists for. You have latitude to define and aggregate the programs you display, as long as the components of total program expense are evident.

Management and general. This is the residual category for activities that are not directly identifiable with a program or with fundraising. ASC 958-720-45-2A names accounting, financial reporting and human resources as supporting activities that benefit the whole entity, and their costs stay in management and general. Costs of the governing board, the executive office and general legal work usually land here too. The CEO's compensation, the subject of rules like the Section 4960 excise tax on high nonprofit pay, sits here unless the CEO directly conducts or supervises programs or fundraising.

Fundraising. These are activities that induce donors to give: campaigns, donor list maintenance, special events, grant solicitations and preparing fundraising materials. A fourth supporting category, membership development, applies to member-based organizations.

ASC 958-720-45-2A also says that direct conduct or direct supervision of a program or fundraising activity requires allocation out of management and general. The same guidance cites information technology as an example of a shared cost that is generally allocated among the functions it serves.

Allocation Methods for Shared Costs

Direct identification (also called assigning) is the preferred approach whenever a cost relates to one function. Allocation is for costs that genuinely serve more than one function, and the method you choose has to be reasonable, consistently applied and disclosed in the notes.

These bases are practitioner guidance; FASB does not prescribe a list. The mechanics are close to those used in manufacturing overhead allocation methods: pick a driver that tracks how the cost is consumed, measure it, and apply the same rate to every dollar in the pool.

Salaries deserve the most care. The IRS uses a simple example in its Form 990 instructions: an employee who spends 40% of the time on fundraising and 60% on program management must be split 40/60, and the organization "can't report the 100% of salary as program expenses" because the majority of time was program work.

Operating lease cost under the ASC 842 lease standard is an occupancy expense and follows the same square footage split as utilities.

Worked Example: Building the Statement of Functional Expenses

The organization below is illustrative. Riverbend Literacy Center has $828,000 of total expenses and one program. Here are the facts and the allocation logic.

• Salaries and benefits, $600,000. Tutors cost $360,000, all program. The executive director costs $120,000 and keeps a time log showing 50% supervising tutoring, 30% general management and 20% donor work. The finance manager ($70,000) is all management and general. The development director ($50,000) is all fundraising.
• Occupancy, $96,000, and depreciation, $20,000. The building has 10,000 square feet: 7,000 used for classrooms, 2,000 for offices and 1,000 for the development team. That gives 70%, 20% and 10%.
• Information technology, $24,000. Allocated by the salary share of each function after the salary split above.
• Audit and accounting fees, $18,000. All management and general.
• Program supplies, $40,000. All program.
• Joint mailing, $30,000. A mailing to non-donor parents in the school district that teaches a reading routine and also asks for gifts. It passes the purpose, audience and content tests described below, and 40% of the printed area is the reading routine, so it is split 40% program and 60% fundraising under the physical-units method.

Executive director: $120,000 x 50% = $60,000 program, x 30% = $36,000 management and general, x 20% = $24,000 fundraising. Salary totals are then $420,000 program, $106,000 management and general and $74,000 fundraising, which are 70%, 17.667% and 12.333% of the $600,000 total. IT of $24,000 x those shares gives $16,800, $4,240 and $2,960.

Every row adds across to its natural total and the columns add to $828,000. If Riverbend had mailed the same piece to its prior donor list, the audience test would fail and the full $30,000 would go to fundraising. Program would fall to $558,000 (67.39%) and fundraising would rise to $118,560 (14.32%), with total expense unchanged.

Joint Costs: The Purpose, Audience and Content Tests

Joint costs are the shared costs of an activity that combines fundraising with a program or management and general component, such as a mailing or an event with an educational session. ASC 958-720 (the former SOP 98-2) allows allocation out of fundraising only when three criteria are all met. An AICPA Not-for-Profit Expert Panel article in the Journal of Accountancy summarizes them:

1. Purpose. The activity's purpose includes accomplishing a program or management and general function, which for programs means a call for specific action by the audience that helps the mission. Under the compensation-or-fees test, the purpose criterion fails if a majority of any party's compensation for a component is tied to contributions raised, which catches commission-based fundraising consultants.
2. Audience. The activity is treated as entirely fundraising, unless enough evidence supports another classification, "if the audience includes prior donors or is otherwise selected for the likelihood to contribute."
3. Content. The material supports the program or management and general function. Material that only educates about a cause, without a call for specific action, counts as support of fundraising.

If any criterion fails, all costs of the activity go to fundraising, apart from the cost of direct donor benefits. If all three are met, use a rational and systematic allocation method such as physical units, relative direct cost or stand-alone cost, and apply it consistently. ASC 958-720-50-2 then requires disclosure of the types of joint activities, a statement that costs were allocated, the total allocated and the portion charged to each function.

How the Statement of Functional Expenses Maps to Form 990 Part IX

Part IX of Form 990 is titled Statement of Functional Expenses, and it uses the same four columns: (A) total, (B) program services, (C) management and general and (D) fundraising. According to the 2025 Instructions for Form 990, "Section 501(c)(3) and 501(c)(4) organizations must complete columns (A) through (D)," while other exempt organizations must complete only column (A). Form 990 itself is required once gross receipts reach $200,000 or year-end total assets reach $500,000; smaller organizations can file Form 990-EZ instead.

Part IX natural lines are fixed, so your statement rows need a crosswalk:

A strong chart of accounts that maps to these lines saves hours at year end. If line 24e exceeds 10% of total expenses, each item on it must be listed on Schedule O. Unrelated business income tax paid or accrued must also be reported separately on line 24, which links Part IX to your Form 990-T and UBIT filing.

Where Form 990 differs from GAAP:

• The IRS lists costs that must be reported in column (C), including board meetings, general legal services, accounting, general liability insurance, auditing, human resources and investment management. Under GAAP, direct internal investment expenses are netted against investment return, so they appear in different places on the two reports.
• Direct expenses of fundraising events go on Part VIII, line 8b, rather than in Part IX column (D). Indirect event expenses, such as certain advertising, stay in column (D).
• Costs to secure a grant or contract to perform a service that meets the grantor's specific needs belong in program services. Costs to solicit grants that fund services to the general public are fundraising.
• On line 26, check the box only if joint costs were allocated under SOP 98-2, now ASC 958-720. Using the IRS's own example, $100,000 of joint costs with 10% allocated to education is reported as $100,000 in column (A), $10,000 in column (B) and $90,000 in column (D).

For Riverbend, line 26 would show $30,000 in column (A), $12,000 in column (B) and $18,000 in column (D). Organizations with audited statements must reconcile book expenses to the return on Schedule D, Parts XI and XII, so every difference above needs a documented reconciling item. Funders and watchdogs read the program percentage from Part IX, and the public support test on Schedule A draws on the same return, so consistency across schedules matters.

Common Errors in the Statement of Functional Expenses

Leaving the executive director entirely in management and general. If the director runs a program or leads donor meetings, ASC 958-720-45-2A requires that time to be allocated out. Compensation disclosures connect to the excess benefit transaction rules, so get the director's time log right.

Allocating accounting, audit and HR costs to programs. These benefit the whole entity and stay in management and general under both GAAP and the IRS instructions. Pushing them into programs flatters the program ratio, and it is a shift auditors and reviewers look for.

Allocating joint costs that fail the audience test. A typical failure is an appeal mailed to a prior donor list. Absent strong contrary evidence, the full cost is fundraising.

Allocation bases with no evidence behind them. Percentages set once and never refreshed are hard to defend. Include time studies and square footage schedules in your PBC request list for a first-time audit.

Grids that do not foot or do not tie. Each natural row must equal the natural total in the ledger, and functional totals must agree with the statement of activities. Investment expenses netted against return and special event direct costs shown as direct donor benefits are common reconciling items.

Part IX numbers that drift from the audited statements. Unexplained differences invite questions from grantors, and organizations subject to the single audit requirements for federal awards rely on the same allocation records for indirect cost claims.

Frequently Asked Questions

Is a separate statement of functional expenses required? No. ASC 958-720-45-15 requires the analysis of all expenses by nature and function, and it can appear on the face of the statement of activities, in the notes, or as a separate statement.

What are the three functional expense categories for nonprofits? Program services, management and general, and fundraising. Member-based organizations may add membership development as a fourth supporting category.

How do you allocate functional expenses between program and admin? Assign direct costs to one function. Allocate shared costs on a reasonable base you can document, such as time records for salaries and square footage for occupancy, apply it consistently and describe the method in the notes.

Do all exempt organizations complete every column of Form 990 Part IX? Only 501(c)(3) and 501(c)(4) organizations must complete columns (A) through (D). Other exempt organizations must complete column (A) and may complete the rest.

Can a small nonprofit skip the statement of functional expenses? Any nonprofit issuing GAAP financial statements must present the analysis, subject to materiality. Organizations filing Form 990-EZ or 990-N do not complete Form 990 Part IX. When deciding the level of assurance a funder needs, see our comparison of a financial statement audit, review and compilation.

Next Step

Madras Accountancy supports nonprofits and the CPA firms that serve them with bookkeeping, functional expense allocation schedules, Form 990 preparation support and audit support. If you want a second set of hands on your allocation methods or your Part IX crosswalk, contact our team.