|Gregory B. Capin, CPA, is a partner of Capin Crouse LLP in Greenwood, Indiana. He is chairman of the AICPA not-for-profit organizations committee. Joel Tanenbaum, CPA, is a technical manager in the AICPA accounting standards division. Mr. Tanenbaum is an employee of the American Institute of CPAs and his views, as reflected in this article, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation.|
Most external users of not-for-profit financial statements, including donors and other resource providers, want the organization (1) to maximize its spending on the causes it exists to support and (2) to minimize spending on fundraising (soliciting contributions) or management and general activities (administration). Users look favorably on NPOs that spend what they believe to be a high proportion of their resources on program activities-delivering goods and services to beneficiaries, customers or members. Conversely, they look unfavorably on NPOs that spend what they believe to be a high proportion of resources on fundraising or management and general activities rather than on programs.
NPOs sometimes conduct joint activities, which combine fundraising with activities that have elements of both program or management and general. For example, a mailing may include program materials, such as a letter urging the audience to take action to prevent XYZ disease as well as a request for contributions. NPOs also commonly conduct joint activities using telemarketing and special events, such as walkathons and dinners. Because of the emphasis financial statement users place on the amounts reported for program, fundraising and management and general, how the costs of a joint activity are reported is important.
LOOKING BACK, LOOKING AHEAD
In 1987, the AICPA accounting standards executive committee issued SOP 87-2, Accounting for Joint Costs of Informational Materials and Activities of Not-for-profit Organizations That Include a Fund-Raising Appeal, to provide NPOs with guidance on accounting for joint activities. That standard was applied inconsistently and was difficult for NPOs to implement. This led AcSEC to undertake a project to revise it. AcSEC used the SOP 87-2 model as a starting point, with a view toward clarifying the guidance that was unclear, providing entities with more detailed guidance, revising some guidance and expanding the scope to include all costs of joint activities rather than merely joint costs.
The result was SOP 98-2, Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund-Raising, issued in March 1998. The SOP is effective for years beginning on or after December 15, 1998, with earlier application encouraged. It amends the AICPA Audit and Accounting Guide Not-for-Profit Organizations, which incorporated the guidance in SOP 87-2. (Exhibit 1, page 39, compares SOP 98-2 with its predecessor, SOP 87-2.)
S OP 98-2 applies to all fundraising activities of NPOs and to state and local government entities. However, the SOP is expected to have little effect on such entities because most of them do little fundraising.
An exposure draft of the SOP generated significant interest and controversy. Most of the 300 commentators opposed the SOP for various reasons, primarily because they believed it would adversely affect NPOs, both financially (by increasing the costs NPOs report as fundraising, thereby limiting their ability to raise additional funds) and operationally (by changing the ways NPOs raise funds). Many commentors believed the SOP would result in overstating fundraising because it was biased toward reporting expenses as fundraising. Others believed the SOP would result in understating fundraising because it was too permissive and costs of activities that should be reported as fundraising would be reported as program. AcSEC believes SOP 98-2 is an improvement over SOP 87-1 and will result in more consistent and meaningful reporting.
SOP 98-2 says an NPO must meet the criteria of purpose, audience and content, as defined in the SOP, to report the costs of a joint activity as program or management and general. Meeting the purpose criterion demonstrates that the activity's purpose includes accomplishing program or management and general functions. Meeting the audience criterion demonstrates that the NPO selected the audience because it is suitable for accomplishing the activity's program or management and general functions. Meeting the content criterion demonstrates that the activity's content supports program or management and general functions.
In establishing the purpose, audience and content criteria, SOP 98-2 says a joint activity must meet all three to report the activity's costs as other than fundraising. (See the sidebar on page 42 for an exception for exchange transactions). If a joint activity meets all three criteria, the entity should charge the costs of the activity that can be identified with a particular function to that function. Joint costs, such as postage, or other costs not identifiable with a particular component of the activity should be allocated between fundraising and the appropriate program or management and general function.
For example, if a joint activity meets all three criteria, the cost of a program pamphlet should be charged to program, the cost of a donor reply card to fundraising and postage costs should be allocated between fundraising and program. If the joint activity fails to meet any of the criterion, the entity must report all of the activity's costs-including those that otherwise might be considered program or management and general costs had they been incurred in a different activity-as fundraising expense. While some elements of the activity may appear to be program or management and general on a standalone basis, they are considered to be in support of fundraising when any of the criteria are not met.
This means, for example, that if an organization's mailing includes both a solicitation and a pamphlet that otherwise would be considered a program piece, and the mailing does not meet the audience criterion, the mailing's entire cost, including the program pamphlet, should be charged to fundraising. This results in meaningful financial reporting because the pamphlet, when used in this context, supports fundraising rather than program. The flowchart in exhibit 2, pages 40-41, summarizes the conclusions in the SOP.
PURPOSE, AUDIENCE AND CONTENT
Each of the three criteria for evaluating joint activities has separate requirements an entity must meet. A common thread runs through each-for program activities, there must be a call for action. An example of a call for action is asking the audience to undertake an exercise program to prevent XYZ disease. A less obvious example is motivating audience members to engage in specific activities that will educate them about matters other than the causes, conditions, needs or concerns the entity's programs are designed to address (such as scholarly pursuits). Education about the entity's programs is considered to be in support of fundraising and is not a call for action under the SOP. Nor is asking for contributions. Without a call for action, no costs should be charged to program.
|Exhibit 1: Guidance in SOP 98-2 vs. Guidance in SOP 87-2 and the NPO Guide|
M any organizations conduct education activities that would not meet the SOP's criteria because they do not include a call for action. In the past, some organizations considered activities that inform their audiences about the causes the organizations address, or about the nature of their program activities, to be program activities when done in conjunction with soliciting contributions. While this information may help solicit contributions, providing it is a fundraising activity if contributing to the organization is the only action a recipient is asked to take. In the future, some organizations may wish to modify their joint activities so they include a call for action that meets the SOP's criteria.
Purpose. The purpose criterion is the first hurdle entities face in determining whether they are undertaking an activity to accomplish something other than fundraising. It has three tests: (1) the compensation test, (2) the similar-function/similar-scale/same-medium test and (3) other evidence.
An activity automatically fails the purpose criterion—and all costs of the activity must be charged to fundraising—if a majority of compensation or fees for any party's performance of any component of the discrete joint activity varies based on contributions raised. For example, if a professional fundraiser is paid a percentage of the contributions raised, the activity fails the purpose criterion and all costs should be charged to fundraising. The compensation test works only one way: It can result in an activity failing the purpose criterion-but not passing it.
If an activity does not fail the compensation test, an entity applies the similar-function/similar-scale/same-medium test next. An activity meets the purpose criterion if its program or management and general component is conducted without the fundraising component using the same medium-a mailing or newspaper advertisement-and on a scale similar to or greater than that on which it is conducted with the fundraising. The similar-function/ similar-scale/same-medium test also works only one way: It can result in the activity passing the purpose criterion but not failing it.
The compensation test takes precedence over the similar-function/similar-scale/same-medium test: If the activity fails the former test, the latter is moot-the activity fails the purpose criterion and the entity should charge all costs to fundraising.
If neither test applies, entities should consider other evidence. The SOP provides examples of the kinds of other evidence an entity should consider. Other than activities that have elements of program but no call for action and those that fail the compensation test, few activities are expected to fail the purpose criterion.
Audience. If an activity meets the purpose criterion, the entity should next consider the audience criterion A rebuttable presumption exists that the audience criterion is not met if the activity's audience includes prior donors or is otherwise selected based on ability or likelihood to contribute. Because the SOP recognizes that an entity may select its audience for more than one reason (such as for both fundraising and program reasons), the presumption can be overcome if the audience is selected for program or management and general purposes as well. For example, the entity may select its audience based on the audience's need to use the action called for or its ability to take action to help the entity meet the goals of the program component of the activity. For management and general purposes, the entity may select the audience because it is required to send a receipt to comply with IRS requirements.
|HELP ON THE WEB|
|CPAs who are preparing presentations on SOP 98-2 and all those wishing a detailed overview can download an outline and Power Point presentation from the AICPA Web site at www.aicpa.org/members/div/acctstd/general/othitem.htm|
SOP 98-2 says that in determining whether this presumption is overcome, an entity should consider the extent to which it selected the audience based on its ability or likelihood to contribute and contrast that with the extent it selected the audience for reasons that may overcome the presumption. For example, the presumption would not be overcome if the audience's ability or likelihood to contribute is a significant factor in its selection and its need for the action related to the program component of the joint activity is insignificant.
In many circumstances, organizations and their auditors will have to make judgments about why the organization selected an audience to determine whether the audience criterion is met. If the audience comprises names culled from a larger list of names, the attributes used to narrow the list provide insight into why the audience was selected.
Content. The activity meets the content criterion if its content supports program or management and general functions as defined in the SOP. For example, to support a program function the activity must call for the recipient to take a specific action that will help accomplish the entity's mission. To support a management and general function, the activity must fulfill one or more of the entity's management and general responsibilities. (Information identifying and describing the entity, the needs or concerns to be met or how the contributions provided will be used is considered in support of fundraising.)
MAKING THE ALLOCATION
SOP 98-2 requires that allocation methods be rational and systematic, result in reasonable allocations and be applied consistently given similar facts and circumstances. It provides no detailed guidance on how such allocations should be calculated or which methods should be used. Many observers believe the SOP would be more useful if it required or prohibited certain methods. AcSEC believes, however, that no particular allocation method or methods are necessarily more desirable in all circumstances and therefore did not impose further requirements. However, an appendix to the SOP illustrates several allocation methods, any one of which may result in a reasonable or unreasonable allocation of costs in particular circumstances.
The SOP also covers other matters, such as an exception for incidental activities, disclosure requirements and illustrations.
Incidental activities. If the activity meets the definition of a joint activity because of some incidental aspect (for example, if the words "contributions to NPO X can be sent to" appear on a small area of a message that otherwise would be considered a program activity) and the criteria in the SOP are met, the organization need not go through the effort of allocating the costs. Instead, it can merely charge all costs of the joint activity to the main activity it has undertaken.
Disclosures. Entities that allocate joint costs are required to disclose
- The types of activities for which joint costs have been incurred.
- A statement that such costs have been allocated.
- The total amount allocated during the period and the portion allocated to each functional expense category.
In addition, entities are encouraged, but not required, to disclose the amount of joint costs for each kind of joint activity, if practical.
Illustrations. An appendix to SOP 98-2 illustrates how organizations and their auditors can apply the purpose, audience and content criteria to various fact patterns.
Required implementation of SOP 98-2 is less than a year away. Affected organizations and their auditors should start reviewing their activities now. Some entities undoubtedly will wish to consider changing the way they conduct their fundraising and other activities in order to meet the criteria in the SOP and may require significant lead time to do so. Plan ahead!
|Some organizations conduct joint
activities, such as lectures or dinners, that are special events
through which attendees receive a direct benefit (admission to
the lecture or meal) in an "exchange transaction."
Organizations should not report as fundraising the costs of the
goods or services provided in exchange transactions that are
part of joint activities, regardless of whether the purpose,
audience and content criteria are met. |
Assume an organization has a special event with a $100 ticket price. The activity does not meet the audience criterion; therefore, the organization should report all costs, other than the direct donor benefits , as fundraising. The direct donor benefit—a dinner—costs the organization $25 and has a fair value of $30. In addition, the organization incurs other costs for the event including $5 that otherwise might be considered management and general costs had they been incurred in a different activity and $10 of fundraising costs. The organization should charge $25 to cost of sales and $15 to fundraising. (If the benefits provided to the donor are program related, the organization may report cost of sales as a program cost.)