Nonprofit Accounting Basics
Joint Cost Allocation
Joint Costs of Multi-purpose Activities. This is the subject of AICPA Statement of Position No. 98-2. (Key parts of the text of the SOP are included as Attachment I, below.) It applies when an organization combines the fundraising function with another function - usually some type of program activity, such as public education. An example of this would be a charity whose mission is to eradicate a particular disease that sends mailings which include (in one envelope) educational information about the disease - such as a list of symptoms of it, followed by encouragement to see a doctor if such symptoms are noticed, together with an appeal to make a contribution to the charity. Different charities conduct different types of activities that potentially require consideration of how to account for the activities - as program, or as fundraising.
A question is sometimes raised: is an activity like educating the public about a disease, or some other issue as valid a program expense, as other types of expenses such as food, medicine, or a nurse's salary? The accountant's answer to this is that we do not judge the appropriateness of the activities of an organization as long as they reasonably fall within the definition above (and, of course, do not appear to be possibly outside of the law), and are fairly described in the organization's financial statements. Educating the public about a disease would appear to be well within the definition of program services. SOP 98-2 gives specific examples of how educating the public may be considered a program activity.
The main accounting issue is: to which functional category (or categories) should the ‘joint' costs of the envelope and postage (usually the largest component of the total cost of the activity, as printing is relatively inexpensive) be charged? Charity management naturally would like to charge most of the cost to program expense on the basis that the mailing furthers the mission of the charity by helping to eradicate the disease in question, and that the fundraising component of the activity is relatively minor. Regulators, watchdogs, and others acting in the interests of donors are concerned that the charity may overstate the program portion of the activity, thus misleading donors into believing that the charity is doing more good for the public than it really is; they would have the charity charge more (or all) of the ‘joint' costs to fundraising.
Given the inherent bias of organization management on this issue, SOP 98-2 is written from the point of view that all ‘joint' costs in these circumstances are presumed to be fundraising costs unless the charity can show that there has been a bona fide program activity conducted as part of the activity.
SOP 98-2 includes three criteria that are to be used to judge whether or not an activity is considered to qualify as a bona fide program activity: purpose, audience, and content. The management of an audit client must be able to demonstrate, to their auditor's satisfaction, that the three criteria are met with regard to a joint activity. All three criteria must be met, otherwise all joint costs default to fundraising.
An important part of the purpose and content criteria is that the activity must include a ‘call to action' on the part of the recipient, other than making a contribution. In the above example, the call to action is to ‘see a doctor' [if the disease symptoms are noticed]. Other calls to action might include: communicating with public officials about some issue, volunteering to help some other organization, changing one's personal behavior in some beneficial way, participating in a scientific research study, attending an academic educational program.
A brief summary of the three criteria follows:
Purpose - Did the reason for doing the activity include bona fide accomplishment of a program function, i.e. something that will help achieve the mission of the organization (whatever that mission is)? This is a somewhat judgmental criterion; the SOP lists some indicators that may be useful in making that judgment. Positive indicators include: the activity is also conducted without a fundraising component, the program-related results and accomplishments of the activity are measured, the activity is conducted by persons whose expertise is in the program area. Negative indicators include: the activity is conducted by persons whose expertise is in the fundraising area, the persons conducting the activity are compensated (at least partly) based on the amount of contributions raised by the activity.
Audience - Did the activity target mostly rich people, or prior donors? If so, there is a presumption that it is primarily a fundraising activity. This presumption may be overcome by demonstrating that the target audience also has the potential for benefiting in a substantive way from the program component of the activity. The disease example is a good example of this; we are all at risk of contracting various diseases. This ability to rebut the presumption is important because charities naturally do send solicitations to prior donors, but these people also are often able to help fulfill the organization's mission in other ways as described above in the discussion of the call to action.
Content - Is the content of the activity genuinely program-oriented? Any ‘educational' material must actually be of educational value. There must be the call to action described earlier.
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GAAP issued by the accounting profession:
- SFAS 117, Financial Statement of Not-for-Profit Organizations, para. 28;
- Not-for-Profit Organizations, AICPA Audit and Accounting Guide, 2007 edition, Chapter 13, generally, esp. para. 13.06, .28, .32, .34, .36-.55, .58;
- AICPA SOP 98-2, Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund Raising (included in the AICPA audit guide);
Standards issued by ‘industry' organizations:
- Standards of Accounting and Financial Reporting for Voluntary Health and Welfare Organizations (the ‘Black Book'), 4th ed., National Health Council, Chapter 5, generally, esp. pp. 81-83, 91-98;
- Accounting and Financial Reporting Guide for Christian Ministries, Evangelical Joint Accounting Committee, 2001, Chapter 5 & Appendix F, generally, esp. para. 5-16 - 21;
- Not-for-Profit GAAP - 2008, Richard Larkin & Marie DiTommaso, John Wiley & Sons, Chapter 13;
- The Nonprofit Handbook - Fund Raising, 3rd ed., John Wiley & Sons, 2001, Accounting for Fund-raising Expenses, pp. 1031-1034, (Part D of Chapter 49, Accounting for Contributions), Richard Larkin, CPA.
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