Nonprofit GPS

If you are a performing arts organization and have substantial expenses relating to advertising for people to buy tickets for the performances, it would make sense to functionally allocate those expenses to program activities, right?  After all, providing these performances is part of your mission.  Actually, the answer is probably no.  Whether advertising expense can be classified as a program or supporting services expense depends on the purpose of the advertising.  Generally, costs of soliciting funds (other than contributions) should be classified as management and general expenses.  This includes the costs of soliciting funds for exchange transactions.

If you are recording income from grants as an exchange transaction (i.e., the funds are received in exchange for a service provided), then the costs that go into managing that grant would be properly classified as management/general and should not be classified as program or fundraising expenses.  Grant management costs in this case could include the expenses relating to preparing the grant application, monitoring and reporting.

Another example is when a museum or performing arts organization advertises to solicit ticket sales or admissions.  Advertising expenses in this case would also be classified as management/general.

On the flip side, if an organization is spending money to advertise a program they offer and the program fee charged is less than fair market value, then advertising expense may be properly classified as a program activity.  An example of this is when an organization whose mission is to help people quit smoking advertises to a population of smokers to ask them to be the beneficiaries of their program.  If the organization charges a small fee for the purpose of getting the participants to stay committed to the program, then the advertising that was expensed to solicit these types of program fees can be properly classified as program.

It may seem to go against logic in some cases when advertising has to be classified as management/general, but choosing to allocate those expenses to program would not be in accordance with generally accepted accounting principles.

Colette Kamps, CPA

Both the Form 990 and your financial statements are required to disclose any joint costs that have been allocated. Many times our clients will respond to our inquiry about such costs with an explanation of how they allocated the cost for this one activity between the two programs to which it related. While we appreciate that they were able to allocate those costs, they do not qualify as Joint Costs. If you thought of similar costs when you saw Joint Costs, read on. Or if you are thinking to yourself that you think you know what a Joint Cost is, but you aren’t certain about allocating them, this is for you.

Joint Costs – costs related to an activity that includes a fund-raising appeal.

For the most part these are costs that are related to such things as your newsletter that includes a solicitation for donations. Or your website where you are providing information about your organization but also requesting donations. In terms of allocating such costs, the presumption is that the expense is a fundraising expense. That means 100% of the costs for that newsletter or website or activity would be a fundraising expense. Unless you meet three very specific criteria:

Purpose
Audience
Content

Note that all three must be met in order to be permitted to allocate the cost between fundraising and program (or management & general).

Purpose – the main purpose is to accomplish the organization’s mission. This is very subjective, however there is guidance: is a similar activity conducted without a fundraising component? Or the activity does not have any fundraising measurement (you are not measuring the success of the activity based upon the amount of money received)? 

Audience – if it is sent to all your former donors or a list of “potential donors” it is likely not going to qualify for this test. You need to be able to demonstrate that the audience was selected to fulfill the organization’s mission rather than to fulfill the organization’s need for funds to fulfill the mission.

Content – the content must support the program or the organization’s mission.

Accounting Standards are very specific in their requirements, and while the above provides a good overview, if you are still unsure you should contact your accountant and review the standards.

Katie Thomas, CPA

At a recent Lunch & Learn I presented the topic of cost allocations for nonprofit organizations.  Allocating costs in a nonprofit involves the functional allocation of expenses between 3 different classifications:  program activities, management/general activities, and fundraising activities.  Allocating costs may not be considered to be much of a priority at a nonprofit organization.  Why does it matter? 

But then an organization is denied a grant that was applied for because the grantor has a rule that program expenses must be at least 75% of total expenses and the organization’s Statement of Functional Expenses that was submitted with the audited financial statements show that program expenses were only 62%.

Or a grantor doesn’t want to give an organization funds for their job training program because job training is not included as a program on the Statement of Functional Expenses and the grantor thinks that the organization doesn’t have a focus in this area.

And what about Accounting Standards?  Are nonprofit organizations aware that cost allocations are required by generally accepted accounting principles and that there is specific guidance about how you are allowed to allocate those expenses and which types of expenses should be allocated where?  You could actually receive a material weakness from your auditor for not allocating costs properly or for not having a cost allocation plan or methodology for how you allocate costs.

The most common errors in allocating costs include the following:
• Not properly allocating management/general expenses.  Management/general relates to the overall direction of the organization which would include expenses such as salaries for the accounting function, human resources, expenses relating to budgeting, and board of directors meetings. 
• Reporting no fundraising expenses when the organization has substantial contribution income (it didn’t cost anything to raise that money?).
• Not reporting all of the major programs separately or reporting a grantor as a program (the funding source would not be a program activity).
• Not allocating insurance, occupancy and depreciation.

Colette Kamps, CPA

I recently attended an Inspire Luncheon hosted by the Scottsdale Chamber at which Linda Milhaven spoke. For those who are involved in Scottsdale you likely know (or know of) Ms. Milhaven, as she is very involved in the community. While I was excited to hear what she had to say, I was struck by something others likely found insignificant. In talking about her time at college, she spoke about how she started tutoring a child who had been placed in a half-way house due to various circumstances. She then went on to explain how - despite her best efforts - she just couldn’t get through to him. She referred to this as her “false start” in volunteering. Ms. Milhaven explained that she was not cut out for the one-on-one volunteering at which others seem to excel.

What really got me about this was that for years I watched my roommates and colleagues spend their time on these amazing projects that put them in direct contact with the people they were helping. Whether it was the roommate who was a Big Sister through Big Brothers/Big Sisters of America or my buddy who would spend hours tutoring underprivileged middle school students in math, I just couldn’t get excited about any of those projects. I could have done them, and I would have done as good a job as I could have. And I wanted to. That is what everyone seems to think of when they think of volunteering – the direct-impact front-line program. They ‘hero-ize’ these positions, but they neglect to include in their picture all the “behind the scenes” work – the administrative side of these programs. And in doing so, they are almost able to relegate those positions to subpar, insignificant, or menial. But without someone filling these roles, those front-line volunteers would not have a program to work for.

I appreciated that she acknowledged that it is great that people want to participate in these programs and can fill these much needed roles, but that for others their way of giving back is to give their time and talents in planning or serving on the board or a committee. Regardless of what position you fall into – “front line” or “behind the scenes” or somewhere in between – Thank You!

Katie Thomas, CPA