Reporting Expenses by Functional Classification

SFAS No. 117 requires nonprofit organizations to present information about expenses by function, such as major programs or services and major classes of supporting services. This information may be communicated either in the statement of activities or in the notes to the financial statements.⁶⁶ CPB encourages reporting expenses in a matrix showing both functional classification and natural, or object, classification, as a supplemental statement commonly referred to as a “Statement of Functional Expenses” or as a note to the financial statements.

The functional classifications should conform as closely as possible to the specific program and supporting activities captions that have become standard for public broadcasting and are outlined in this section.

The Statement of Activities should present costs separately for each significant program and supporting activity. Program services are those directly related to the public broadcasting station’s mission. Supporting services do not relate directly to the purposes for which the broadcasting entity exists, and are generally categorized into fundraising, membership development, and management and general expenses.

Functional reporting classifications for program services vary according to the nature of the service rendered. For most public broadcasting entities, several separate services are identifiable, and, in such cases, expenses for program services should be reported separately. The purposes of the various functions should be clearly described, and each functional classification should include all direct and directly allocable costs not properly classified as supporting services (for example, certain types of production overhead).

In order to identify a service as a program cost, the following criteria should be applied:

! The service contributes directly to the achievement of the broadcasting entity’s objectives, goals, or missions.

! The service requires a significant amount of the entity’s resources.

The following program costs are considered typical for most public broadcasting entities and, at a minimum, should be reported in the Statement of Activities if applicable.

Program Services

Programming and Production

This function consists of the production and/or acquisition of programming and conducting program operations. This category includes such functions as program development, program planning, equipment operation, and editing.

Below is a list of some activities whose costs, including salaries and benefits for personnel engaged in activities, should be included in this classification:

66 SFAS No. 117, paragraph 57.

! Broadcast rights for programs or series or rights to use or adapt published materials

! Program planning and research (script writing, printing, and consulting)

! Directors, producers, cast, stagehands, engineers, technicians, and other personnel involved

! Rental of facilities, wardrobes, or production equipment

! Space, supplies, and other station resources used

! Repair and maintenance of programming and production equipment

! Set construction and operation, sound synchronization, lighting, props, or wardrobe

! Depreciation and amortization of station equipment and leasehold improvements used

! National Public Radio (NPR) membership dues and Public Radio International affiliate fees

! The portion of the Public Broadcasting Service (PBS) Programming Assessment and PBS/SIP related to this function

Broadcasting

This function consists principally of program transmission and interconnection. Also included are scheduling and engineering. Below is a list of some activities whose costs, including salaries and benefits for personnel engaged in these activities, should be included in this classification:

! Scheduling programs for airing

! Repair and maintenance of broadcasting equipment

! Depreciation of antenna, transmission, and other broadcasting equipment

! Distribution and interconnection fees

! The portion of the PBS Programming Assessment related to this function

! Web hosting and streaming fees Program Information and Promotion

This function consists of informing the viewing or listening public of specific available program services. Below is a list of some activities whose costs, including salaries and benefits for personnel engaged in those activities, should be included in this classification:

! Producing or acquiring “spots” designed for the promotion of specific programs

! Materials and related supplies used for promoting programs and services

! Advertising in newspapers or other media

! Preparing, reproducing, and distributing program guides

! Travel and related expenses of promotion

! The portion of PBS Programming Assessment related to this function Supporting Services

Fundraising and Membership Development

Fundraising consists of inducing others to contribute money, securities, time materials, or facilities. Below is a list of some activities whose costs, including salaries and benefits for personnel engaged in those activities, should be included in this classification:

! Costs incurred in the solicitation of underwriting funds and grants

! Costs of membership development

! Acquiring and distributing fundraising material

! Designing, printing, and distributing leaflets or posters for fundraising

! Meetings for the purpose of improving fundraising techniques

! Services of fundraising consultants and talent

! Developing and maintaining contributor records

! Committee meetings dealing with fundraising policies and issues, including the preparation of minutes and reports of such meetings

! Program and production costs of broadcast appeals for funds

! Mailing costs related to fundraising

! Direct costs of special fundraising activities and auctions

Care should be taken to ensure the public broadcasting entity considers the guidance contained in SOP No. 98-2 (discussed earlier in Section 3.5 of the Principles: Fundraising Costs) when allocating the cost of joint activities (fundraising costs).

Underwriting and Grant Solicitation

Underwriting development consists of soliciting program underwriting funds and general support grants from foundations, corporation, or governments. This line should be used if costs are significant and shown separately in the financial statements adjacent to the caption for fundraising and membership development.

Management and General

This function consists of supervising and controlling overall, day-to-day operations, including accounting and office service departments. It also includes resources and activities whose costs are not directly identified with another function, but which are indispensable to the conduct of those activities and to an organization’s existence. This includes expenses for the overall direction of the entity’s general board activities, business management, general recordkeeping, budgeting and related purposes. Below is a list of some activities whose costs, including salaries and benefits for personnel engaged in those activities, should be included in the classification:

! Personnel administration, including recruiting

! Accounting, auditing, and budgeting

! Legal services of a general (non-program) nature

! All occupancy costs not specifically identifiable to other functions

! General office functions, such as switchboard, receptionist, mail services, and maintenance of general office files

! Purchase and distribution of office supplies and equipment

! Maintenance of operations manuals, directors committee lists, and expenses related to board and administrative committee meetings

! Depreciation of buildings, furnishings, and equipment used in management and general functions

! The Association of Public Television Stations and regional organization dues, the non-programming portion of payments to PBS, and National Public Radio representation

Depreciation and Amortization

Depreciation and amortization consist of the allocation of the cost, or other carrying value, of physical and intangible assets over their estimated useful lives. Because depreciation does not represent a function itself, it should appear as a caption only in a schedule of functional expenses.

Depreciation or amortization must be allocated to the various functional categories (both program and supporting) in the Statement of Activities. Allocation should be made using a systematic and appropriate basis developed for this purpose.

Example

The following is an example of the preferred matrix presentation, showing expenses by both functional and natural classifications:

Exhibit 3-17. Example Schedule of Functional Expenses by Natural Classifications

Program Fundraising Underwriting

Programming Information Total and and Total

and and Program ManagemenMembership Grant S upport

Production Broadcasting Promotion Services and GeneralDevelopmentSolicitation Services 200X 200X –1 Salaries, wages,