Allocating
AND
Reporting
Ministry
Expenses
Accounting and
Financial Reporting
Guide for
Christian Ministries
by Evangelical Joint Accounting Committee
460 pages. Softcover.
T
his Guide has been prepared by some of the most qualified
people in nonprofit accounting to assist Christian ministries. It
will assist ministries in accounting for and reporting on their
varied activities in compliance with generally accepted accounting
principles (GAAP), as well as recognizing an even higher level of public
accountability mandated by the Scriptures.
This Guide includes in-depth material on functional expense
allocations and examples of financial statement reporting for many
different types of ministries.
The Guide may be purchased at www.ECFA.org.
ECFA expresses sincere appreciation to Mr. Gregg Capin, CPA, Partner with
Capin Crouse LLP, and Mr. David Cram, CPA, Vice President for Finance,
Wycliffe International, for their significant contributions to this publication.
© 2008 by ECFA, Evangelical Council for Financial Accountability
T
he presentation of expenses based on a “functional” classification
reflects the expenses according to the purpose for which the expenses
are incurred.
A functional expense presentation helps readers of financial statements
(including donors, foundations, regulators, and financial institutions) in
understanding how a nonprofit organization spends its resources. Nonprofits
filing Form 990 must reflect functional expenses on the Form, consistent
with the organization’s financial statements.
The broad functional classifications are:
•
Program services (goods or services distributed to beneficiaries,
customers, or members that fulfill the purposes or mission for which
the organization exists), and
•
Supporting activities (all activities other than program services, which
are indirectly related to the purposes for which the organization exists
but necessary for its conduct).
By reporting expenses in this manner, a nonprofit communicates how much
has been spent for program purposes and how much was used to support
those services through administration, fund-raising, and, when applicable,
membership-development.
A functional presentation is contrasted with a “natural” classification. In a
natural classification, expenses are reported according to the nature of the
items acquired; e.g., salaries, benefits, travel, utilities, insurance, depreciation,
interest expense, grants, professional fees, and so forth.
Beyond meaningfulness to financial statement users, functional expense
reporting is required for statements to be in conformity with accounting
principles generally accepted in the United States (GAAP), as set forth by
the Financial Accounting Standards Board’s (FASB) Statement of Financial
Accounting Standards (SFAS) No. 117, Financial Statements of Not-for-Profit
Organizations, paragraphs 26-28.
The functional presentation may be used either in the statement of activities or
the notes to the financial statements, except for voluntary health and welfare
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organizations. They are required to present a basic statement of functional
expenses, reflecting the allocation of natural expenses to functional classifications. An example of functional expenses reflected in the statement of activities
is shown on page 19. An example of functional expenses displayed in the
footnotes is shown on page 20.
The presentation of expenses as both natural and functional is meaningful
to users and is encouraged for all organizations as either a basic statement,
a note to the financial statements, or a supplemental schedule. An
example of a combined natural and functional statement is shown on
page 21.
Nonprofits that file Form 990 are required to present their expenses on a
functional basis. However, certain expenses are either not shown on the
Form 990 or not included in the functional allocation, which may cause the
functional expense allocation to differ from what is shown in the audited
financial statements.
For example, contributed services and use of facilities are excluded from total
income and expenses on the Form 990. Therefore, the functional expenses
on the Form 990 of organizations that receive contributed services or use of
facilities will not match the numbers presented in the audited financial
statements.
Expenses relating to fund-raising events are netted against fund-raising event
revenue and are shown on Part I of the 990. Such expenses, therefore, are
not included in the Form 990’s functional expense allocation.
Part II of Form 990 is a statement of functional expenses. An example of a
completed Form 990, Part II, is shown on page 22.
Program Services
Paragraph 27 of FASB Statement No. 117 provides:
Program services 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. Those
services are the major purpose for and the major output of the
organization and often relate to several major programs.
A nonprofit’s expenses must further its purposes as stated in its charter, bylaws
and, if applicable, its representations to tax authorities. The organization
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should report its major program services and the applicable expenses for each
program. Typical expenses of program services include salaries and benefits,
travel, supplies, printing, non-capitalized equipment, depreciation, and all
other direct or indirect expenses applicable to the activity.
The functional reporting classification for program services will vary from one
organization to another, depending upon the nature of each organization’s
ministries. A single functional reporting classification may be adequate to
portray the program services of some organizations. However, many
organizations provide more than one identifiable program and should report
separately for each major program or group of programs. In addition, some
organizations may want to present their program expenses by location;
e.g., region, country, or continent.
The Accounting and Financial Reporting Guide for Christian Ministries,
published by the Evangelical Joint Accounting Committee (EJAC),
provides examples of program services for various types of Christian
ministries (see pages 23-24). Use of these categories, where applicable,
will help promote more uniformity and understanding in reporting by
nonprofit organizations.
When allocating expenses to program services, there should be a
reasonable, practical, and verifiable reason for charging an expense to a
specific program. Otherwise, charge it to the appropriate supporting
activity.
Required presentation of total program services. If the components
of total program expense are not evident on the face of the statement of
activities, the notes to the financial statements should disclose total
program expense and, if applicable, provide information about why total
program expenses disclosed in the notes does not directly tie into the
statement of activities.
Example: Costs related to the sales of ministry-related products
that fulfill program purposes may be included in a contrarevenue line for cost of goods sold. In other instances, cost
of sales may be reflected in the program expense category. If
cost of sales is shown as a contra item in the revenue section,
the notes to the financial statements should identify the
amount of program expense reflected in cost of sales.
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Supporting Activities
Supporting activities make it possible to perform the program services of the
organization. These activities include management and general, fund-raising,
and membership-development.
Paragraph 28 of FASB Statement No. 117 provides:
Supporting activities are all activities of a not-for-profit organization
other than program services. Generally, they include management and
general, fund-raising, and membership-development activities.
Management and general activities include oversight, business
management, general recordkeeping, budgeting, financing, and related
administrative activities, and all management and administration except
for direct conduct of program services or fund-raising activities.
Management and General
The American Institute of Certified Public Accountants’ (AICPA) Audit
and Accounting Guide for Not-For-Profit Organizations defines management
and general expenses as:
. . . those that are not identifiable with a single program, fund-raising
activity, or membership-development activity but that are indispensable to the conduct of those activities and to an organization’s
existence. They include oversight, business management, general
recordkeeping, budgeting, financing, soliciting revenue from exchange
transactions, such as government contracts and related administrative
activities, and all management and administration except for direct
conduct of program services or fund-raising activities.
By definition, management and general activities are those that cannot be
attributed solely to a particular program service or to fund-raising or
membership-development activities. The following are examples of
management and general activities:
•
•
•
•
•
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General board and committee meetings
Executive direction and corporate planning
Office management
Corporate legal services
Procuring personnel, except volunteers
•
Receptionist, switchboard, mail distribution, filing, and other office
services
•
•
•
•
•
•
•
•
•
Organization and procedure studies
Accounting, auditing, budgeting, and external financial reporting
Internal financial and management reporting
Interest and other financing
Management information systems
A portion of occupancy costs, including occupancy-related depreciation
A portion of depreciation
Advertising
Other activities indispensable to the organization’s existence but not
identifiable with any program, fund-raising, or membershipdevelopment activity
Further clarifications include:
•
Supervision and employee training should be reported as management
and general, fund-raising, or program if they apply directly to one of
those functions.
•
Direct supervision of specific individual programs should be charged
to a specific program.
•
Costs of domestic and overseas administrative personnel not chargeable
to a specific program are to be reported as management and general.
•
Administrative costs directly related to fund-raising activities should be
charged to fund-raising.
Some activities in the preceding list above may be reported as a function other
than management and general; for example, legal services related to acquiring
land for a camping program, or committees gathered to coordinate a specific
program or fund-raising project.
Recruiting personnel. The cost of recruiting personnel for compensated
positions is normally management and general, but may be reported as a
cost of the function served by the position, unless it is not practical or the
cost of tracking such is not cost beneficial.
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Receipting contributions. Acknowledgments of contributions or dues,
including incidental elements to facilitate future gifts such as a turn-around
device and envelope, are management and general expense. However, if the
acknowledgment includes a further appeal for funds there may also be an
element of fund-raising that should be considered a joint activity and
accounted for in accordance with Statement of Position (SOP) 98-2.
Ministry awareness. Expenses incurred in keeping a ministry’s name before
the public (ministry awareness) may be management and general rather than
fund-raising, if they are considered to be advertising.
Stewardship reporting. The cost of disseminating information to inform
the public of the ministry’s stewardship of contributed funds, such as the
annual report, should likewise be classified as management and general.
However, if the activity is done in conjunction with a fund-raising appeal,
account for it in conformity with SOP 98-2.
Fund-raising
Fund-raising activities involve encouraging current and potential donors to
contribute money, securities, materials, facilities, other assets, services or time
to the organization.
Any activities that are undertaken with the anticipation of receiving
contributions are considered fund-raising activities even if the activities
do not explicitly ask for contributions. For example, an organization or
individual making support needs or investment opportunities known is
undertaking fund-raising activities. The financial statements should
disclose total fund-raising expenses.
The AICPA Audit and Accounting Guide glossary defines fund-raising activities as:
Activities undertaken to induce potential donors to contribute money,
securities, services, materials, facilities, other assets, or time. They
include publicizing and conducting fund-raising campaigns;
maintaining donor mailing lists; conducting special fund-raising events;
preparing and distributing fund-raising manuals, instructions, and
other materials; and conducting other activities involved with soliciting
contributions from individuals, foundations, governments, and others.
Fund-raising includes costs of developing, producing, and transmitting
appeals for contributions (including the appropriate portion of radio and
TV programs, printing, addressing, postage, consultants, and maintenance of
mailing lists and other records), preparation and distribution of fund-raising
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manuals, and the salaries of personnel connected with fund-raising activity.
Salaries and other expenses of any staff members involved in fund-raising
activities should be proportionately allocated to fund-raising.
Affiliate fund-raising. Fund-raising expenses for affiliates or provided to
affiliates for the purpose of fund-raising should also be charged to this function.
Recruiting volunteers. Fund-raising includes encouraging potential donors
to contribute their services and time, so costs related to recruiting volunteers
(unpaid workers) should be included in fund-raising expenses, regardless of
whether the services contributed by those volunteers meet the recognition
criteria for contributed services.
Membership-Development
Organizations that derive revenue from members’ dues generally incur
expenses related to generating that revenue. Such expenses, if material,
should be reported in a membership-development category within
supporting activities.
Expenses incurred to solicit dues which are in fact “contributions” should be
reported as fund-raising. If membership dues are in part contributions and in
part exchange transactions, soliciting membership dues is a joint activity and
should be accounted for in conformity with SOP 98-2. The determining
factor is what form of revenue results from the activity.
Membership-development does not apply to most churches, colleges, or
missionary organizations; however, associations of such organizations
frequently collect dues from their member organizations.
Paragraph 28 of the FASB Statement No. 117 provides the following:
Membership-development activities include soliciting for prospective
members and membership dues, membership relations, and similar
activities.
Membership organizations should report, in a separate category of
supporting expenses, the cost of soliciting prospective members, sending
membership renewal notices, and similar expenses, subject to the
constraints of SOP 98-2.
Joint Activities
When fund-raising activities are conducted concurrently or simultaneously
with other activities such as management and general or program services,
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they are referred to as joint activities. This is in contrast to activities that are
conducted sequentially or separately from others that may be allocated based
on specific identification of time and expenses rather than by using allocation
methods and assumptions.
Examples of joint activities include:
•
Publications and mailings – direct mail, newsletters, prayer letters,
magazines and others
•
Special fund-raising events – dinners, banquets, conferences, auctions,
performances and others
•
Support raising – deputation, furloughing missionaries, representation,
and others
Because of the unique nature of joint activities and concerns about understating
fund-raising costs and allocating expenses disproportionately to program, the
AICPA has issued specific accounting guidance on this area in its SOP 98-2
Accounting for Costs of Activities of Not-for-Profit Organizations and State and
Local Governmental Entities That Include Fund-Raising, superceding SOP 87-2,
Accounting for Joint Costs of Informational Materials and Activities of Not-for-Profit
Organizations That Include a Fund-Raising Appeal.
SOP 98-2 addresses joint costs incurred in fund-raising activities that also
have an element of program, management and general, or membershipdevelopment cost.
The default treatment of such costs is to treat them as fund-raising expense.
This is what many organizations do. However, if they meet the three criteria
outlined in the SOP and described below, the costs are to be allocated
between fund-raising and the respective program, management and general,
or membership-development categories.
The following steps summarize the approach to determine when SOP 98-2
applies to your activities, whether allocation to functions other than fundraising is permitted, how to choose an allocation methodology, and what
disclosures are required. (It is important to understand and apply the detail
provisions of SOP 98-2, rather than this highly summarized road map,
because of many applicable provisions and exceptions.)
Step one: identification of activity.
Identification must start at an “activity” level
rather than an “expense” level. The focus on
discreet activities that include fund-raising
then leads to identifying all expenses
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relating to the joint activity, including specifically identifiable costs and “joint
costs” that require the application of assumptions and methods to see how they
should be allocated among program services and supporting activities.
Step two: criteria application. Apply the criteria to see if allocation is
appropriate for “joint costs.” Joint activities must meet all three of the
following criteria in order to allocate the expenses to functions other than
fund-raising (see the complete SOP 98-2 text).
1. Purpose
The purpose criterion may be met if the purpose of the joint activity
includes accomplishing program, management and general, or
membership-development functions.
Example: A family support organization newsletter informs readers
about ministry activities that encourage continued financial support
and asks them to contact directly their state and local government
representatives to encourage them to implement specific programs
designed to educate and help victims of domestic abuse.
2. Audience
The audience criterion is presumed to have failed if the audience is
principally composed of donors or potential donors who may have been
selected based on their ability or likelihood to contribute to the entity.
However, this is a rebuttable presumption that may be overcome if the
audience is also selected based upon their need for and ability to benefit
from the component that is not fund-raising.
Example: A medical professional association conducts regional
seminars for donor/members and provides programmatic
education on the latest studies and methods to treat and
prevent premature births and miscarriages. The donor/members
previously indicated an interest in this particular topic.
3. Content
The content criterion may be met if the joint activity actually supports
a program or a management and general function, as follows:
a. Program. The joint activity must call for specific action by the
recipient that will help accomplish the organization’s mission other
than by raising funds. If the need for and benefits of the action
are not clearly evident, information describing the action and
explaining the need for and benefits of the action is provided.
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b. Management and general. The joint activity fulfills one or more
of the organization’s management and general responsibilities
through some component of the joint activity.
Example: A relief and development agency provides a report on
specific relief efforts following a disaster with a related appeal
that includes a family devotional and prayer guide with ideas for
action to assist the poor and needy.
Step three: allocation method. If an activity meets the purpose, audience, and
content criteria, then choosing a method to allocate the joint costs is appropriate.
The cost allocation methodology (see pages 11-13) used should be rational and
systematic, it should result in an allocation of joint costs that is reasonable, and
it should be applied consistently given similar facts and circumstances.
Step four: disclosure. When joint costs are allocated for activities that
include fund-raising, SOP 98-2 requires that the following information be
disclosed in the notes to the financial statements:
1. The types of activities for which joint costs have been incurred
2. A statement that such costs have been allocated
3. The total amount allocated during the period and the portion allocated
to each functional expense category
Organizations are encouraged but not required to disclose the amount of
joint costs for each kind of joint activity, if practical.
Incidental Activities
Occasionally, fund-raising, program, management and general, or membershipdevelopment activities may be conducted in conjunction with another activity
and be incidental to that other activity. When this occurs, nonprofits are not
required to allocate them and therefore may charge them to the functional
classification related to the activity that is not the incidental activity.
For example, an entity may conduct a fund-raising activity by including a
simple message, such as, “We gladly accept contributions,” on a small area of a
monthly newsletter that is otherwise considered a program, management and
general, or membership-development activity based on its purpose, audience,
and content. This fund-raising activity would most likely be considered
incidental to the program, management and general, or membershipdevelopment activity being conducted, and therefore all costs would be charged
to the program, management and general, or membership-development activity.
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Allocation Methods
There are various methods or possible bases for the reasonable allocation
of natural expenses. Allocation may be based on related financial or
nonfinancial data.
For example, salaries may be allocated between program, management
and general, fund-raising, and membership-development based on time
reports of individual workers or sample time studies. Rent, utilities, and
maintenance can be allocated based on square footage devoted to certain
activities.
Regardless of how the allocation is made, a realistic and reasonable functional
expense allocation is required.
Ministries should evaluate their expense allocation methods and related
support periodically to verify that they are still appropriate. If there is more
than one function involved that includes fund-raising, the activity will need
to be allocated to fund-raising or evaluated under SOP 98-2.
Most ministries have multiple functions; therefore, one expense may apply
to more than one function. In those cases, expenses should be allocated to
the program services and supporting activities benefited. For example, the
salary and related expenses of an individual may be allocated among two or
more activities based on the individual’s job descriptions and the use of
their time.
Example: The salary of a school teacher might be allocated to the
school ministry for eight months and to church growth and
evangelism for the rest of the year, where he or she is involved
during the four “nonschool” months.
Example: The automobile expenses of an administrator who,
in addition to the otherwise 400-mile route to a management
seminar, drives 100 miles in order to solicit a prospective donor
could be allocated 20 percent to fund-raising and 80 percent to
management and general.
To the extent such costs can be identified with a particular function and it
is practicable to allocate them, the costs should be allocated. For example,
the costs of a human resource department that are identifiable with
particular functions such as orientation of new field personnel of a
mission-sending agency and related training on cross-cultural issues should
be reported as costs of the functions to which those persons will be
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assigned. Costs of core human resource activities that are not identifiable
with a particular function should be reported as management and general
costs.
Recruiting personnel. The costs of recruiting personnel for compensated
positions may be reported as a cost of the function served by the position,
if separately identifiable from other personnel recruiting functions.
Occupancy expenses. Building expenses, such as depreciation, utilities,
and directly related interest, should be allocated to functions based on use
of the building. Often this follows the functional allocation of personnel
occupying the facilities.
Paragraph 13.39 of the AICPA Audit and Accounting Guide provides the
following:
. . . the expenses associated with occupying and maintaining a
building, such as depreciation, utilities, maintenance, and insurance,
may be allocated based on the square footage of space occupied by
each program and supporting service. If floor plans are not available
and the measurement of the occupied space is impractical, an estimate
of the relative portion of the building occupied by each function may
be made. Occupying and maintaining a building is not a separate
supporting service.
Example: A rescue mission houses all of its operations in a large
building that it rents.
•
Eighty percent of the building, based on square footage, is
used for the ministry’s programs and includes the kitchen,
eating area, classrooms, and sleeping areas.
•
Fifteen percent is used for management and general purposes
and houses the offices of the executive director, chief financial
officer, and other administrative employees.
•
Five percent is used for fund-raising purposes and includes
the development director’s office, a portion of the copy room,
and the fund-raising appeal assembly area.
The total occupancy expense for the rescue mission is $500,000
dollars a year and includes rent and utilities. Therefore,
$400,000 of the occupancy expense would be allocated to
program services, $75,000 to management and general, and
$25,000 to fund-raising.
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Interest costs. Interest costs, including interest on a building’s mortgage,
should be allocated to specific programs or supporting services to the extent
possible; interest costs that cannot be allocated should be reported as part of
the management and general function.
If interest costs are capitalized in relation to capital acquisitions and
capitalized interest costs are allocated to more than one function (or for
other reasons are not reported as a single amount in the statement of
activities), total interest cost should be disclosed in the notes to the financial
statements.
Expense allocation records. Extensive detailed records maintained for the
purpose of allocating expenses are not required; reasonable estimates based on
objective criteria may be used. However, the basis for allocating expenses
should be consistent from period to period and any changes in the basis for
allocating expenses should be disclosed.
Some commonly used allocation methods include:
•
Physical units method. Under this method, joint costs are allocated
proportionately based on number of units of output. Examples of units
of output are lines, square inches, number of minutes, and physical
content measures.
•
Relative direct cost method. This method calls for joint costs to be
allocated to the components of the respective activities on the basis of
their respective direct costs. Direct costs
are expenses that are specifically
identified with a fund-raising,
program, or management and
general function.
•
Stand-alone joint-cost
allocation method.
Under this method, joint
costs are allocated to
each component of an
activity based on a ratio.
This ratio considers
estimates of costs that
would have been incurred
even if the activities had
been conducted
independently.
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Specific Examples of Allocations
Reporting Costs Related to Sales of Goods and Services
Occasionally, ministries will sell books or operate thrift stores to help
generate revenue for the ministry. These pursuits may be a part of the
programs of the ministry, but often are not.
Paragraphs 13.19 and 13.20 of the AICPA Audit and Accounting Guide
address how to report costs related to sales of goods and services:
The way that costs related to sales of goods and services are displayed
depends on whether the sales constitute a major or central activity of
the organization or a peripheral or incidental activity. For example, a
museum that has a store that is a major or central activity should
report and display separately the revenues from the store’s sales and
the related cost of sales. Cost of sales is permitted to be reported
immediately after revenues from sale of merchandise, and may be
followed by a descriptive subtotal, or cost of sales may be reported
with other expenses. If the store sells merchandise that is related to
the museum’s program, the store would be a program service and the
cost of the store’s sales would be reported as a program expense. In
other circumstances, cost of sales could be reported as a separate
supporting service. For example, if operating a cafeteria is a major or
central activity but is not related to the organization’s programs, the
cafeteria’s cost of sales would be reported as supporting services.
In contrast, a church that occasionally produces and sells a cookbook
(considered to be a peripheral or incidental activity) has gains
(or losses) from those sales, and the receipts and related costs are
permitted to be offset and only the net gains (or losses) are reported.
(These losses are not classified as an expense so they should not be
reported by their functional classification).
Furloughs, Sabbaticals, and Study Leaves
A significant activity of most missionary organizations is furlough, also
referred to by some organizations as home service or home assignment.
Other organizations have similar activities, such as sabbaticals or study
leaves. The nature of these activities does not lend itself to usual allocation
techniques; e.g., time summarization would involve many subjective
determinations. A missionary on furlough may be involved simultaneously
in many activities.
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In order to properly allocate furlough and other leave expenses, the
organization should periodically conduct a survey of these personnel,
listing types of typical activities anticipated. Estimates should be made of
the amount of time, in hours, spent on each activity during a test period.
Activities should not be grouped or labeled, to avoid influencing the
outcome of the survey. If the survey is objective, survey results can then
be extended to achieve a reasonable allocation of these costs.
For example, the cost of the activities should be appropriately allocated among:
•
Continuing education — to the function(s) to which the individual
will return (e.g., program)
•
Rest and recuperation — to the function(s) in which the individual
was previously involved
•
•
Maintenance or development of support — to fund-raising
Ministry and program-related activities — to the program(s) affected
or to the home ministries program
•
Recruitment and guidance of new paid workers — to the function(s)
benefited
•
•
Recruitment of volunteers — to fund-raising
Administrative and reporting — to management and general
All related expenses; e.g., salary, benefits, travel, and so on, should be
allocated among the activities described above unless the person’s
assignment can be clearly identified as relating to one specific activity.
Example 1: All expenses of a missionary whose sole task is to raise
funds for a particular program or project would be charged to
fund-raising.
Example 2: A teacher who is pursuing further education on a fulltime basis during leave to enhance his or her qualifications for an
assignment should have expenses charged to that particular
assignment (program).
Catalogs
Some ministries produce catalogs providing donors the opportunity to
“purchase” items for ministry outreach. Donors may designate their gift
to buy books, tapes, and other items which the nonprofit utilizes in conducting
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program activities or to sponsor
needy children or a radio
station broadcast.
These catalogs contain
an element of program
expense, since they
accomplish some of the
ministry’s purposes, such as public
awareness. However, they are also clearly fundraising in nature. The application of SOP 98-2 is required.
The first test is the purpose test and requires that the activity should call for
a specific action by the audience that will assist the entity in accomplishing a
specific mission or goal that is unrelated to fund-raising. Most catalogs do
not meet the specific action criteria and therefore the expenses must be totally
allocated to fund-raising.
Example: A relief and development ministry publishes an annual
Christmas catalog. Donors have the opportunity to support the
ministry’s programs by “purchasing” specific items to be used or
given away by the ministry. The catalog includes medical kits,
farm animals, housing items, and more. The catalog does not
include a call for a specific action, rather its purpose is strictly to
raise funds for the ministry. Therefore, all expenses related to the
Christmas catalog are allocated to fund-raising.
Annual Reports
Many ministries publish an annual report to inform donors and others
interested in the ministry’s accomplishments. These reports typically focus
on ministry outputs and accomplishments, devoting only a small portion
of the report to the finances of the ministry — how much money was
donated, how it was spent, etc. The portion devoted to the financial status
of an organization does not typically contain an appeal. The primary
purpose is to inform.
Assuming that no appeal is present, this would not be considered a fundraising expense, rather, it would represent a management and general cost.
This fulfills a stewardship responsibility of reporting back to supporters on
the use of resources.
Example: A church denomination publishes an annual report
to inform its members of its program accomplishments and
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financial status for the year. Although financial information is
included in the annual report, it is strictly informative and does
not contain a fund-raising element. The expenses directly
related to the annual report are functionally allocated to
management and general.
Newsletters
Newsletters may serve to inform the supporters of a ministry about the
condition, events, specific stories, and more about the operations of a
ministry. They may or may not contain information that would be
considered program to the readers of the newsletter. In addition, they may
or may not contain fund-raising. Consideration should be given to whether
or not a fund-raising element exists. There may be one of the following:
•
•
•
Fund-raising appeal
Financial information, but no appeal
No financial information included
Newsletters only represent program expenses if they result in providing
program services to the readers of the newsletter. If such newsletters contain
fund-raising, the SOP 98-2 criteria are met.
Talking about program is not program. How is the text of the newsletter
(or prayer letter — see below) viewed by the recipient? Does the newsletter
teach the reader, for example, how to be a better father or husband? Does
it challenge the reader to a deeper spiritual walk with Christ? If so, these
represent program expenses. If the material is oriented toward providing
information and telling stories about program accomplishments, this most
likely represents management and general costs.
Prayer Letters
These types of letters typically describe the ministry accomplishments and
request prayer for specific events, people, and ministries. They may or
may not mention the finances of the ministry. In some cases, they may
not mention the finances but enclose a separate financial response vehicle
in the envelope. Consideration should be given to whether or not there is
fund-raising through one of the following:
•
•
Fund-raising appeal
Financial information but no appeal
17
•
•
No financial information in the letter, but a response vehicle enclosed
No financial information included
Prayer letters may represent fund-raising or management and general,
depending on whether they represent reporting back to supporters or
maintaining support. Also, if they include a “call to action” and meet the
criteria of SOP 98-2, an allocation may be made to program.
Grants (Including Support to Affiliated Organizations)
Foundations, trusts, and other organizations sometimes make contributions
in the form of grants to individuals and to domestic or foreign entities,
including local, national, and international affiliates. Grants may be either
contributions or exchange transactions. The amount of such grants should
be disclosed separately in the financial statements or footnotes.
If the specific purposes of payments to affiliates are determinable (for
example, to carry out a specific program or to raise funds), the expenses
should be recorded by their functional classification.
If portions of payments to affiliates cannot be allocated to specific functions,
those portions should be reported on the statement of activities as a separate
supporting activity on a line labeled “unallocated payments to affiliated
organizations.”
Summary
Functional expenses represent the intended purposes for which costs are
incurred. However, it is more important to evaluate and monitor the
programmatic “outputs” that result from the expenditures and to measure
the outcomes or accomplishments.
It is vital for a ministry to develop information and methods to report
accomplishments related to its mission and exempt purposes. Only then
can the organization itself and its constituencies evaluate the efficiency
and effectiveness of its operations.
18
Exhibit A
Statement of Activities
December 31,
2008
Changes in Unrestricted Net Assets:
Support and revenue
Contributions
Donated skilled services (see note x)
Interest income
Total unrestricted revenue
$
Net assets released from restrictions:
Satisfaction of equipment acquisition
restrictions
Satisfaction of time restrictions
Total revenues, gains, and other support
Expenses:
Program services:
Program A
Skilled services contributed
Supporting activities:
Management and general
Fund-raising
Total expenses
Increase (Decrease) in unrestricted net assets
Changes in Temporarily Restricted Net Assets:
Contributions
Net assets released from restrictions
Increase (Decrease) in temporarily restricted
net assets
Change in Net Assets
Net Assets, Beginning of Year
Net Assets, End of Year
$
70,631
8,640
112
79,383
2007
$
35,401
35,401
6,000
2,000
8,000
-
87,383
35,401
49,436
8,640
58,076
26,031
26,031
11,397
8,421
4,695
3,410
77,894
34,136
9,489
1,265
(8,000)
8,000
-
(8,000)
8,000
1,489
9,265
10,754
9,265
9,265
$
Note: This is an example of reflecting the functional expense allocation in the
body of the statement of activities.
19
Exhibit B
Notes to Financial Statements
December 31, 2008
Functional Allocation of Expenses
The cost of providing the various programs and other activities
have been summarized in the financial statements. Accordingly,
certain costs have been allocated among the programs and
supporting services benefited.
Expenses for the year are classified as follows:
Program services
Program A
Skilled services contributed
Supporting activities
Management and general
Fund-raising
Total Expenses
2006
2005
$ 50,036
8,640
58,676
$ 26,031
26,031
10,797
8,421
4,695
34,136
$ 77,894
$ 34,136
Note: This is an example of reflecting the functional expense allocation in the
footnotes to the financial statement instead of in the statement of
activities.
20
Exhibit C
Statement of Functional Expenses
Year Ended December 31, 2008
Program A
Contributed
Program Management
Services and General Fund-raising
Total
Salaries, wages benefits
Travel
Supplies
Printing
Professional services
Accounting fees
Legal fees
Occupancy
Depreciation
Interest
Telephone
$ 38,520
1,250
1,881
2,866
$ 8,640
-
$ 6,420
207
$ 6,420
870
191
$ 60,000
2,120
1,881
3,264
4,500
600
419
-
2,500
500
750
200
15
205
750
190
2,500
500
6,000
800
15
814
Totals
$ 50,036
$ 8,640
$10,797
$ 8,421
$ 77,894
Note: Although not required by accounting standards for nonprofits other than
voluntary health and welfare organizations, many nonprofits find the
inclusion of a statement of functional expense helpful to readers of the
financial statements.
21
Exhibit D
22
Exhibit E
Typical Categories of Program Services
Schools, Bible Schools, and Seminaries
Bible schools
Correspondence schools
Christian training institutes
Extension programs
Seminaries
Seminars/conferences
Education
Other
Churches, Church Growth, and Evangelism
Bible classes
Camps
Church ministry
Church planting
Church relations
Christian education,
Sunday school,
vacation Bible schools
Prison ministries
Fellowship
Youth clubs, youth
centers, hostels
Evangelism
Evangelistic crusades
Military ministry
Counseling
Music
Missions
Worship
Other
Education/Training Ministry (other than Bible Schools and Seminaries)
Adult literacy
Candidate training schools
Children’s schools
Day-care centers
Elementary schools
Kindergartens
Orphanages
Colleges
Preschools
Retreat centers
Schools for the
handicapped
Secondary schools
Seminars
Teacher training
Libraries
Music
Arts
Sports
Other
Linguistics Ministry
Anthropology
Linguistics
Literacy materials
Specialized training schools
Translation
Other
Camps
Food service
Horse ranches
Adult conferences
Day trips
Youth camps
Other
23
Typical Categories of Program Services (continued)
Media Ministry
Bookstores and distribution
Cassettes
Films (not used for
recruiting or fund-raising)
Printing
Publications
Radio
Tape ministry
Television
Tracts
Other
Medical Ministry
Crisis pregnancy centers
Dental clinics
Hospitals
Medical training schools
Pharmacies
Primary health care
medical clinics
Public health
Other
Ministry to Constituency (other than fund-raising activities)
Furlough ministries
Home service ministries
Magazine and media
Reports
Prayer bulletins and
reporting
Spiritual counseling
Other
Relief, Rehabilitation, and Community Development Ministry
Agriculture training
Clothing distribution
Community planning
Food distribution
Food production
Industrial training
Medical services
Resettlement
Water development
Other
Services to Missions/Churches
Aviation
Computers
Construction
Development and
maintenance
Radio
Retirement facilities
Vehicles
Other
Rescue Missions
Medical clinics
Food service
Housing
Public education
24
Rehabilitation
Thrift stores
Other
Resources and Authoritative Literature
Statement of Financial Accounting Standards (SFAS) No. 117, Financial
Statements of Not-for-Profit Organizations. Available from the Financial
Accounting Standards Board at www.fasb.org or by calling (800) 748-0659.
Statement of Position (SOP) 98-2. Available from the AICPA at
www.cpa2biz.com or by calling (888) 777-7077.
AICPA Audit and Accounting Guide for Not-for-Profit Organizations.
Available from the AICPA at www.cpa2biz.com or by calling (888) 777-7077.
Accounting and Financial Reporting Guide for Christian Ministries by
the Evangelical Joint Accounting Committee. See the inside front cover of
this booklet for ordering information.
EVANGELICAL COUNCIL FOR FINANCIAL ACCOUNTABILITY
440 WEST JUBAL EARLY DRIVE, SUITE 130
WINCHESTER, VA 22601
540-535-0103 • 800-323-9473
EMAIL: information@ECFA.org
WEB: www.ECFA.org