Nonprofit Accounting Basics

Accounting for Fundraising Expenses


Generally accepted accounting principles (GAAP), in Statement of Financial Accounting Standards No. 117, Financial Statement of Not-for-Profit Organizations (SFAS 117) issued by the FASB, requires that (in most cases) expenses of not-for-profit organizations be reported in three categories of activities: program, management and general, and fundraising (or, for a membership organization, membership development).

Fund-raising expenses are defined (in paragraph 28 of SFAS 117) to include, "publicizing and conducting fund-raising campaigns; maintaining donor mailing lists; conducting special fund-raising events; preparing and distributing fund-raising manuals, instructions, and other materials; and conducting other activities involved with soliciting contributions from individuals, foundations, government agencies, and others."

Para. 13.34 of the AICPA audit guide expands that definition by saying that, "Fund-raising activities involve inducing potential donors to contribute money, securities, services, materials, facilities, other assets, or time." Footnote 12 to that paragraph adds that costs of soliciting donated services are fund-raising costs, even when the resulting donated services do not meet the criteria (in SFAS 116) for recording as contributions. Para. 13.58 further notes that fund-raising costs of federated fund-raising organizations should be reported as fund-raising, even though fund-raising is central to the program of these organizations. Para. 13.06 requires that fund-raising costs be expensed currently, even though current costs may result in the receipt of contributions in future periods.

Two types of costs related to fundraising activities are not usually reported as such: costs of accounting for contributions (which, like most accounting costs, are considered an administrative expense); and costs of direct benefits, such as food, to attendees at fund-raising events such as dinners, golf parties, etc. (which are normally reported separately as deductions from the proceeds of the event). Also, time spent by fund-raising volunteers will often not qualify for recording under SFAS 116, and thus is not normally recorded as contribution revenue or fund-raising expense.

By contrast, program services are defined (in paragraph 27 of SFAS 117) as, "the activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill the purposes or mission for which the organization exists." There are numerous kinds of program services offered by not-for-profit organizations and, thus, there are many different kinds of expenses that can qualify as program expenses.

Some expenses are entirely related to the rendering of program services, such as the costs of food distributed by a food bank or medicine used in a clinic, or the salary of the nurse who runs the clinic. Some are entirely fund-raising, such as the salary of the director of development and his/her staff. And some are allocations of organization expenses that benefit more than one function, such as the salary of the executive director of the organization - who spends some of his/her time directly overseeing program activities, some time in general management, and some in fundraising. This expense will be allocated based on the time spent in each activity. Other expenses such as rent and utilities for a multi-purpose building will be similarly allocated - often based on the allocation of the salaries of the persons occupying the building.

Management of charities would like to be able to report as high a percentage of their total expenses as possible as having been incurred for program activities, and as low as possible for the other two categories, as this will presumably make donors more willing to give to an organization that is perceived as spending more of its resources for public benefit, and less on ‘overhead'.