Members of the Financial Accounting Standards Board’s not-for-profit committee March 1 raised the topic of joint cost allocation as a potential new project for the board to address for nonprofit entities and discussed changes in its use.

Joint cost allocation has been an ongoing issue in the not for profit sector for over twenty five years, and has been cited as an area that can be the subject of abuse for organizations that want to reduce fundraising expenses and inflate their program expenses.

The AICPA issued Statement of Position 98-2, Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund Raising, in March 1998 to establish guidance to account for costs of joint activities. It also requires disclosures about the nature of the activities for which joint costs have been allocated and the amounts of joint costs.
Loosely stated, the guidance enables organizations to allocate certain costs between fundraising and program expenses— if the criteria of purpose, content and audience are met based on the guidance in the standard.

Marketplace Evolved.
NAC member, Kenneth Euwema said the accounting provisions for joint cost allocation are important, but need to be done right and therefore revised so that they better fit current market trends. “The way organizations do this call to action work, is very different today than it was when [SOP 98-2] was written,” said Euwema, who is also VP, Membership Accountability at United Way Worldwide.
“It isn’t a mail appeal anymore—its going on Twitter and on Facebook and creating a presence and getting people educated about a community issue that needs to be addressed and talking to them about ways that they can get engaged in that and it isn’t just asking for money, it’s asking them to call their senator, it’s asking them to volunteer at a local event to try and solve this thing,” he said.
Euwema said the accounting guidance under SOP 98-2 does not align with business operations, which have evolved as a result of technological advancement—and thus have become more nuanced.
“When we go out and engage Value State Digital and paid them two hundred thousand dollars to help us build this Twitter and Facebook presence and all of those things—that’s all fundraising?; when our point is to make the 'call to action' for advocating?--So it needs to be revisited so that we have some clarity of how to do this better in the current context of the way we operate,” he said.

Different Approaches.

The Discussions furthermore revealed a difference in approach among companies--with some not using the GAAP approach, while others who do use GAAP, improperly apply the provisions.  NAC member Bennett Weiner, also COO of Better Business Bureau Wise Giving Alliance, said he felt the dual behavior may be stemming from the application issue of an existing standard that is not always being followed appropriately, as opposed to abuse by everyone who is doing joint cost allocation.
“I think most of the naturally soliciting charities that we evaluate have some joint cost allocation in their financial statements, so it’s a common practice, but abuse can occur, and it’s a question of opinion as to who is the monitor as to what sets of numbers they’re going to be using,” he said. 
Another NAC member felt that the statement of functional expenses itself is somewhat broken and forces organizations to express their business models in ways that are not helpful. “There’s this kind of implication that general fundraising and program are mutually exclusive kinds of activities when you have organizations where fundraising is 100 percent of what they do and they then give money out,” said Clara Miller, President of F.B. Heron Foundation.
“So I really think that most not-for-profits out there, GAAP or no GAAP, actually force those numbers--they’re unreliable and they’re not helpful for comparative basis or for really making information available widespread,” she said. Miller said the board should consider as an alternative, using natural classification and comparing organizations straight up on how their operations are put together.

The premise is that no single financial ratio metric should be the sole determinant of any donating decision. 

I deciding whether or not to address the accounting provisions, the FASB’s approach should not be done from the position of those not following GAAP, said Bennett. For example: if there’s an abuse with donated services, it doesn’t mean such services should not be recognized, he said. “I think that the issue to keep in mind as we look at these differences and changes—don’t let the actions of a few dictate the financial statements of the many,” Bennett said. 
by Denise Lugo  dlugo@bna.com