Joint Costs That Include a Fundraising Appeal

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:

• Program activities are the activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill the purpose or mission for which the not-for-profit organization exists.
• Management and general activities are those other than program, fundraising, or membership development activities, but that are indispensable to the conduct of those activities and to an organization's existence.
• Fundraising activities are those undertaken to educate potential donors to contribute money, securities, services, materials, facilities, other assets, or time.
• Membership development activities include soliciting for prospective members and membership dues, member relations, and similar activities.

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:

1. Whether compensation or fees for performing the activity are based on contributions raised. The purpose criterion is automatically failed if a majority of the compensation or fees for any party's performance of any component of the discrete joint activity varies based on contributions raised for that discrete joint activity.
2. Whether similar program or management and general activity is conducted separately and on a similar or greater scale. The purpose criterion is met if either of the following two conditions is met.

   Condition 1

   • The program component of the joint activity calls for specific action by the recipient that will help accomplish the entity's mission; and
   • A similar program component is conducted without the fundraising component using the same medium and on a scale that is similar to or greater than the scale on which it is conducted with the fundraising.

   Condition 2

   • A management and general activity that is similar to the management and general component of the joint activity being accounted for is conducted without the fundraising component using the same medium and on a scale that is similar to or greater than a scale on which it is conducted without fundraising.
3. Other evidence. If the factors described in 1. or 2. do not determine whether the purpose criterion is met, other evidence may be used to determine whether the criterion is met. All available evidence, both positive and negative, should be considered to determine whether the purpose criterion is met.

For example, evidence that the purpose criterion may be met includes:

• The entity measures the program results and accomplishments of the joint activity.
• The activity has a call to action by the recipient that will accomplish the entity's mission and if the entity conducts the program component with a significant fundraising component in a different medium.

Evidence that the purpose criterion may not be met includes:

• The evaluation of any party's involved performance for the joint activity is based on the contributions raised, or whether some, but less than a majority, of compensation or fees for any party's performance, of any component of the joint activity varies based on contributions raised for the discrete joint activity.

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:

1. The organization's written mission statement, as stated on its fundraising activities, bylaws, or annual report;
2. Minutes of board of directors’ (and committee) meetings or other meetings;
3. Restrictions imposed by donors (who are not related parties) on gifts intended to fund the related parties;
4. Long-range plans or operating activities;
5. Written instructions to other entities, such as scriptwriters, consultants, or list brokers, concerning the purpose of the joint activity;
6. Internal management memoranda.

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:

1. The audience's need to use or reasonable potential for use of the specific action called for by the program component of the joint activity.
2. The audience's ability to take specific action to assist the entity in meeting the goals of the program component of the joint activity.
3. The not-for-profit organization is required to direct the management and general component of the joint activity to the particular audience or the audience has reasonable potential for use of the management and general component.

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:

1. Program. The joint activity calls for specific action by the recipient that will help accomplish the organization's mission.
2. Management and general. The joint activity fulfills one or more of the organization's management and general responsibilities through a component of the joint activity.

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:

1. The types of activities for which joint costs have been incurred;
2. A statement that such costs have been allocated;
3. The total amount allocated during the period and the portion allocated to each functional expense category.

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 on the guidance of Appendix G contained in FASB ASC 958-720-55.

Note X: Allocation of Joint Costs

In 20X1, the Historical Museum of the city of Anywhere, Inc. conducted activities that included requests for contributions, as well as program and management and general components. Those activities included direct mail campaigns, special events, and a telethon. The costs of conducting those activities included a total of $XXX,XXX of joint costs, which are not specifically attributable to particular components of the activities (joint costs). (The following sentence is encouraged but not required by SOP 98-2.) Joint costs for each kind of activity were $XX,XXX, $XXX,XXX, and $XXX,XXX, respectively. These joint costs were allocated as follows:

Fundraising	$xxx,xxx
Restoration program	xx,xxx
Education program	xx,xxx
Management and general	xx,xxx
Total	$xxx,xxx

Contributed Items Used for Fundraising Purposes

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.

Reporting Special Events

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)

1. Cost of direct benefits to donors as a line item deducted from the special event revenues;
2. Cost of direct benefits to donors in the same section of the statement of activities as other programs or supporting services (and allocating expenses among the various functions if necessary);
3. Presenting the contribution and exchange portions of the gross revenues separately, with the costs of direct benefits to donors deducted from the exchange portion of the gross revenue.

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:

1. They are normally part of an organization's strategy and it normally carries on such activities; or
2. The event's gross revenues or expenses are significant in relation to the organization's annual budget.

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.

Reporting No Fundraising Expenses

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:

• Because of name recognition or custom, donors contribute to the not-for-profit organization without the not-for-profit organization undertaking fundraising activities.
• Fundraising activities related to contributions are conducted entirely or almost entirely by volunteers whose contributed services do not meet the recognition criteria for contributed services.
• Other organizations that the not-for-profit organization does not control contribute to the not-for-profit organization with the not-for-profit organization undertaking minimal or no fundraising activity or other participation in relation to those contributions. Examples of these types of circumstances provided by the TPA are:
• A religious organization obtains most or all of its contributions from member tithing.
• Most or all contributions arise from volunteers making phone calls or writing letters on the organization's behalf (and this volunteer activity does not meet the recognition criteria for contributed services).
• An organization has no paid staff, and most or all contributions arise from uncompensated board members soliciting contributions (and the board member activity does not meet the recognition criteria for contributed services).
• The reporting organization is a private foundation or is supported by a private foundation, and the reporting organization expends no or minimal resources in soliciting these contributions.
• The reporting organization obtains most or all of its contributions from one or more organizations that it does not control (fundraising not-for-profit organizations), expends minimal resources, and has minimal participation in soliciting these contributions.

Factors to Be Considered in Deciding Whether Allocation of Joint Costs of Multipurpose Activities Is Appropriate

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.

¹ However, 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.

² Examples of such action (or, in some cases, refraining from an action) include:

• If you are suicidal, call our hotline.
• If you notice these symptoms, go to your doctor.
• Write or call your legislator [other public officials, etc.].
• Eat more healthy foods [examples given].
• Stop smoking.
• Give blood. (This is not considered a request to support the blood bank as it is merely acting as an agent for the ultimate recipient. Requests to give to the charity cash or commercially available items—clothing, food, etc.—are considered fundraising even if the items are passed on to others, whereas requests to give such items directly to those in need [e.g., victims of disaster] are not fundraising for the charity. Blood is a special case due to its unique source of supply and special processing requirements.)
• Volunteer to help out at your local nursing home. (Fundraising if urged by the nursing home; program if urged by a charity whose purpose is to make life better for the elderly.)
• Don't drink and drive.
• Say no to drugs.
• Protest. (Must describe object of protest and specific method of protest, such as a time and place to demonstrate, a person/organization to communicate with, or other specific action; a general call to protest against something is too vague to qualify as program.)
• Pray. (If urged by an organization connected with a religious denomination for which prayer is a central focus of activity.)
• Boycott some specific company or product.
• Complete and return the enclosed questionnaire. (Only if the questionnaire is an essential part of a bona fide scientific research project, the results of which will be broadly used to further some social good. If the results will merely be compiled and disseminated by the organization itself as a matter of interest, or if the questionnaire is included only as a method of motivating recipients to respond, it does not qualify as a program activity.)
• Contribute to a charity (one in no way affiliated with the entity conducting the activity).

³ Examples of actions that are too vague too qualify as “program” activity include:

• Support your local police. (To qualify as program, there would have to be specific suggestion as to how such support should be manifested.)
• Wear a ribbon [or other item]. (To qualify as program, there would have to be specific suggestions as to how wearing a ribbon would, in and of itself, contribute to achieving some social good. Usually this would happen only through other specific actions such as demonstrating, lobbying, boycotting, etc.).
• Protest. (Unless specific time/place/method of protest is specified.)
• Read [the accompanying literature]. (Learning about a problem may be helpful, but is of no public or personal benefit unless the learner proceeds to take some action based on the knowledge gained. To qualify as program, the activity would have to urge some specific subsequent action.)
• Save energy. (To qualify as program, there would have to be specific examples of things to do to save energy.) Similarly for “Don't pollute,” “Drive safely,” and other general slogans.

⁴ Examples of such tangible evidence include:

• Written instructions to other persons/organizations regarding the purpose of the activity, audience to be targeted, method of conducting the activity, etc.
• Contracts with unrelated scriptwriters, mailing houses, list brokers, consultants, etc.
• Content of the activity.
• Mission of the organization as stated in its IRS Form 1023/4, fundraising material, annual report, etc.
• Restrictions imposed by donors (who are not related parties) on gifts intended to fund the activity.

Other tangible evidence that may be helpful, but, because it is solely internal to the organization, is not so persuasive as audit evidence include: