For years beginning after December 15, 2017, all nonprofits are required to present their expenses by both their natural and functional classifications in one location. This article, What You Need to Know About the New Expense Reporting Requirements , covers the basics of the new expense reporting requirements of FASB Accounting Standards Update 2016-14. More clarification is provided in the standard regarding the definitions of program service expenses and support service expenses (management and general [M&G] activities, fundraising activities, and membership development activities). This article provides some additional guidance and answers a few questions that might arise as nonprofit leaders are implementing these changes.

How do I determine the categories of Program and Support Activities?

The categories of Program and Support Activities will differ with each organization. Programs are the activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill the purposes or mission for which the organization exists. Some factors to consider in determining your categories are: budgetary categories, geographical areas served, classifications of individuals served, purposes of different grants, and how programs are separated for management or board oversight. If you have several small programs, these can be grouped into an “Other” category.

Support activities are commonly separated into the following categories: M&G, fundraising, and membership development. M&G expenses are costs that are not directly related to one or more program, fundraising, or membership development efforts. Specific examples are in the article on expense reporting article mentioned above. Fundraising expenses are costs incurred to solicit donations of money, services, materials, or time. Membership development activities consist of soliciting for prospective members and membership dues, member relations, and other associated activities.

Keep in mind that all nonprofit organizations are unique in their programs and what may be a major program for one organization can be a supporting activity for another organization.

What should a cost allocation plan look like?

The plan will vary a lot by organization. However, here are some guidelines:

First, the plan should be in writing and approved by the governing board. Second, it should identify which costs are to be allocated (salaries/wages, rent, utilities, etc.). Third, it should define the method for allocating those costs. An optional item is a section that defines which items should be directly allocated to a certain program or support category. Management should review the cost allocation plan annually to be sure it is still accurate.

What method of allocation should I use?

It depends on the expense. Whenever possible, costs should be directly assigned to a function. For those expenses that cannot be directly assigned to a single function, the most common methods of allocation are square footage used and employee time spent on each activity, but other methodologies may be appropriate for your organization. Square footage is often used for allocating occupancy-related costs. Salaries, benefits, and other payroll-related expenses can be allocated by determining the amount of time spent on various activities. This is done by performing a time study. Another method is based on units used. For example, your telephone bill could be allocated based on the use of each phone in the building. Consider the factors that increase or decrease a cost to help you in determining the proper methodology. The important thing is to have a reasonable basis for your methodologies.

We have a cost allocation plan for allocating indirect costs to our grants. Isn’t this the same thing?

No, it’s not. Although allocation of some costs may be similar, indirect costs will likely be split differently for grants versus support expenses for financial statements under FASB Accounting Standards Update 2016-14. For example, a portion of administration costs such as salaries, wages, and fringe benefits for the executive director, accounting staff, and other administrative staff can often be allocated to grants if they spend time on the grant. For financial reporting, these costs are usually considered M&G expenses. Therefore, your cost allocation plan for grants should be a separate document from your cost allocation plan for financial reporting.

How should we classify volunteer costs, such as volunteer meals and staff time coordinating volunteers?

It depends on what the volunteers are doing. If volunteers are assisting with administrative activities, the cost should be classified as M&G expense. If volunteers are working fundraising events, it would be considered a fundraising cost. If they are assisting with activities that carry out the organization’s mission or purpose, the cost would be considered program expense.

If you have other questions in regards to the new expense reporting requirements, please contact your Hawkins Ash CPAs representative.

Article was written by: Lora Vandevoorde, CPA

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Sandy Jensen
I joined Hawkins Ash CPAs in 2001 and am a partner in the firm's La Crosse office. I provide audit services to nonprofit and educational agency audits. I also have extensive experience providing audit services to credit unions. I am chair of the firm’s nonprofit service group and a member of the firm’s Audit and Accounting Committee.

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