Allocating Expenses Under the New Nonprofit Reporting Standards

BMEX 2019May 8, 2019

Brian E. Bender, CPA, MBASenior Manager & Co-Chair of Nonprofit Practice

IntroductionBrian is a Senior Manager and Co-Chair of the S.R. Snodgrass Nonprofit Practice Group. He has dedicated nearly 15 years of his professional experience to serving trade associations, membership organizations, social clubs, foundations, charities, and numerous other nonprofit entities. With a decade of experience in public accounting, and 5 years serving as a financial executive for several large trade associations and an international membership organization in Washington, DC, he provides a unique perspectiveand approach to serving his clients. He has presented at various industry events, including the annual American Institute of Certified Public Accountants

(AICPA) Not-for-Profit Industry Conference and recently completed a three-year term on the AICPA Not-for-Profit Entities Expert Panel, during which he served as an instructor in the AICPA’s Nonprofit Certificate Program.

Brian is a Certified Public Accountant with a bachelor’s degree in accounting from West Virginia University. He also earned a Master of Business Administration, with a concentration in entrepreneurship, from Suffolk University’s Sawyer Business School. Brian is a member of numerous professional organizations, including the AICPA, the Greater Washington Society of Certified Public Accountants, the Pennsylvania Institute of Certified Public Accountants, Pennsylvania Association of Nonprofit Organizations, and the American Society of Association Executives.

Brian E. Bender, CPA, MBASenior Manager & Co-Chair of Nonprofit PracticeS.R. Snodgrass, P.C. bbender@srsnodgrass.com

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Objectives• Understand why you should care about expense allocations and

the changes in this area

• Examine the general provisions of the new financial reporting standards for nonprofits, and how reporting on expenses ties into those new standards

• Consider the existing methods and requirements for expense allocation, and how the changes made in ASU 2016-14 will affect your financial statements

• Identify and illustrate the definition of management and general expenses, applying the definition to various examples

• Prepare the additional disclosures required for methodologies related to allocation of expenses 3

Why do we care?Stakeholders pay attention!

1) Watchdog Organizations

2) Board Members

3) Related Organizations

4) Membership6) Competitors

5) Federal Agencies 7) Donors 8) Auditors

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Overview of ASU 2016-14

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Expenses- Report expense by function and

nature- Analysis showing relationship by

function and nature

Cash Flows- Still allow for direct or indirect

method- No longer require indirect

reconciliation for direct method

Investment Return

- Investment return is now required to be presented net of direct internal and external investment expense

- No longer required to disclose netted expenses, although not precluded from including this disclosure

Net Asset Classification- Two, rather than three classes of

net assets- Underwater endowment

accounting changes and additional disclosure requirements

Liquidity and Availability

- Qualitative and quantitate disclosure

- Liquidity and availability of resources tied to PRNA, TRNA, and unrestricted and designated funds

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The nonprofit financial statement presentation and disclosure standard (ASU 2016-14) is effective for year-ends beginning after December 15, 2017 (December 31, 2018 calendar year-ends).

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Existing Requirements

Pre-ASU 2016-14 requirements for expense reporting:

• All nonprofits must break out by function on the statement of activities (income statement)

• Program expenses• Supporting services

• Management and general expenses • Fundraising expenses• Member development expenses

• 501(c)(3) Health and Welfare Organizations were required to break out by nature and function

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Existing Requirements

Acceptable allocation methodologies:

• Direct allocation • Assigning each expense (i.e., invoice, line item on an

invoice, individual employee) to a functional category based on direct usage

• Indirect allocation • Using a rational and objective basis to allocate

expenses based on financial or nonfinancial data to multiple programs or functional expense categories

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Existing RequirementsAcceptable basis of indirect allocation:

• Headcount (supplies)• Square footage (occupancy)• Usage (fixed assets, intangible assets, or inventory)• Timecards (salary, benefits, bonus, EBP, taxes)• Possible timecard alternatives:

• Current job descriptions?• Monthly or quarterly questionnaires?• Consider other reporting needs such as grants,

lobbying, etc.

• Estimates – based on other documented methodologies derived from above, or other reasonable allocation 8

Existing Requirements

Accounting for joint costs:

• ASU 2016-14 did not affect accounting for joint cost• Allows you to allocate across program and supporting

activities – or – limits you to including as fundraising/ member development

• ASC Paragraph 958-720-55-2, Not-for-Profit Entities—Other Expenses—Implementation Guidance and Illustrations—Flowchart of Application of the Criteria for Classification of Joint Costs

• Evaluate based on three tests• Purpose (compensation, similar activities, other);• Audience (selecting invitees); and • Content (programmatic call to action vs. education) 9

Expense Reporting – What Changed?

• Expanded requirement to disclosure by nature and function to other organizations

• Updated definitions and provided examples

• New required disclosures

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Current GAAP

Schedule of functional expenses mandatory for health and welfare organizations and recommended, but not required, for other NFPs.

New GAAP

Expenses reported by nature and function either in statement of activities, schedule of functional expenses or in notes for all NFPs.

This should be presented in an analysis that disaggregates functional expense classifications by their natural expenseclassifications.

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Expense Reporting – Nature and Function

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Options for presentation:

• Within the statement of activities • Notes to the financial statements• Statement of functional expenses

• Presentation as supplementary information is notpermitted as this is now part of the basic financial statements

Expense Reporting – Nature and Function

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Nat

ure

Function

SAMPLE WITH ONE PROGRAM

Expense Reporting – Nature and Function

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SAMPLE WITH MULTIPLE PROGRAMS AND COGS

Nat

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Function

Expense Reporting – Nature and Function

Line Item Summary

Program Services Activities that result in a good or service being distributed to beneficiaries, customers, or members that fulfill the purposes or mission for which a nonprofit exists

Management and General Activities related to oversight

Fundraising Activities to entice potential donors to contribute

Membership Development Activities to gain or retain members

• Original definition of M&G in the master glossary: Activities that are not identifiable with a single program, fundraising activity, or membership-development activity but that are indispensable to the conduct of those activities and to an entity's existence.

• The definition was updated to define M&G as: Supporting activities that are not directly identifiable with one or more program, fundraising, or membership-development activities.

• Additional overarching criteria added in ASU 2016-14: Activities that represent direct conduct or direct supervision of program or other supporting activities require allocation from management and general activities. Additionally, certain costs benefit more than one function and, therefore, shall be allocated.

Expense Reporting – Definitions

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M&G Per 990* M&G Per FASB/GAAP** M&G Per Fed***BOD meetings and committee meetings

Oversight, business management, and HR

Executive director

Office management General recordkeeping Personnel (oversight)

Staff meetings (unless program or fundraising specific)

Advertising and promoting sales Management information systems

Auditing Budgeting Budget and planning

HR, investment management, and other centralized services

Administering government, foundation, and similar contract’s billing and collection

Finance and business services

Annual report Annual report Safety and risk management

General legal services All other M&G except for direct conduct of programs, fundraising, or member development activities

General counsel

General liability insurance Informing public of NFP’s stewardship of funds

Expense Reporting – Definitions

* Per 990 Instructions ** Per ASU 2016-14 *** Per CFR Chapter II Part 200 Appendix IV (Indirect cost rate – M&G) 16

Center for Plain English Accounting (AICPA): While the implementation provides examples that may be broadly applicable, individual facts and circumstances at organizations should always be considered. For example, while the implementation guidance indicates that HR functions would support the entire entity, consider a situation in which an organization spent a significant amount of time and money trying to fill a key programming position, potentially even engaging a pricey third-party search firm to find a highly qualified candidate. In that situation, an argument could be made for direct costs being allocated to programming activities.

Expense Reporting – Definitions

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Example: Cost allocations – CEOA not-for-profit‘s CEO spends a portion of time: Directly overseeing the rescue program Working with current and potential donors on fundraising activities Supervising the other areas of the organization

How should you allocate the CEO’s compensation?

A. ProgramsB. Management and generalC. FundraisingD. Allocated to A and CE. Allocated to A, B, and C

Expense Reporting – Example #1

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Example: Cost allocations – CEOA not-for-profit‘s CEO spends a portion of time: Directly overseeing the rescue program Working with current and potential donors on fundraising activities Supervising the other areas of the organization

How should you allocate the CEO’s compensation?

A. ProgramsB. Management and generalC. FundraisingD. Allocated to A and CE. Allocated to A , B, and C

Expense Reporting – Example #1

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A.B.C.D.E.

ProgramsManagement and general FundraisingAllocated to A and B Allocated to A, B, and C

Example: Cost allocations – CFOA not-for-profit‘s CFO has primary responsibility for: Accounting and reporting Short-term budgeting and long-term financial planning Cash management Direct oversight of the organization’s endowment

How should you allocate the CFO’s compensation?

Expense Reporting – Example #2

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A.B.C.D.E.

ProgramsManagement and general FundraisingAllocated to A and B Allocated to A, B, and C

Example: Cost allocations – CFOA not-for-profit‘s CFO has primary responsibility for: Accounting and reporting Short-term budgeting and long-term financial planning Cash management Direct oversight of the organization’s endowment

How should you allocate the CFO’s compensation?

Expense Reporting – Example #2

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Example: Cost allocations – Human ResourcesThe human resources department at a nonprofit is generally involved in the benefits administration for all personnel of the nonprofit. This includes:

All of management All employees who are allocated to program activities All fundraising employees

How should you allocate the human resources expenses?A. ProgramsB. Management and generalC. FundraisingD. Allocated to A and BE. Allocated to A, B, and C

Expense Reporting – Example #3

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Example: Cost allocations – Human ResourcesThe human resources department at a nonprofit is generally involved in the benefits administration for all personnel of the nonprofit. This includes:

All of management All employees who are allocated to program activities All fundraising employees

How should you allocate the human resources expenses?A. ProgramsB. Management and generalC. FundraisingD. Allocated to A and BE. Allocated to A, B, and C

Expense Reporting – Example #3

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Expense Reporting – Disclosure

Qualitative disclosure and methodologies to allocate costs are now required

SAMPLE DISCLOSURE #1

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Expense Reporting – Disclosure

SAMPLE DISCLOSURE #2

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Expense Reporting – Audit Procedures

From the AICPA:

• Auditors will need to understand how management chooses to allocate expenses and evaluate the methodologies for reasonableness.

• The allocation of functional expenses requires careful consideration and professional judgment. With the release of ASU 2016-14, auditors and preparers need to take a closer look at the potential for misstatement due to flaws in the models.

• Auditors will need to consider the risk of fraudulent reporting, as the pressure on not-for-profit entities to minimize general and administrative and fundraising and development costs is ever present.

What should I do now?

• Evaluate your current reporting

• Draft a functional expense schedule for your organization

• Review allocation methodology line-by-line with all stakeholders

• Adjust allocation methodologies for new definition

• Draft footnote disclosure on allocation and provide all information to your auditor to confirm treatment prior to year-end

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