Quite often, when beginning an audit or consulting engagement for a new nonprofit client, we run across a situation where the nonprofit has historically classified all of their special event expenses as fundraising costs. Since donors and grantor organizations generally prefer to give to those nonprofits who are putting a high percentage of every dollar into its programs, there is a great incentive to classify more expenses in the program category and fewer expenses in the management/general and fundraising categories. However, by default, nonprofits often classify 100% of special event expenses in the fundraising category either because this is always the way it has been done or because the nonprofit isn’t aware of a method by which these expenses can be called anything but “fundraising."
Back in 1998, the Accounting Standards Division of the American Institute of Certified Public Accountants came out with a very important Statement of Position that dealt with how organizations, including nonprofits, can properly allocate costs of activities that include a fundraising component. While the underlying accounting principles within this Statement of Position (SOP) have been rewritten in the 2009 Accounting Standards Codification issued by the Financial Accounting Standards Board, the basic principles are the same. So, for purposes of simplicity, I’ll just reference the combined effect of the legacy document and the recent revisions as “the SOP."
Under the SOP, the following three criteria must be met for a nonprofit to classify certain special event costs as “program," instead of “fundraising."
The activity should call for specific action by the audience that will help accomplish the organization’s mission.
If an organization’s mission is improving the health of teens within the community, they may decide to hold a special event geared toward local retail store owners. A call to action may involve educating the store owners about the effects of chewless tobacco and requesting that store owners place educational posters near the entrance of the stores. They may also ask the store owners to host educational seminars to employees on the dangers of chewless tobacco. This call to action must be connected to the purpose or mission of the organization.
A presumption exists that the audience criterion is not met if the audience includes prior donors or is otherwise selected based on its ability or likelihood to contribute to the nonprofit. This presumption can be overcome if the audience is also selected because of their need to use the nonprofit’s programs or the audience’s ability to take specific action to assist the nonprofit in its mission.
In the example of the nonprofit with a mission of improving the health of teens, the nonprofit invites all local retail store owners whether or not they have donated to the nonprofit in the past.
If the need for and benefits of the action are not clearly evident from the special event, information describing the action and explaining the need for benefits of the action is provided.
The organization provides a handout to the retail store owners, in addition to a specific call for action. The handout explains the prevalence and dangers of the use of chewless tobacco that will help the store owners in furthering the mission of the nonprofit organization.
If all three of the aforementioned criteria of the SOP are met, costs of special events should be allocated as follows:
The costs associated with exchange transactions occurring during a special event (i.e. a meal) should generally be considered program expenses.
All other identifiable costs with a particular function should be charged to that function. For example, an auctioneer’s fee for the special event is clearly related to raising funds for the organization. Therefore, that cost is fundraising.
Remaining joint costs should be allocated between program, management/general, and fundraising.
In my next blog, I’ll discuss appropriate methods of allocating these remaining joint costs.