Charity Navigator’s new ‘joint cost allocation adjustment’ is drawing criticism from many charities and nonprofit professionals, including accountants and auditors.
A long-established accounting practice (embodied in FASB ASC 958-720) establishes guidelines for accounting for costs of activities that include fundraising. Such activities include direct mail, telephone solicitation, door-to-door canvassing and special events, which might be more immediately associated with fundraising, but such activities also include awareness campaigns. For example, a nonprofit has as part of its mission the reduction of incidences of heart disease amongst women. In fulfilling that mission, the nonprofit rents space at events that are attended by women and educates interested parties about the effects of the disease and the ease and benefits of screening for it. The nonprofit also solicits contributions at these events. The purpose, audience and content criteria of FASB ASC 958-720 are likely to be met for such an event, and so the costs of the event would be allocated between program and fundraising. This is an efficient activity, because the nonprofit can combine multiple goals in a single event.
Charity Navigator’s response is to state at its website: ‘…we believe that donors are not generally aware of this accounting technique and that they would not embrace it if they knew a charity was employing it, nor does Charity Navigator. Therefore, as an advisor and advocate for donors, with rare exception, when we see charities using this technique we factor out the joint costs allocated to program expenses and add them to fundraising’.
So much for the accounting rules – the costs of the heart disease screening event would be allocated by Charity Navigator entirely to fundraising, and maybe the nonprofit would drop from a four star to a three star charity as a result.
The rules for accounting for costs of activities that include fundraising are complex and do require the application of professional judgment, and there have certainly been cases where more fundraising costs than program costs should have been reported. However the accounting rules do have to be followed, so don’t toss them out the window and chase the stars!