New Accounting Standards on Reporting Fundraising Expenses
July 29, 2007
(July 30, 2007) The American Institute of Certified Public Accountants (AICPA) released new guidelines for the reporting of fundraising expenses by charitable organizations.
The AICPA has released three Technical Practice Aids (TPAs) that answer key questions about how fundraising expenses should be accounted for in the following situations. AFP’s Code of Ethical Principles and Standards of Professional Practice requires that members “use accurate and consistent accounting methods that conform to the appropriate guidelines adopted by the American Institute of Certified Public Accountants (AICPA)* for the type of organization involved. (* In countries outside of the United States, comparable authority should be utilized.)”
TPA 6140.20. Nonprofit organizations (NPOs) reporting no fundraising expenses.
The first TPA asks if it is possible that a nonprofit organization could report contributions but only have minimal or no fundraising expenses. This situation has been a growing concern for the Internal Revenue Service (IRS) and other regulators when they examine Form 990 documents and other charity materials and find charities that raise significant amounts of money but list no fundraising expenses.
The AICPA replies that it would be “unusual,” but does list several circumstances where this situation could occur:
- Donors contribute to the charity without the charity undertaking fundraising activities because of name recognition or custom
- Fundraising activities related to those contributions are conducted entirely or almost entirely by volunteers whose contributed services do not meet the recognition criteria for contributed services in paragraph 9 of FASB Statement No. 116
- Other organizations that the charity does not control contribute to the charity with the charity undertaking minimal or no fundraising activity or other participation in relation to those contributions
Specific examples include a religious organization that receives it funding through tithing, an organization that has no paid staff or compensated board members or a private foundation receiving support through family members or other organization with no solicitations necessary.
TPA 6140.21. Should an NPO report amounts charged to the NPO by a professional fundraiser gross (as fundraising expenses) or net (as a reduction of contributions)?
The second TPA refers to situations where a “fundraiser” (in the context of the AICPA statement, referring to an outside individual or an organization that solicits funds directly for the charity, not a consultant or employee of the charity) charges a charity for soliciting contributions. Some charities, especially those that use percentage-based compensation, argue that because they never see the funds the solicitor keeps for costs and overhead, that money shouldn’t be counted as an expense.
However, the AICPA maintains that the charity should report the entire amount raised by the solicitor as fundraising revenue, and the amount charged by the solicitor as a fundraising expense, not a reduction of contributions.
TPA 6140.22. In circumstances in which the reporting NPO undertakes a transaction in which another NPO (fundraising NPO) raises contributions on behalf of the reporting NPO, and the reporting NPO compensates the fundraising NPO for raising those contributions (compensation including, but not limited to, an administrative fee), should the reporting NPO report the fundraising NPO’s compensation gross (as fundraising expenses) or net (as a reduction of contributions)?
In other words, an intermediary organization (such as a federated fundraising entity, e.g., a United Way) raises funds and passes money on to a charity, and in return receives some sort of compensation (e.g., an administrative fee).
The third TPA concludes that the charity that receives the money (the “reporting NPO”) should report the gross amount of the contributions as contribution revenue. Administrative fees withheld by the intermediary organization (the “fundraising NPO”) should be reported as expenses.
The new TPAs, including background and more details, are available at the AICPA website in PDF format.