The Importance of Functional Expense Reporting
Many nonprofit organizations have a reason to report expenses by functional expense classification. Most commonly, the expenses are presented in generally accepted accounting 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. Expenses may be similarly reported for cash or income tax bases of accounting. If the nonprofit is a 501(c)(3) or 501(c)(4), presenting by functional expense classification is also necessary for IRS Form 990 purposes.