By Rick Shields, CPA, Principal at Blue & Co.
One of the issues not-for-profits must address is how to raise funds while also properly reporting the associated costs for donor development. In addition to this is the pressure to raise funds while using a minimum of resources. Part of this is intuitive, the standard efficiency analysis, but part of it also relates to how not-for-profits can be “graded” according to certain metrics, such as percentage of functional expenses that are for program services as opposed to administration and fundraising.
The criteria for classification of expenses as fundraising for generally accepted accounting principles (GAAP) and the Form 990, Return of Organization Exempt From Income Tax are substantially the same in most areas and include the following:
- Costs of soliciting contributions and grants from individuals, foundations, government agencies, and others.
- Costs of fundraising campaigns.
- Acquisition and maintenance of donor lists and prospect lists.
- Costs of fundraising materials, including manuals, instructions, and other materials.
However, there is one key distinction between GAAP and the Form 990. This relates to fundraising events:
- GAAP –
- Costs of facility rental, staffing, transportation, supplies, and related event costs should be reported as fundraising expenses on the statement of functional expenses or equivalent schedule in the footnotes.
- Costs that directly benefit event attendees should be accounted for separately. Such costs include:
- Meals provided and merchandise or other items of value given to attendees if there is a charge to attend the event.
- Auction items sold, regardless of whether there is a charge to attend the event.
- For costs of fundraising events that directly benefit event attendees, there are two options:
- Report as cost of events (not fundraising expenses) on the statement of functional expenses or equivalent schedule in the footnotes.
- Report as an offset to revenue from the corresponding events.
- Form 990 –
- All costs of fundraising events are offset against revenue from the event.
The impact of the Form 990 method is that expenses on the 990’s statement of functional expenses will reflect a greater percentage of program services than the corresponding percentage on GAAP basis financial statements.
Not-for-profits should be aware of the following:
- Proper reporting of fundraising expenses: In addition to directly allocable costs for payments to third parties, this includes an allocation of salaries for time spent soliciting or talking to donors or prospects as well as all time and resources used to procure grants. Not properly reporting fundraising expenses can create transparency issues and a lack of trust.
- Different reporting methods between GAAP and the Form 990: These reporting methods can generate different amounts on the statement of functional expenses, and this may impact the way the not-for-profit is viewed through the lens of financial metrics.
Understanding the intricacies of fundraising expense reporting is crucial for maintaining transparency and trust with your donors. If you need assistance navigating the differences between GAAP and Form 990, or have any other questions about proper reporting, our team at Blue & Co. is here to help. Reach out to your local Blue & Co. advisor today for expert guidance and support.
