As not-for-profit organizations adopt the new financial statement presentation changes, they may want to take another look at their accounting for fundraising costs. Not-for-profits have some flexibility when it comes to allocating costs to fundraising efforts.
The need to be as accurate and as transparent as possible in the presentation of fundraising costs has always been an important metric, but is becoming more important as some organizations will be presenting the statement of functional expenses as part of their financial statements for the first time. Thanks in part to the functional expense reporting requirements in the new financial statement presentation changes, regulators and financial statement users can see a detailed breakdown of fundraising costs in not-for-profit financial statements. Fundraising costs also appear in the Form 990.
Some regulators are taking enforcement actions against not-for-profits for accounting maneuvers that could be construed as deliberately skewing fundraising costs. Not-for-profits can improve their accounting for fundraising by following some of the tips below.
Understand the Difference between Program Costs and Fundraising Costs
In their financial statements, not-for-profits provide a statement of activities and notes to their financial statements about whether the expenses are program services or support activities. Support activities include management and general activities, fundraising activities, and for membership organizations, membership development activities. Regulators are on the look-out for costs that are being inappropriately labeled as program costs (and therefore, not being classified as an overhead expense). Not-for-profit organizations that clearly understand and delineate program costs can ensure they have accurate financial reporting.
The Financial Accounting Standards Board (FASB) defines program services as activities (goods or services) that fulfill a not-for-profit’s mission. For a higher education entity, these could include student instruction and research. For a health and welfare organization, this may include patient care and educational programs.
Supporting activities include everything else. Management and general activities often involve recordkeeping and payroll, budgeting, financing, donor communication, employee benefit plan management and soliciting funds other than contributions and membership dues, among other items. Fundraising activities include the costs associated with raising funds from donors, including direct solicitation, special events, maintaining donor lists, and grant writing.
Sometimes the lines between program costs, management and general activities costs, and fundraising costs can get blurry. There may be expenses that are incurred for multiple functions.
Not-for-profits can split these costs among the different types of expenses when certain criteria are met, but these joint cost allocation criteria are hard to meet. The AICPA’s Statement of Position (SOP) 98-2, Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fundraising provides some detailed examples of single function costs that may appear to be joint costs, and situations that are actually joint expense scenarios.
For example, if compensation or fees for performing an activity or program are based on contributions raised, then the activity or program does not qualify as a program cost. By contrast, an activity that has both program and fundraising elements could be classified as a joint program and fundraising expense if the joint activity encourages participants to an action that directly accomplishes the not-for-profit’s mission, and if a similar program without a fundraising element is used in the same medium and on the same (or greater scale) to deliver a not-for-profit’s programs.
Not-for-profit organizations with fundraising activities that are closely tied into any of their programs should review the examples in SOP 98-2 (codified in ASC Topic 958, Not-for-Profits Other Expenses Implementation Guidance and Illustrations—Flowchart of Application of the Criteria for Classification of Joint Costs) to determine if the associated expense of the program meets the criteria for joint allocation.
Be Judicious with Joint Cost Allocation
Once organizations have determined they have a joint cost situation, they will need to apply the appropriate joint allocation method.
For example, a fundraising department may be housed within a larger building that the not-for-profit leases. A portion of the lease expense, building depreciation, and utilities would support the fundraising department, and could therefore be assigned to fundraising costs. Not-for-profits can compare the square feet of the building being used by the fundraising department in relation to the total space and apply that proportion to the building costs to determine the fundraising portion of those expenses.
Organizations should also apply the square feet allocation method for any part of the buildings being used exclusively for programs or core activities. Some organizations may be lumping all building costs into management and general activities expenses, which would increase the amount of overhead costs.
Another allocation method that may be useful, depending on an organization’s set-up, is the time studies approach. A not-for-profit executive tasked with fundraising for a certain percentage of his or her job responsibilities could allocate a portion of his or her related employment expenses (including compensation) to fundraising. Alternatively, if a not-for-profit has dedicated individuals for fundraising or program management, the organization could use the head count method to allocate employee-related costs between program costs and fundraising costs.
The joint allocation method selected should be consistent for all similar facts and circumstances. Not-for-profit organizations will also need to disclose the activities that generated joint costs, the allocation method they used to determine each function’s share of those costs, and the portion of the joint costs allocated to each type of expense in their financial statement disclosures.
Work with Your Auditor
An outside accountant could help review your accounting for fundraising and indicate whether there are any concerns about the allocation of fundraising costs. For more information about accounting for fundraising costs, please contact us.
- Best Practices in Accounting for Fundraising Costs
- Presenting the New Not-for-Profit Financial Statement
Heather Hernandez is a Senior Manager in the San Diego office of CBIZ & MHM. She can be reached at 858.795.2063 or HHernandez@cbiz.com.