Accounting for the Joint Costs of Activities Involving Fund Raising under SOP 98-2

By Clark, Stanley J.; Jordan, Charles E. | The National Public Accountant, December 1999 | Go to article overview

Accounting for the Joint Costs of Activities Involving Fund Raising under SOP 98-2


Clark, Stanley J., Jordan, Charles E., The National Public Accountant


In March 1998, the American Institute of Certified Public Accountants (AICPA) issued a new Statement of Position (SOP) 98-2 to provide guidance in accounting for the costs of activities of not-for-profit and state and local governmental entities that involve a fund-raising component. This statement, which supersedes SOP 87-2, establishes Generally Accepted Accounting Principles (GAAP) in this area. The AICPA deemed the new statement necessary because the requirements of SOP 87-2 were unclear in some key areas. As a result, there existed considerable diversity in the way fund-raising costs were reported. This diversity created a problem for financial statement readers and potential donors because one of their chief concerns is how effectively an entity uses the monies donated to it. One key measure of effectiveness is the percentage of money used to carry out the mission of the entity versus the percentage used in fund-raising activities.

SOP 98-2 concerns costs associated with an activity that has a fund-raising component that may not be the central focus of the activity. A common example would be a direct mail-out that has an informational component where the information provided is consistent with the entity's mission (e.g., an anti-smoking leaflet mailed by the American Cancer Society) and the solicitation includes a reply card that can be used to make a contribution to the entity. This solicitation has both program and fund-raising components which leads to the question of how to classify the costs (i.e., as program costs or fund-raising costs). SOP 98-2 provides a framework to answer this question.

Applying SOP 98-2

The application of SOP 98-2 requires an entity first to assess whether allocation of joint costs is allowed. This assessment uses three criteria based on purpose, audience and content. Table 1 presents the primary questions that must be addressed in examining each of these criteria. All three criteria must be met for costs to be allocated. If anyone of the criteria is not met, then all costs of the activity, not just the joint costs, are considered fund-raising costs. An exception to this exists for exchange transactions, such as the cost of a meal paid for by the audience of an activity. The cost of the meal would be reported as cost of sales for the activity.

The purpose criterion concerns whether the activity under evaluation accomplishes program or management and general functions of the entity. The following three tests relate to the purpose criterion: (1) compensation, (2) similar program! same medium, and (3) other evidence. The activity fails the compensation test if the compensation or fees paid for any party's performance in relation to the activity varies based on the amount of contributions received as a result of the activity. An important point about the compensation test is that it cannot, by itself, result in the purpose criterion being met. If the activity passes the compensation test, then the remaining two tests are used to determine if the purpose criterion is met. The similar program/same medium test attempts to determine if the entity conducts essentially the same activity through the same medium (i.e., direct mail, speaker meeting, etc.) without a request for contributions. If the answer is yes, the activity meets the purpose criterion. If no , then other evidence must be examined. The key issue in examining the other evidence is whether the program element of the activity calls for a specific action by the recipient that will accomplish the entity's mission, SOP 98-2 provides examples of both positive and negative evidence that can be used in this assessment.

In the second criterion, the essential issue is the reason for choosing the particular audience for the activity. If the entity chose the audience based primarily on their ability or likelihood of contributing to the entity, then a rebuttable presumption exists that the activity fails the audience criterion. …

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