Fundraising expenses are those expenses incurred to induce donors to contribute to an organization. Such expenses must be reported separately in the financial statements of organizations that solicit significant amounts of gifts from the general public. The FASB standards require such disclosure by all not-for-profit organizations (except where these costs are immaterial to an entity). Issues relating to these expenses include what types of expenses should be called fundraising, when they should be reported as expenses, and when and how to allocate multiple-purposes expenses. Chapter 14 also discusses functional reporting requirements. The reporting of fundraising expenses is important to readers of financial statements of not-for-profit organizations. Readers are interested in the percentage of fundraising expenses to the organization's program expenses and total expenses. They are also interested in how much money is raised for each dollar of fundraising expenses.
In certain circumstances, joint costs of informational materials and activities that include a fundraising appeal may be allocated between fundraising and the appropriate program or management and general function. Since the percentage of a not-for-profit organization's total expenses that are used for programmatic activities is an important performance indicator, the allocation of expense among program, general and administration, and fundraising activities is very important for proper financial reporting by not-for-profit organizations. The GAAP requirements for fundraising and joint costs are contained in FASB ASC 958-720-05 to 958-720-55.
If an organization receives an item to be used for fundraising purposes (e.g., to be auctioned), it should be recognized as a contribution and measured at fair value. The difference between the fair value contribution amount and the amount received for those items from the ultimate recipient should be recognized as an adjustment to the original contribution amount.
Organizations are required to report revenue and expenses from special events on the statement of activities as gross amounts if the events are part of the organization's ongoing major or central activities. In cases where the special event is incidental to the organization's central activities, special event revenue and expenses may be reported gross or net on the statement of activities.
Fundraising expenses are the costs related to activities that involve inducing potential donors to contribute assets, services, or time. Fundraising activities include the following: (AICPA Guide, paragraph 13.62):
As stated in FASB 958-720-25-4, fundraising costs should be expensed as incurred regardless of the fact that contributions resulting from the activities generating these costs may be received in future periods. However, paragraph 13.10 of the AICPA Guide includes a provision that allows capitalization of tangible fundraising assets that will be used in fundraising activities in a future period. Such assets might include printed materials such as brochures, promotional items, and prepaid postage. Of course, any such capitalized assets must be assessed for possible impairment of value.
Many not-for-profit organizations solicit financial support from the public through a variety of fundraising activities, including direct mail, door-to-door canvassing, telephone solicitation, telethons, and special events. Some of the costs incurred by such organizations are clearly identifiable with fundraising, such as the cost of fundraising consulting services. However, organizations often incur joint costs, such as postage and other communication costs, in distributing materials or performing activities that relate to several functions, including program activities, fundraising, or other supporting services. It is often difficult to distinguish the amounts of joint costs that relate to each function.
There are specific GAAP requirements to address the issue of when and how costs could be allocated for activities that had some aspects of a program activity or management and general activity, and some aspects of a fundraising activity. In general, not-for-profit organizations would prefer to allocate more costs to program activities than to fundraising. The percentage of total expenses spent on program activities compared with management and general expenses or fundraising expenses is a key performance indicator that is important to current and potential donors. The criteria that must be met in order to allocate costs are somewhat more rigid than the loose set of rules previously used in practice.
Basic understanding. GAAP provides the rules for when “joint activities” are allocated.
A joint activity is an activity that is part of the fundraising function and has elements of one or more other functions, such as a program, management and general, membership development, and any other functional category used by not-for-profit organizations.
Joint costs are the costs of conducting joint activities that are not identifiable with a particular component of the activity. Joint costs may include the costs of salaries, contract labor, consultants, professional fees, paper, printing, postage, event advertising, telephone, air time, and facility rentals.
To understand the issues to be addressed on allocating joint costs, the financial statement preparer also needs a working knowledge of what program, management and general, fundraising, and membership development activities represent. Functional reporting is further discussed in Chapter 14. However, for purposes of this discussion, the following summarizes the definitions of these terms as provided in GAAP:
Basic guidance. GAAP specifies the criteria of purpose, audience, and content, which if met, permit the costs of a joint activity that are identifiable with a function to be charged to that function and the joint costs to be allocated between fundraising and program and management and general functions. If any of the criteria are not met, all costs, including those costs that might have been considered program or management and general costs if they had occurred in a different activity, are considered to be fundraising with one exception. The exception is that the costs of goods or services provided in exchange transactions that are part of joint activities should not be reported as fundraising, for example, the cost of a meal provided as part of a special event that would not have to be charged to fundraising even if the three criteria are not met.
Appendix A in this chapter lists some factors to be considered in deciding whether allocation of multipurpose activities is appropriate.
Allocation methods. GAAP requires that the cost allocation methods used to allocate joint costs should be rational and systematic, resulting in an allocation of joint costs that is reasonable. The method should be applied consistently given similar facts and circumstances. There are three commonly used allocation methods for allocating joints costs.
Physical units method. In the physical units method, joint costs are allocated to materials and activities in proportion to the number of units of output that can be attributed to each of the materials and physical content measures.
Relative direct cost method. This method allocates joint costs to each of the components of the activity based on their relative direct costs.
Stand-alone cost allocation method. This method allocates joint costs to each component of the joint activity on a ratio that uses estimates of the costs that would have been incurred had the joint activity been performed separately.
Criteria. Clearly the determination of whether the three criteria of purpose, audience, and content are met is the key factor in determining when joint costs can be allocated. FASB ASC 958-720-45 describes each of these criteria and provides examples of situations that would or would not meet these criteria. The following summarizes these criteria.
Purpose criterion. The purpose criterion is the most extensive and difficult to apply of the three criteria. It is met if the purpose of the joint activity includes accomplishing program or management and general functions.
Program functions. In order for the purpose to accomplish program functions, the activity should call for specific action by the audience that will help accomplish the entity's mission. (For example, if the not-for-profit organization's mission is to reduce the risk of heart attacks, an activity that motivates an audience to take action would be one that calls on the audience to lose weight, exercise, eat healthily, etc. by suggesting ways that the audience could accomplish this.) For program functions, if this test is met, then the test in the following is applied (for management and general activities, only the test in the following is applied).
Program functions and management and general functions. The following factors should be considered in the order in which they are listed to determine if the purpose criterion is met.
Condition 1
Condition 2
For example, evidence that the purpose criterion may be met includes:
Evidence that the purpose criterion may not be met includes:
The not-for-profit organization may also evaluate both the program results and the fundraising results of a joint activity. The relative weight that the organization may give to each of the evaluation results may be indicative of whether the purpose criterion has been met.
Other evidence may also be provided by the qualifications of the consultants or the employees that perform the joint activity. For example, if the joint activity is handled exclusively by a consultant that performs fundraising activities, this evidence may suggest that the purpose criterion has not been met. On the other hand, if the joint activity is handled almost exclusively by employees who work on program activities (and are not members of the fundraising department), evidence is provided that the purpose criterion may be met.
GAAP also provides a list of tangible evidence of intent that may assist an organization in determining whether the purpose criterion is met. Examples include:
Audience criterion. GAAP presumes that the audience criterion is not met if the audience of a joint activity includes prior donors or is otherwise selected based on its ability or likelihood to contribute to the not-for-profit organization. However, this presumption can be overcome if the audience is also selected for one or more of the following reasons:
If the audience does not contain prior donors, or is not otherwise selected based on its ability or likelihood to contribute, the audience criterion is met if the audience is selected for one or more of the aforementioned reasons.
Content criterion. The content criterion is met if the joint activity supports program or management and general functions as follows:
Incidental activities. In circumstances in which a fundraising, program, or management and general activity is conducted with another activity and is incidental to that other activity, and the conditions are met for allocation, joint costs are permitted but not required to be allocated and may therefore be charged to the functional classification related to the activity that is not the incidental activity. However, in circumstances in which the program or management and general activities are incidental to the fundraising activities, it is unlikely that the conditions required by it would be met to permit allocation of joint costs.
Disclosures. Not-for-profit organizations that allocate joint costs are required to disclose the following in the notes to their financial statements:
GAAP encourages, but does not require, that the amount of joint costs for each kind of joint activity be disclosed, if practical.
The following sample note disclosure is based upon the guidance of Appendix G contained in FASB ASC 958-720-55.
Not-for-profit organizations may receive contributions of gifts-in-kind (such as tickets, gift certificates, works of art, or merchandise) that are to be used for fundraising purposes. For example, an organization may receive an item from a resource provider and then auction it off to a recipient during a fundraising event. When an organization receives an item to be used for fundraising purposes, it should be recognized as a contribution and measured at fair value. The difference between the fair value of the contribution amount and the amount received for those items from the ultimate recipient should be recognized as an adjustment to the original contribution amount.
Some organizations conduct fundraising activities, including special social and educational events (such as dinners, dances, and theater parties). Organizations are required to report revenue and expenses from special events on the statement of activities as gross amounts if the events are part of the organization's ongoing major or central activities. If the special events are peripheral or incidental to the organization's central activities, special event revenue and expenses may be reported either as gross or net amounts on the statement of activities.
When the not-for-profit organization is reporting gross revenue and expenses of direct benefits to donors related to special events on the statement of activities, several reporting alternatives are available as follows: (AICPA Guide, paragraphs 13.40 to 13.43)
AICPA Technical Practice Aid 6140.08 (now included in paragraph 13.40 of the AICPA Guide) clarifies that the costs of donor benefits that are not program related and that are provided in exchange transactions should be reported as a separate supporting category, such as cost of sales, and should not be reported as fundraising.
Some ways in which the organization could display the results of the special event as part of its statement of activities are illustrated as follows: (FASB ASC 958-720-45)
For example, assume an organization has a special event that is an ongoing and major activity with a ticket price of $100. The event includes a dinner that costs the organization $25 and that has a fair value of $30. In addition, the organization incurs other direct costs of the event in connection with promoting and conducting the event, including incremental direct costs incurred in transactions with independent third parties and the payroll and payroll-related costs for the activities of employees who are directly associated with, and devote time to, the event. Those other direct costs, which include administrative costs of $5 and fundraising costs of $10, are unrelated to the direct benefits to donors and, accordingly, should not be included as costs of benefits to donors. In addition, the organization has the following transactions, which are unrelated to the special event: unrestricted contributions of $200, program expenses of $60, management and general expenses of $20, and fundraising expenses of $20.
Listed below are three ways in which the organization could display the results of the special event as part of its statement of activities.
GAAP permits, but does not require, organizations to report receipts from special events that are peripheral or incidental activities net of related costs, without reporting those costs on the face of a statement of activities. Costs netted against receipts from peripheral or incidental special events should be limited to direct costs.
The frequency of the events and the significance of the gross revenues and expenses distinguish major or central events from peripheral or incidental events. Events are ongoing major and central activities if:
Events are peripheral or incidental if they are not an integral part of an organization's usual activities or if their gross revenues or expenses are not significant in relation to the organization's annual budget.
The AICPA issued Technical Practice Aid (TPA) 6140.20 (now included in paragraph 13.62 of the AICPA Guide) to address the question of whether there are circumstances in which not-for-profit organizations report contributions revenue, but do not report fundraising expenses.
This TPA concludes that it would be unusual for a not-for-profit organization to have contributions but have minimal or no fundraising expense. However, it does provide several examples where this might actually be the case:
Not-for-profit organizations should disclose the following related to fundraising:
The following is a list of factors that may be helpful to not-for-profit organizations in deciding whether to allocate joint costs of multipurpose activities. No one of these factors is normally determinative by itself; all applicable factors should be considered together. These factors relate only to the question of whether to allocate at all, not to determining which costs are allocable or how to allocate.
Factors Whose Presence Would Indicate Allocation May Be Appropriate | Factors Whose Presence Would Indicate Allocation May Not Be Appropriate |
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1. Activity is directed at a broad segment of the population, or at a population specifically in need of the program services of the organization. | Activity is directed primarily at individuals with higher income, or at previous contributors.1 |
2. The group intended to benefit from the “program” activity and the benefits to be derived is well-defined. | The group and/or the benefits are not well-defined. |
3. Specific tangible action by the recipient, which will benefit the recipient or other parties, is explicitly urged; the action is unrelated to providing the financial or other support to the organization itself.2 (Required factor.) | Action urged is not specific, tangible, or explicitly stated, or consists primarily of supporting the organization itself.3 |
4. The “program” activity urged is consistent with the organization's stated mission. | The “program” activity urged is inconsistent with or only marginally related to the mission. |
5. The “program” content of the activity is high. | The fundraising content is high. |
6. It is likely the activity would be carried on (in some form) even if the fundraising component were not present. | It is doubtful the activity would be carried on if the fundraising component were not present. |
7. There is tangible evidence to support the existence of a bona fide program component of the activity.4 | Evidence of program content is only intangible, hearsay, speculative, management assertions, etc. |
8. The person actually supervising the activity is not a professional fundraiser, and is compensated by a fee or salary. | The person is a professional fundraiser or is compensated by a bonus or a percent of amounts raised. |
9. The person within the organization responsible for overseeing the activity is part of the program staff. | The person is part of the development staff. |
1However, this factor would not necessarily be a bar to allocation if it can be demonstrated that higher-income persons or previous contributors in fact are in a better position to make use of or benefit from the “program” content of the activity. For example, previous contributors to an organization whose program is to change public policy are presumably especially likely to act on an appeal to write to government officials. | |
2Examples of such action (or, in some cases, refraining from an action) include:
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3Examples of actions that are too vague too qualify as “program” activity include:
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4Examples of such tangible evidence include:
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Other tangible evidence that may be helpful, but, because it is solely internal to the organization, is not so persuasive as audit evidence include: