Academic journal article Journal of Accountancy

How NFPs Should Allocate Joint Costs: Consistent Application Leads to Fair Depictions in Financials

Academic journal article Journal of Accountancy

How NFPs Should Allocate Joint Costs: Consistent Application Leads to Fair Depictions in Financials

Article excerpt

Not-for-profit entities (NFPs) are under constant pressure to devote an increasing portion of their expenditures to accomplishing their mission programs. While this goal sounds appealing, the NFP must also perform management activities to operate the NFP effectively and maintain sustainable fundraising efforts to support the organization.

NFP ratings agencies use the percentage of expenses devoted to programming as a key component in the formulas they use to monitor, rate, and compare NFPs. Because of the reliance on and ease of availability of this information, donors and the press also track these percentages carefully.

NFPs often hold events, produce newsletters or videos, or conduct other activities that both serve their mission programs and provide fundraising opportunities. The costs related to these joint activities are appropriately allocated in part to program expenses and in part to fundraising or management and general expenses. That allocation can appear somewhat subjective and has come under increased scrutiny.

Recent media reports have questioned the efficacy and subjective nature of NFPs' reporting of joint costs. Indeed, the risk of improper allocation makes accounting for costs of activities that include joint costs a complex area for NFPs and their auditors.

This is not a new issue for the profession. Industry guidance to address criticism in this area dates to 1964. In 1998, the AICPA adopted Statement of Position (SOP) 98-2, Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund Raising, which is now part of FASB ASC Subtopic 958-720, Not-for-Profit Entities--Other Expenses. With an increased focus on the cost of fundraising being used as an industry benchmark, it is incumbent on management and auditors of NFPs to understand and consistently apply these rules to accurately report these costs.

As pressures increase for NFPs to be efficient and effective in delivering on their missions, combining like activities can be a successful method of addressing common audiences. When properly applied, the criteria set forth in the accounting standards support the identification of joint costs that meet the requirement for allocation when a fundraising appeal exists. The guidance describes acceptable allocation methods in order to provide a consistent framework for allocating these costs and also details disclosure requirements intended to promote transparency in this area.


To identify valid activities that would require the allocation of joint costs, three criteria related to purpose, audience, and content must be evaluated. Processes for evaluation of these criteria are described in the Accounting for Joint Activities flowchart in ASC Paragraph 958-720-55-2, Not-for-Profit Entities--Other Expenses--Implementation Guidance and Illustrations--Flowchart of Application of the Criteria for Classification of Joint Costs.

The purpose criterion is met if the purpose of the fundraising activity includes accomplishing program or management and general functions and these functions meet the definitions set forth in paragraphs 33-37 of ASC Section 958-720-45, Not-for-Profit Entities--Other Expenses--Other Presentation Matters. Program functions should call for a specific action by the audience to help accomplish the NFP's mission. Such calls for action should benefit either the recipient individually or society as a whole.

Three tests to evaluate whether the purpose criterion is met are the compensation-or-fees test, the separate-and-similar activities test, and the other-evidence test:

* Compensation-or-fees test. The basic premise is that the purpose criterion is not met if a majority of compensation or fees for any party's performance of any component of the discrete joint activity is tied to contributions raised. For example, if a commission-based fundraising consultant is used for any part of the activity, the activity would fail this test. …

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