Functional expense reporting and joint cost allocation under ASC 958-720

• Classify expenses as program, management and general or fundraising
• Test the analysis of expenses by nature and function
• Evaluate cost allocation methods disclosed in the notes
• Apply the purpose, audience and content criteria to joint activities

The functional classes

ASC 958-720-45-2 requires information about expenses by functional classification, such as major classes of program services and supporting activities. Supporting activities often include management and general, fundraising and membership development.

• Program services produce goods and services for beneficiaries, customers or members that fulfill the mission.
• Management and general covers oversight, business management, general recordkeeping and payroll, budgeting, financing, administering government and similar contracts, the annual report and human resources (ASC 958-720-45-7).
• Fundraising covers soliciting contributions, including campaigns, mailings and special events.

ASU 2016-14 added ASC 958-720-45-2A: activities that are direct conduct or direct supervision of programs or other supporting activities must be allocated out of management and general. An executive director who spends a third of her time running a program is a program cost for that third. Shared costs, such as information technology, are allocated among the functions that benefit.

Nature by function

Since ASU 2016-14, all NFPs (not just voluntary health and welfare entities) present an analysis of expenses by both natural classification (salaries, rent, supplies, depreciation, grants to others, professional fees) and functional classification, in one location: the face of the statement of activities, a separate statement, or the notes (ASC 958-720-45-15). Expenses reported elsewhere, such as salaries in cost of goods sold or the cost of direct benefits to donors at special events, still go into the analysis under their natural class. Investment expenses netted against investment return stay out of it.

The notes must also describe the method or methods used to allocate costs among program and support functions, and disclose total fundraising expenses (ASC 958-720-50-1).

Allocation methods

Typical bases are time records for personnel, square footage for occupancy, and usage counts for technology. The audit questions are simple: is there a documented basis, is it applied consistently, and does it reflect what happened this year? A time study from five years ago that no one has refreshed is weak evidence.

Joint costs

A joint activity combines fundraising with a program or management and general component, such as a mailing that educates about heart health and asks for a gift. The codified criteria for allocating any joint costs away from fundraising are purpose, audience and content. All three must be met. If any one fails, all costs of the activity are reported as fundraising, except costs of goods or services provided in exchange (such as the meal at an event).

• Purpose: the activity must accomplish a program or management and general function, shown by a call to action that helps achieve the mission, not just a request for money.
• Audience: chosen for its need for the program content or ability to act on it, not mainly for its giving history.
• Content: the material supports program or management and general functions, with a specific action the audience can take.

When joint costs are allocated, the notes disclose the types of activities, the fact that joint costs were allocated, and the total allocated with the portion to each function (ASC 958-720-50-2). Form 990, Part IX, line 26 reports joint costs by column, with a box for organizations that follow ASC 958-720.

Audit approach

• Recompute the allocation of the largest shared costs, starting with salaries.
• Compare program, management and general and fundraising ratios with prior years and explain swings.
• For each joint activity, obtain the materials and mailing list criteria and test all three criteria.
• Agree the functional totals to Form 990, Part IX columns (B), (C) and (D).

The functional expense allocation workbook gives a layout for the recomputation.

A direct mail campaign at Lakeshore Heart Association