Changing Public Perceptions and Misconceptions: Joint Costs Explained
By Jarrod White and James Raftery
I n recent years supposed “watchdog agencies” and overzealous oversight agencies have decided to arbitrarily institute their own opinion of what accounting principles ought to be by, in part, ignoring Joint Cost Allocation and Generally Accepted Accounting Principles (GAAP). In doing so, they are ignoring the legitimate program element of Joint Activities thus wrongly tainting the public’s perception of the non-profits they appear to be targeting. This tactic plays into the perception they are trying to portray; nonprofits spend too much on overhead and not enough on their program missions. A recent article by Dan Pallota succinctly defined this common heartache for non-profits:
"Donors demand such low overhead costs that [the non-profit] can’t hire the talent or invest in the resources they need to maintain the status quo, let alone actually solve the vexing social problems that confront them."
Part of the problem, he goes on to say, is this misconception by the donor is often never challenged effectively. We want to help you face your donors confidently, having clear explanations, showing their donations are being used effectively.
A Joint Activity is a fundraising activity that also includes elements of another function, such as program, management and general, or membership development. Joint Costs are most commonly seen in direct mail and telemarketing campaigns, but it can include other activities.
Using Joint Costs shows a picture of financial efficiency more consistent with reality. However, groups like Charity Navigator and the Better Business Bureau feel this method is often abused and misleading. Therefore, they are digging deeper and in some cases, downgrading the charity's rating and reputation without valid reasoning. The NonProfit Times calls this change "going back to the dark ages when it comes to nonprofit accounting."
The Generally Accepted Accounting Principles (GAAP) adopted by the Financial Accounting Standards Board (FASB) established specific tests (key concepts shown below) we use to identify Joint Activities. With this, we can help you - and your reputation - steer clear of unwarranted scrutiny.
What does this all mean? As soon as your organization does more than ask, 'Please give to our organization', there's a possibility the activity might qualify as a Joint Activity. Common sense says, if you include a 'call to action' as part of the activity, Joint Costs are created and some of it can be moved out of fund-raising. However, it's certainly not that simple. There are additional factors that need to be considered.
First Test - Purpose of the Activity
Does the activity claim to meet program goals in addition to a fundraising request? OR Does the activity call for a specific action other than making contributions?
Is the majority of any party’s compensation or fee unrelated to the amount of contributions raised?
Second Test - Your Audience
Was the audience selected based on the ability or likelihood to contribute, including prior donors? OR Is the audience selected for program or management and general reasons?
Is the audience presented information that is not specific to fund raising?
Third Test - Content
Does the activity claim to meet program goals? OR Are the needs and benefits clearly explained or apparent?
Is the content focused on the organization's management or general activities?
Easy, right? Not exactly. Even when it seems obvious the answer is yes or no, we have experienced many examples of not so obvious explanations because each situation is unique. It's important to know if your activity meets this definition ahead of time so you and your team can record the activity properly. Call us and we'll guide you through your specific situation so you can get it right, the first time, every time.
Sources - Publications: Costs of Activities That Include Fundraising: Joint Activities (Thompson Reuters/PPC, online subscription)
FASB ASC 958-720-45 (FASB, online subscription)
SOP 98-2, Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund Raising (AICPA, FASB, online subscription)
Online: Charities Must Battle Public Misconceptions About Overhead Costs, Dan Pallotta, 09/14/14 (The Chronicle of Philanthopy, www.philanthropy.com, accessed 12/05/14)
How We Rate Charities' Financial Health (Charity Navigator, www.charitynavigator.org, accessed 11/4/14)
Tricks of the Charity Trade (American Institute of Philanthropy, Charity Rating Guide & Watchdog Report, www.charitywatch.org, accessed 10/30/14)
Watchdog Barks Louder on Cost Allocation Issues (The NonProfit Times, www.thenonprofittimes.com, accessed 10/29/14)
If you have any questions about this topic or any others relating to your finances, give us a call or email. We'll be happy to assist you.