Joint Costs: Do You Have Them?

Nonprofit Accountant Northern VA: Joint Costs for nonprofit fundraisersFundraising—it’s a necessary expense to many not-for-profit organizations (NFPs), and yet it’s one that many organizations would like to minimize in order to be able to spend more on the organization’s programs.  Identifying joint costs can be beneficial to your organization, since it potentially moves expenses out of fundraising into program or management and general expenses.

The Financial Accounting Standards Board (FASB) defines joint costs as, “the costs of conducting joint activities that are not identifiable with a particular component of the activity.”  An example it gives is a postage stamp for a letter that includes both fundraising and program components.  For purposes of this article, we are going to focus on joint costs that include fundraising and other components, such as a program component and / or a management and general component.

Once you identify that the activity has joint costs, then you would need to evaluate whether or not the activity meets the three criteria to be able to allocate the costs among the different components.  The activity must meet all three criteria to pass the test.  The criteria are purpose, audience, and content.

The purpose of the fundraising activity should aid in accomplishing program or management and general functions.  Generally the purpose criterion is met if there is no compensation or fees that are tied to the contributions raised for the event, if similar program or management and general activities are conducted, as well as other evidence.  The audience of the fundraising activity should not consist entirely of prior donors or people likely to contribute to the NFP.  The content of the activity should support the program or management and general functions rather than consist of fundraising material.  Program activities generally include a call for action that benefit the recipient individually or society as a whole.

An example could be an organization that wants to help prevent underage drinking sends out a letter to parents of the local high school.  As part of this letter, the organization provides background on the organization, provides underage drinking statistics, calls for parent to talk to their kids about drinking, and asks for contributions.  The purpose of the letter is to educate parents about underage drinking, and there is no compensation or fees tied to the funds raised.  Accordingly, the purpose test is met.  The audience test is met, since the letter was sent to parents of the local high school, not past donors.  The content of the letter supports the program function, and it calls for parents to talk to their kids.  The costs of producing and distributing this letter would be allocable to different functions of the organization, rather than all of the costs going to fundraising.

Costs are allocated using a reasonable, rational, and systematic method.  Using the example above, the organization may choose to allocate the costs based on the portion of the letter attributable to program purposes and the portion of the letter attributable to fundraising purposes.

There are also required disclosures in the notes to the financial statements when the organization allocates joint costs that include fundraising, including the total amount allocated and the amount allocated to each function.

For additional information regarding joint costs that include fundraising, please contact Gurman & Company.