Charity Guidance: Joint Cost Allocation

 

The practice of joint cost allocation has become commonplace among nationally soliciting charities, particularly those with large-scale direct mail activities. The following guidance is intended to help charities understand what joint cost allocation is and how the BBB Standards for Charity Accountability can be impacted by it.

What is joint cost allocation?

Under certain specified conditions, the accounting practice, called joint cost allocation, enables a charity to recognize the costs of a multi-purpose mail campaign as an advocacy or education activity and a portion as a fundraising expense. The current formal accounting guidelines are included in American Institute of Certified Public Accountants (AICPA) Statement of Position 98-2. This item is now codified as Financial Accounting Standards Board (FASB) 958-720-05 through 958-720-55-170.

The original intent of joint cost allocation was to allow charities that perform programmatic work through the mail while also asking for donations to more accurately report their expenses based on this dual objective.

For a more detailed description of the history of this practice, click here see the following past cover story from the Wise Giving Guide:

The accounting position statement referenced identifies that all three of these conditions must be present for joint cost allocation to take place:

1. Purpose: The charity should have evidence (e.g., board minutes, written instructions to fund raisers) that it intended for the direct mail appeal to carry out a public education or advocacy objective.

2. Content: The direct mail appeal should motivate its audience to take some action other than providing financial support to the organization. The shorthand for this requirement is a “call to action” message. Examples of calls to action are: sign and return this petition, see a doctor when these disease warning signs are present, or adopt a dog or a cat at an animal shelter.

3. Audience. If the audience of the direct mail appeal is selected based on its ability to donate without consideration of its need for the “call to action” message, the appeal cost should be allocated to fund raisin

BBB Wise Giving Alliance Perspective on Joint Cost Allocation

BBB Wise Giving Alliance is a strong supporter of Generally Accepted Accounting Principles (GAAP) in charity financial statements. This promotes consistency, comparability and reliability of the information in those statements. BBB WGA has no objection to joint cost allocation as long as the charity financial statements are following the existing accounting rules.

Over time, some organizations have abused joint cost allocation. Rather than using it as a tool to more accurately account for their expenses, some organizations have used it to artificially lower their overall fundraising expenses and/or raise their reported program expenses.

In response to these abuses, some charity monitoring organizations reject all joint cost allocations and recalculate financial statements to include the entire direct mail campaign expense as fundraising. In contrast, the BBB Wise Giving Alliance does not assume that all joint cost allocation is inappropriate. Rather we will review the circumstances, and if we find GAAP is not being followed correctly, we will raise concerns with the charity and may conclude that the charity does not meet one of the BBB Charity Standards. If after a review of the allocation and appeals, BBB WGA agrees that GAAP is being followed, BBB WGA will accept the allocation as stated.

Standard 13 – Accurate Expense Reporting

Usually, the notes to the charity’s audited financial statements will identify if joint cost allocation has taken place. Alternatively, the IRS Form 990 (Part IX, Statement of Functional Expenses, line 26) may show this.

The BBB Charity Standard that directly addresses joint cost allocation is Standard 13, which calls for a charity to accurately report their expenses in their financial statements. When reviewing a charity financial statement that has a joint cost allocation, if we find that more than 50% of its joint cost allocation goes to program services, this will likely trigger a request from BBB WGA for further information. Among other things, BBB WGA will ask for copies of direct mail appeals that have been marked up to show any calls to action as well as indicating what portions of the appeal are considered programs, fundraising, or administration.

After reviewing this additional information, if BBB WGA deems the issues are significant enough to cause the charity to not meet Standard 13, a draft report will be provided to the charity, including our explanation.

Also, the functional breakdown of expenses in a charity financial statements, including its joint cost allocation, is the representation of the charity’s management and is usually presented as such by the auditor.

Common Issues

The following are examples of a few common issues that we have found in reviewing joint cost allocations over the years. Although these are issues to avoid, keep in mind that we treat each evaluation on a case-by-case basis and cannot comment on whether your organization’s appeals meet BBB Charity Standards without reviewing appeals, financial statements, and other fact circumstances.

Missing Calls to Action

AICPA SOP 98-2 requires that, for an appeal to be eligible for joint cost allocation, it must include a call to action that asks donors to do something other than give to the organization that fulfills a programmatic purpose. Some examples include requests for them to write to representatives to support legislation or warning signs for a disease and when to go to the doctor.

If a joint cost allocated appeal is missing a call to action, this would result in the charity not meeting Standard 13.

Ineligible Calls to Action

Not all requests made of a donor can be considered a call to action for joint cost allocation purposes. For example, the AICPA guidelines specifically mention that a call for a donor to educate themselves is not adequate. This would include a call to go to the charity’s website for more information or to sign up for the charity’s newsletter to learn more. These lines alone are not enough to constitute a call to action.

Over-Allocation to Programs

When reviewing direct mail appeals or telemarketing scripts, we sometimes find that the charity has over-allocated the amount of the appeal content that is actually fulfilling a programmatic purpose. Occasionally we will also see that the only portions of the appeal that are considered fundraising are those that specifically ask for a donation.

Charities that do this will likely have an issue meeting Standard 13. When reviewing appeal contents, we take into consideration how much of the appeal is used to convince the donor to give to the charity. This content should be allocated as a fundraising expense.

Accomplishments Allocated as Programs

Many charities list their past accomplishments in their appeals. We have occasionally seen that some charities are joint cost allocating this content as a programmatic expense. While the context of the appeal varies from case to case, charities should keep in mind that the purpose of listing accomplishments is more often about convincing the donor to give to the charity and/or performing an administrative function such as providing information typically found in an annual report, and is not related to the call to action.

Overall Guidance

Our overall message to charities on joint cost allocation is that, if they are using it as intended (as a tool for charities that actually perform programmatic work through solicitations), and not as a way to alter their overall program or fundraising expenses, they are more likely to have appeals that fulfill the criteria set by Generally Accepted Accounting Principles.