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The pressure for non-profit companies to prove that resources are dedicated to programming has increased in the last few years. Watchdog groups and the media have paid special attention to where nonprofits are spending their money. One challenge that nonprofits are facing due to this pressure is accounting their fundraising expenses.
Accounting rules currently require that any activity associated with a fundraising activity must be recorded in full as a fundraising expense. Allocating joint costs is an important aspect of maintaining attractive fundraising to program spending ratio.
Nonprofits are allowed to bundle their fundraising activities with their programs in order to be more efficient. For example, a literacy nonprofit uses a mailing to both recruit volunteers and ask for donations. This method allows the organization to assign most of the cost of this mailing to program expense because the fundraising aspect of the mailing is minor in comparison.
Charity watchdog groups may disapprove of allocation for joint activities, arguing that it overstates the program component and skewing the nonprofit’s fundraising ratio.
Allocation of costs between fundraising and other functions can address this problem, but three criteria must be met:
- Purpose: This condition requires that the activity is intended to accomplish a program or management purpose for the organization. You cannot just ask people to “donate money,” instead there must be a specific call to action for the furthering of your organization’s mission. The mailing example does this by encouraging mailing recipients to volunteer for a literacy program.
- Audience: Selection of your audience is a criterion that can be challenging, especially if your nonprofit is contacting individuals based on likelihood to donate. A good way to better meet the audience requirement is to show that your audience has a high likelihood to respond to your call for action, not only your call for donations.
- Content: The content of the activity must function to support programs or management, and it must be obvious. Explanation of the benefits of the action being called for is a good way to meet this requirement. This criterion focuses on the execution of the activity.
Costs should be allocated using a consistent and systematic methodology resulting in reasonable allocation. Generally, cost allocation is done using physical units, which costs are proportionally allocated to the number of units of output.
Some other approaches to allocation include the relative direct cost and stand-alone joint cost methods. The relative direct cost allocation method uses the direct costs that relate to each activity to allocate indirect costs. The stand-alone joint cost allocation method determines proportions according to the cost of each component if it were conducted independently.
The method you use for joint cost allocation must be disclosed in your nonprofit’s financial statements. Disclosure of your method includes whether joint activities comply with the criteria. A disclosure should also be included with your Form 990.
We can help to answer any questions you have about joint allocation costs. Contact us at 818-334-8623 or click here, and we will contact you.