Determining whether an organization conducts joint activities and properly accounts for these activities can be challenging at times, as it can be subjective depending on the fundraising activity.
Not-for-profits have two categories to allocate expenses. That includes:
- Program—money spent on the organization’s mission.
- Supporting Services:
- Fundraising – the costs of raising money for the mission.
- Management & General – the cost of managing the organization.
- Membership Development – soliciting costs for prospective members and membership dues.
Non-profits usually strive to allocate their expenditures towards their specific programs in order to decrease total fundraising expenses. However, they should also be striving to accurately report the costs associated with their programs to give the board, management, and donors a clear depiction of how funds are spent. Fundraising costs can include advertising, telemarketing, publications, direct mail, and other solicitation activities. However, when these activities also include a call to action, the organization may be able to report them as joint activities. Costs that are accounted for as joint activities can be split between program-specific expenses and fundraising or G&A expenses. It is also important to note that the entity should use a reasonable allocation method.
The rules for an activity to be recognized as joint costs require criteria relating to “purpose, audience, and content”. These criteria must be met in order to allow partial allocation to a function of the program mission or other supporting services. The call to action must include a purpose directed at an audience that they can take action on to help achieve the organization’s goal (not just the goal of raising money). Management must evaluate joint activities for the criteria to ensure that the costs are properly accounted for under the accounting standards. Sometimes determining when expenses can be classified as joint costs can be a gray area. Interpretation and professional judgment are usually factors that go into the determination. The attached article from the Journal of Accountancy is a great guide as to how to allocate joint costs to NFPs.