presents presents Non-Profit Cost Allocation Plan Strategies Crafting an Effective Plan to Distribute Direct and Indirect Expenses A Live 110-Minute Teleconference/Webinar with Interactive Q&A Q& Today's panel features: Sharron O'Donnell, Senior Manager, Bader Martin , Seattle, Wash. Colette Kamps, Senior Manager, Henry & Horne , Scottsdale, Ariz. Wednesday, June 30, 2010 The conference begins at: The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific 10 am Pacific You can access the audio portion of the conference on the telephone or by using your computer's speakers. Please refer to the dial in/ log in instructions emailed to registrations.
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Non Profit Cost Allocation Non-Profit Cost Allocation Plan Strategies June 30, 2010 Sharron O’Donnell, Bader Martin Colette Kamps, Henry & Horne colettek@hhcpa.com sodonnell@badermartin.com
Today’s Program Situations Requiring Cost Allocations Slides 6-10 ( Sharron O’Donnell ) ( Sharron O Donnell ) Key Definitions And Descriptions Slides 11-21 ( Colette Kamps ) Methods For Assembling A Cost Allocation Plan M th d F A bli A C t All ti Pl Slid Slides 22-35 22 35 ( Sharron O’Donnell ) Joint Costs/OMB A-133/UBTI Slides 36-44 ( Collette Kamps ) 5
Situations Requiring Cost All Allocations ti Sharron O’Donnell, Bader Martin Sharron O Donnell, Bader Martin
Cost Allocations: Summary of what will be covered today f h ill b d d • What situations require cost allocations? Why are proper q y p p allocations important? What are some of the problems in allocating? • Definitions/descriptions of program, fundraising, and management/general costs • Cost allocation plans • Joint costs Joint costs • Cost allocation methods for Circular A-133 audits • Regulatory requirements 7
Why I s Cost Allocation I mportant? Why I s Cost Allocation I mportant? • Increasing public scrutiny g p y • Donors becoming more sensitive due to increased activity by “watchdog groups” • Government regulators Government regulators • Area fraught with faulty bookkeeping and willful Area fraught with faulty bookkeeping and willful misrepresentation 8
Allocating Costs: What situations require cost allocations? h i i i ll i An allocation plan that properly assigns costs to An allocation plan that properly assigns costs to programs is essential when making decisions. Reliable and consistent financial reporting Users of your financial information can make informed decisions. 9
How Much I s Enough? How Much I s Enough? • Is there a percentage or a range of percentages that is correct? • Do you know how much it costs to run a program? Do you know how much it costs to run a program? 10
Key Definitions And D Descriptions i ti Colette Kamps, Henry & Horne Colette Kamps, Henry & Horne
Allocating Costs: What situations require cost allocations? h i i i ll i • Natural vs. functional • Accounting standards – Require nonprofits to report expenses by functional classification classification – Voluntary health and welfare organizations are required to present a Statement of Functional Expenses • Voluntary health and welfare organization: Formed for the purpose of performing voluntary p p p g y services for various segments of society; organized for the benefit of the public. It concentrates efforts in attempt to solve health and welfare problems. p p 12
Allocating Costs: Definitions and descriptions fi i i d d i i • Program expenses • Supporting services expenses – Management and general expenses – Fundraising expenses 13
Allocating Costs: Definitions and descriptions (Cont.) fi i i d d i i ( ) • Program expenses: Expenses related to activities carried g p p out to fulfill the mission; include both direct and indirect expenses • Reporting by functional classification includes reporting by major program and supporting expenses – Need to determine the organization’s major programs N d t d t i th i ti ’ j – Requires judgment and knowledge of the organization 14
Allocating Costs: Definitions and descriptions (Cont.) fi i i d d i i ( ) • Considerations in determining major programs g j p g – Report as a separate program if revenues or expenses are > 10% – Separately report programs making up (in total) at least 75% of total program expenses – Is discrete program financial info available? Is discrete program financial info available? – Does management separately evaluate? – Form 990 requires disclosure/description of three q / p largest programs – More than 10 may become overly detailed 15
Allocating Costs: Definitions and descriptions (Cont.) fi i i d d i i ( ) • Supporting services expenses – Management and general – Fundraising – Membership development b h d l 16
Allocating Costs: Definitions and descriptions (Cont.) fi i i d d i i ( ) • Management and general expenses g g p – Relate to the overall direction of the organization – Although indispensible to the organization, they are not identifiable with a specific program and are not a fundraising activity fundraising activity. – Include oversight , business management, record g , g , keeping, budgeting, financing 17
Allocating Costs: Definitions and descriptions (Cont.) fi i i d d i i ( ) • Common types of management/general expenses – Relating to board and committee meetings – Providing executive direction and organization planning (salary of executive director) – Accounting, auditing, budgeting, financial reporting – Procuring and retaining personnel (human resources) – Office services (receptionist, mail distribution, filing duties) – Preparing the annual report – Disseminating information to the public about the organization’s use of donated funds – Costs of advertising for ticket sales or admissions of a performing arts organization, museum, zoo, or similar organization 18
Allocating Costs: Definitions and descriptions (Cont.) fi i i d d i i ( ) • Further consideration of advertising expenses g p – Is the purpose of the advertising primarily to generate revenue from services/admissions, or is it primarily to promote the organization and its i il t t th i ti d it services? – Is the related fee charged de minimis compared with the actual fair market value? – Does the related fee help to increase the effectiveness of the organization’s programs? effectiveness of the organization s programs? 19
Allocating Costs: Definitions and descriptions (Cont.) fi i i d d i i ( ) • Fundraising expenses: Costs related to activities that involve inducing potential donors to contribute assets (cash and non-cash), i d i i l d ib ( h d h) services or time • Common types C t – Conducting of fund-raising campaigns – Conducting special events – Maintaining donor lists M i t i i d li t – Preparing/distributing fund-raising materials – Recruiting volunteers (even if revenue not recognized) – Conducting solicitations – Professional fund-raiser (do not net with revenue) – Other activities involving soliciting contributions 20
Allocating Costs (Cont.) • Problems with fundraising costs/ratios – Allocations are often subjective, not objective. – Some contributions do not requiring ongoing fund raising expenses (bequests, ongoing foundation support) support) – Highly dependent on nature of the organization – The ratio can be affected by temporary events (stage y p y ( g of a capital campaign, the economy) 21
Methods For Assembling A C A Cost Allocation Plan t All ti Pl Sharron O’Donnell, Bader Martin Sharron O Donnell, Bader Martin
Allocating Costs: Cost allocation plan ll i l • Direct identification: Can be identified with a particular function; only allocate when direct identification is not possible or practical ibl ti l • • Indirect expenses: Allocation to more than one function Indirect expenses: Allocation to more than one function – Need to have a cost allocation plan 23
Allocating Costs: Cost allocation plan (Cont.) ll i l ( ) • Cost allocation plan p Need to have a basis for how costs are allocated Need to be consistent Objective methods are preferable to subjective. The plan needs to be documented. 24
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