Accounting for a Not-for-Profit Organization's Fund-Raising Costs

Healthcare Financial Management, Feb, 2001 by Stan J. Clark, Charles E. Jordan

The relative direct-cost method bases the allocation on the costs that can be directly traced to each component of the joint activity. In this example, there is a total of $15,000 in direct costs (ie, $5,000 in program and $10,000 in fundraising). The joint-costs allocation would be as follows:

Program 5,000 [divided by] 15,000 x 30,000 = $10,000

Fund-raising 10,000 [divided by] 15,000 x 30,000 = $20,000

The stand-alone joint-cost allocation method is based on the estimated costs of conducting the activity either without the program component or without the fund-raising component. In this example, assume Entity A estimates that conducting the phonathon without a request for contributions would have cost $8,000. It also estimates that conducting the phonathon strictly as a fund-raising event would have cost $12,000. Based on these estimates, the joint costs are allocated as follows:

Program 8,000 [divided by] 20,000 x 30,000 = $12,000

Fund-raising 12,000 [divided by] 20,000 x 30,000 = $18,000

As mentioned earlier, these allocation methods are offered in SOP 98-2 merely as examples and are not required. Any systematic and rational allocation method is acceptable.

SOP 98-2 requires certain disclosures for any period in which an entity allocates joint costs. These disclosures include:

* The type of activities for which the joint costs have been incurred;

* A statement that these costs have been allocated; and

* The total amount allocated and the portion allocated to each functional expense category.

The statement encourages, but does not require, disclosure of the amount of joint cost for each type of joint activity.

Conclusion

For allocating joint costs associated with program/fundraising activities, SOP 98-2 places a burden on entities to show that the joint activities are not primarily fund-raising vehicles. However, the standard also provides necessary accounting and reporting consistency among entities that are engaged in such activities and, compared with earlier standards, has greatly improved financial reporting for these entities.

Stan J. Clark, PhD, CPA, is associate professor, School of Accountancy and Information Systems, University of Southern Mississippi, Hattiesburg, Mississippi.

Charles E. Jordan, DBA, CPA, is professor, School of Accountancy and Information Systems, University of Southern Mississippi, Hattiesburg, Mississippi.