Infuse Your Nonprofit With Improved Transparency

Allocating costs might not be the most exciting task, especially if your nonprofit has multiple activities. However, the act of allocating costs is crucial because donors and funders want to understand how your organization utilizes its financial resources. Additionally, you need to comply with Generally Accepted Accounting Principles (GAAP), as determined by the Financial Accounting Standards Board (FASB). Let’s explore some FASB standards relevant to cost allocation.

Nature & Function Of Expenses

FASB standards require nonprofits to include an analysis of expenses by nature (such as salaries, rent, and utilities) and function (program services and supporting activities) in their financial statements. This information must be presented in one location on the statement of activities, either in the financial statement notes or a separate financial statement.

Properly allocating costs between program services and supporting activities is essential. According to FASB standards, program services are activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill your nonprofit’s purpose or mission. These are your nonprofit’s primary focus.

Categories Of Supporting Activities

Activities that don’t qualify as program services are considered supporting activities. These need to be broken down into three categories:

  1. Management & General Services: These items are indispensable to your nonprofit’s existence but aren’t identifiable with a single program, fundraising activity, or membership activity. They generally include oversight and administration, budgeting, human resources, and obtaining fee-based revenues.
  2. Fundraising: This includes activities involved in soliciting donations from individuals, foundations, government agencies, and others.
  3. Membership Development: This refers to recruiting prospective members, collecting membership dues, and managing member relationships. If significant benefits or duties are associated with membership, you should state membership development separately in your financial statements5.

Nonprofits often engage in fundraising activities that also have elements of another function. For example, a special event or direct mail campaign might include both fundraising and program components. In such cases, you would allocate costs between fundraising and the other functions if certain criteria related to purpose, audience, and content are met. If those criteria aren’t met, you must report all costs of the joint activity as fundraising6.

Management & General Category

When it comes to the management and general category, avoid treating it as a catchall. Some expenses that might seem like overhead, such as mortgage interest on a building, should be allocated to specific programs or supporting services whenever possible. Additionally, certain costs that appear to relate to the management and general function might belong to more than one function. For instance, insurance could cover property that houses multiple functions or a single program. Recording too much expense to management and general can result in under-allocation to other functions7.

Simplifying The Process

FASB standards require nonprofits to disclose the method they use to allocate expenses. However, guessing and estimates aren’t allowed. Therefore, it’s important to work with knowledgeable accounting professionals.

If you need help working through the complexities of nonprofit accounting, contact a team with proven experience and expertise in nonprofit accounting. Contact GBQ today. Our knowledgeable team can help you simplify the process with an effective cost-allocation plan.

Looking for additional insight? Check out these resources:

Associations: Avoid Certain Activities To Preserve Tax-Exempt Status

Holding On To Your Nonprofit’s Exempt Status

We’ve Got The Lowdown On Updated Cash Flow Reporting Guidance

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