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.
By Colette Kamps, CPA