Non Profit Cost Allocation Plan Strategies Mastering the State's Tax - - PowerPoint PPT Presentation

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Non‐Profit Cost Allocation Plan Strategies

Mastering the State's Tax Reform and Planning for Flow‐Through Income, Tax Credits and Other Issues

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUESDAY, JULY 26, 2011

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Hydeh Ghaffari Senior Partner Ghaffari Zaragoza Oakland Calif Hydeh Ghaffari, Senior Partner, Ghaffari Zaragoza, Oakland, Calif. Colette Kamps, Senior Manager, Henry & Horne, Scottsdale, Ariz. Jean Gilbert, Outsourcing Senior Manager, Raffa, P

.C., Washington, D.C.

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N P fit C t All ti Pl Non‐Profit Cost Allocation Plan Strategies Seminar

July 26, 2011 Colette Kamps, Henry & Horne

colettek@ hhcpa.com

Hydeh Ghaffari, Ghaffari Zarogoza

hydeh@ gzaaccounting.com

Jean Gilbert, Raffa, P .C.

jgilbert@ raffa.com

Today’s Program

Tying Together Three Frameworks [Hydeh Ghaffari] Slide 7 – Slide 15 Definitions Of Relevant Concepts [Colet t e Kamps] Slide 16 – Slide 26 GAAP/Tax Differences And Federal Awards [Hydeh Ghaffari] Slide 27 – Slide 36 Determining An Allocation Methodology [Jean Gilbert ] Slide 37 – Slide 47

TYING TOGETHER THREE

Hydeh Ghaffari, Ghaffari Zaragoza

TYING TOGETHER THREE FRAMEWORKS

Allocating Costs: Information Availability

• Financial statements
• Audited financial statements open to public inspection in

some states so e states

• Made available to funding sources by management
• Increasingly posted on NFPs’ websites
• Tax returns
• Form 990 is open for public inspection

Form 990 is open for public inspection

• Posted at Guidestar

8

Allocating Costs: Importance

• Measure of stewardship
• Increasing public scrutiny
• Increasing public scrutiny
• Watchdog groups
• Donors
• Advisors
• Faulty bookkeeping
• Faulty bookkeeping
• Intentional misrepresentation

9

Allocating Costs: Uses

• Informed decision-making
• Externally

― Governmental funding sources Governmental funding sources ― Private funding sources ― Watchdog groups (rating)

• Internally

― Cost of program activity or a project within the activity Full recovery of costs ― Full recovery of costs ― Whether to respond to an RFP ― Self-evaluation

10

Allocating Costs: Framework

• Cost assignment
• Cost directly benefits the final cost objective
• Cost directly benefits the final cost objective.
• Cost allocation
• Cost benefits two or more final cost objectives, to a

degree. ― Cost allocation basis Cost allocation basis ― Cost allocation methods

11

Allocating Costs: Framework (Cont.)

• GAAP
• ASC 958-720-45
• AICPA A&A Guide, Chap. 13
• Required at entity level

― Program activities ― Administration (management and general) ― Fundraising ― Membership

• Internal Revenue Service
• Part IX: Statement of Functional Expenses

― Program services ― Management and general ― Fundraising R i d f 501( )(3) d 501( )(4) i ti d t i t t

• Required for 501(c)(3) and 501(c)(4) organizations and certain trusts

12

Allocating Costs: Cost Assignment

• Activities (GAAP)

( )

• Program activities (not a funding source)

― Provider trainings Respite services ― Respite services ― Daycare services

• Administration (management and general)

― Overall administration of the organization (governance, marketing, strategic decision-making, financing, etc.) ― Obtaining and responding to RFP related to exchange transactions

• Fundraising

― Solicitation of contributions

• Membership development (Not donor development)

13

Allocating Costs: Cost Allocation

• Cost benefiting one or more activities as defined in the previous slide
• Facility-related costs

― Operations (copier, rent, postage, etc.) ( ) ― Cost of people maintaining the facility

• Joint activities

― Cost of an activity with a fundraising component ― Cost of an activity with a fundraising component

• Cost benefiting several projects within an activity
• Provider training

h

• Training the trainers
• Cost benefiting various population served within an activity
• E.g., residents of Alameda County
• People affected by HIV virus

14

Allocating Costs: Definition

• Final cost objective

Final cost objective

• A project, or
• A program activity, or
• Certain population, or
• An award, or
• Another direct activity of an entity for which costs can be
• Another direct activity of an entity for which costs can be

accumulated

• Direct cost
• Cost that can be assigned directly to a final cost objective
• Shared
• Cost for which a cost allocation method and basis should

Cost for which a cost allocation method and basis should be used

15

DEFINITIONS OF RELEVANT

Colette Kamps, Henry & Horne

DEFINITIONS OF RELEVANT CONCEPTS

Allocating Costs:

What situations require cost allocations?

• Natural vs. functional
• Accounting standards
• Require nonprofits to report expenses by functional

l f classification

• Voluntary health and welfare organizations are required to

present a Statement of Functional Expenses V l t h lth d lf i ti F d f

― Voluntary health and welfare organization: Formed for

the purpose of performing voluntary services for various segments of society; organized for the benefit of the

• public. It concentrates efforts in attempt to solve health
• public. It concentrates efforts in attempt to solve health

and welfare problems.

17

Allocating Costs:

Definitions and descriptions

• Program expenses
• Supporting services expenses
• Management and general expenses

F d i i

• Fundraising expenses

18

Allocating Costs:

Definitions and descriptions (Cont.)

• Program expenses: Expenses related to activities carried out to

fulfill the mission; include both direct and indirect expenses b f l l f l d b

• Reporting by functional classification includes reporting by

major program and supporting expenses

• Need to determine the organization’s major programs

R i j d t d k l d f th i ti

• Requires judgment and knowledge of the organization

19

Allocating Costs:

Definitions and descriptions (Cont.)

• Considerations in determining major programs
• Report as a separate program if revenues or expenses are
• Report as a separate program if revenues or expenses are

> 10%

• Separately report programs making up (in total) at least

75% f t t l 75% of total program expenses

• Is discrete program financial info available?
• Does management separately evaluate?

g p y

• Form 990 requires disclosure/description of three largest

programs M th 10 b l d t il d

• More than 10 may become overly detailed

20

Allocating Costs:

Definitions and descriptions (Cont.)

• Supporting services expenses
• Management and general
• Fundraising

M b hi d l

• Membership development

21

Allocating Costs:

Definitions and descriptions (Cont.)

• Management and general expenses
• Relate to the overall direction of the organization
• 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.

• Include oversight, business management, record keeping,

budgeting, financing

22

Allocating Costs:

Definitions and descriptions (Cont.)

• 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

d l (h )

• Procuring and retaining personnel (human resources)
• Office services (receptionist, mail distribution, filing duties)
• Preparing the annual report
• Disseminating information to the public about the
• rganization’s use of donated funds
• Costs of advertising for ticket sales or admissions of a

performing arts organization museum zoo or similar performing arts organization, museum, zoo, or similar

• rganization

23

Allocating Costs:

Definitions and descriptions (Cont.)

• Further consideration of advertising expenses
• Is the purpose of the advertising primarily to generate
• Is the purpose of the advertising primarily to generate

revenue from services/admissions, or is it primarily to promote the organization and its 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? the organization s programs?

24

Allocating Costs:

Definitions and descriptions (Cont.)

• Fundraising expenses: Costs related to activities that involve

inducing potential donors to contribute assets (cash and non- cash), services or time

• Common types
• Conducting of fund-raising campaigns

Conducting special events

• Conducting special events
• Maintaining donor lists
• Preparing/distributing fund-raising materials

R iti l t ( if t i d)

• Recruiting volunteers (even if revenue not recognized)
• Conducting solicitations
• Professional fund-raiser (do not net with revenue)

O h i i i i l i li i i ib i

• Other activities involving soliciting contributions

25

Allocating Costs (Cont.)

Problems with fundraising costs/ratios

• Problems with fundraising costs/ratios
• Allocations are often subjective, not objective.
• Some contributions do not requiring ongoing fund raising

q g g g g expenses (bequests, ongoing foundation support)

• Highly dependent on nature of the organization
• The ratio can be affected by temporary events (stage of a
• The ratio can be affected by temporary events (stage of a

capital campaign, the economy)

26

GAAP/TAX DIFFERENCES AND

Hydeh Ghaffari, Ghaffari Zaragoza

FEDERAL AWARDS

Allocating Costs: GAAP/Tax Differences

• Form 990: Part IX (Sect. 501(c)(3), 501(c)(4) and certain trusts
• Requires reporting of expenses in the following columns:

― Programs ― Management and general Management and general ― Fundraising

• Management and general

Cost of obtaining and responding to RFPs for exchange ― Cost of obtaining and responding to RFPs for exchange transactions from governmental sources ― GAAP: Management and general ― Tax: Fundraising ― Shared costs when using simplified method of shared cost allocation ― GAAP: Reported under shared cost column ― Tax: Combined with management and general

28

Allocating Costs: GAAP/Tax Differences (Cont.)

• Fundraising
• Fundraising

― No other differences other than that described under management and general in the previous slide

• Programs

― Costs of an activity with related and unrelated components components ― Cost of publication with: ― Educational content ― Advertising content ― GAAP: The advertising content is “management and general” cost general cost ― Tax: The advertising content is “programs” cost

29

Allocating Costs: Federal Awards

• Only applicable if NFP expends:
• Direct federal awards subject to regulations
• Indirect federal awards subject to regulations
• Only applicable to charging expenses against the award vs. assigning

and allocating costs to the organization’s activities

• Cost principles (Circular A-21, A-87 and A-122)

Cost principles (Circular A 21, A 87 and A 122)

• OMB Circular A-122 (2 CFR Part 230)
• Final cost objective

Direct cost of the award (not the entity)

• Direct cost of the award (not the entity)
• Indirect cost of the award (not the entity)
• Personnel costs

30

Allocating Costs: Federal Awards (Cont.)

• Final cost objective
• An award, OR

― Providing training to foster parents residing in Alameda County

• A project, OR

― Providing training to foster parents

• A service, OR

― Providing training (Foster parents, adoptive parents, respite care providers, etc.)

• Other direct activity of an entity

― An employee should be clear about the effort spent in the cost

• bjective
• bjective

― I worked 20% of my time providing training to foster parents ― I worked 20% on the project funded by Department of Health and Human Services and Human Services

31

Allocating Costs: Federal Awards (Cont.)

• Direct cost of the award
• Direct cost of the final cost objective
• Cost that can be directly identified with the cost objective

Payment to trainers providing the training ― Payment to trainers providing the training ― Material used during the training ― Cost of facilities used for the training

• Indirect cost of the award
• At cost objective level

― Cost that benefits two or more cost objectives ― Salary of director of training (oversees all various types of training) ― Supplies cost (when supplies are used by all different types of trainings)

• At entity level

At entity level ― Cost of organizational facilities (i.e. shared costs) ― Management and general costs of the organization

32

Allocating Costs: Federal Awards (Cont.)

• Different levels of cost allocation
• Different levels of cost allocation
• Entity level

― Allocate shared costs to all activities with the organization P l l

• Program level

― Allocate shared costs that benefit all program activities

• Project level

― Allocate shared costs that benefit various population/projects within a program activity

• Funding source level

g ― Allocate final cost objective costs between two or more funding sources ― Unless expressly required by the funding source, not Unless expressly required by the funding source, not recommended by the presenter

33

Allocating Costs: Cost Allocation Plans Vs. Indirect Cost Rates

• Cost allocation plans
• To ensure that all costs benefiting a final cost objective are

accounted for

• No one acceptable method
• No one acceptable basis
• No two organizations are similar

No two organizations are similar

• Indirect cost rates
• Vehicle to recover costs that are indirect to an award

Few acceptable methods described in OMB circulars

• Few acceptable methods described in OMB circulars

― Simplified method of allocation (indirect cost = M&G + shared) Di h d f ll i (i di &G) ― Direct method of allocation (indirect cost = M&G) ― Multiple allocation base method (multiple indirect cost pools)

34

Allocating Costs: Cost Allocation Plans Vs. Indirect Cost Rates (Cont.)

Cost allocation plan Direct costs: M&G $300,000 Indirect cost rate (simplified method, basis = direct costs) Direct costs: Fundraising $300,000 Fundraising 200,000 Programs 2,000,000 Direct costs $2,500,000 Shared costs (entity level) 1,000,000 Programs 2,000,000 Direct costs $2,300,000 Indirect costs: M&G $300,000 Shared costs (entity level) 1,000,000 Total cost $3,500,000 Shared costs 1,000,000 Indirect costs $1,300,000 Indirect cost rate (1,300,000/$2,300,000) 56% (1,300,000/$2,300,000) 56% Assumption – All indirect costs are allowable

35

Allocating Costs: Federal Awards (Cont.)

• Personnel costs
• Largest cost
• Personnel files to substantiate the employment and rate of pay
• Personnel manuals to substantiate benefits
• Time effort reporting to substantiate allocation of salaries and

benefits to federal awards benefits to federal awards

• Time effort reporting required by OMB Circular A-122
• After-the-fact determination of actual activity

Signed by employee or a responsible supervisor

• Signed by employee or a responsible supervisor
• Prepared at least monthly, and
• Coincide with one or more pay periods

36

DETERMINING AN

Jean Gilbert, Raffa, P.C.

ALLOCATION METHODOLOGY METHODOLOGY

Allocating Costs: Identify Goals

• The reason we allocate costs is to determine the true cost of
• The reason we allocate costs is to determine the true cost of

any activity.

• Function
• Program
• Project

38

Allocating Costs: Basic Definitions

• Understand the difference between direct and indirect costs
• Understand the difference between direct and indirect costs
• Direct costs: Costs that are unique and exclusive to the

activity

• Indirect costs: Costs that are shared resources used by the

entire organization

39

Allocating Costs: Basic Definitions (Cont.)

• Indirect cost pool: This is a grouping of indirect costs that
• Indirect cost pool: This is a grouping of indirect costs that

must be allocated.

• Cost driver: The criterion upon which a cost pool is allocated

40

Allocating Costs: Drivers

• When a driver is identified it should be:
• When a driver is identified, it should be:
• Reasonable
• Logical
• Defensible

41

Allocating Costs: Drivers (Cont.)

• Reasonable
• Common element to all activities
• Common element to all activities
• Usually the highest expense

― Examples: Headcount, square footage, $ value of time, total direct expenses

42

Allocating Costs: Drivers (Cont.)

• Logical
• It is direct and proportional
• It is direct and proportional.
• It is based on the efforts and costs of the activity itself,

not the outcome. ― Example: Payroll based on effort expended on activity

43

Allocating Costs: Drivers (Cont.)

• Defensible
• The results are fair and consistent
• The results are fair and consistent.
• The results can be duplicated.
• The methodology is documented.

― Example: The auditor can take your methodology and duplicate the results duplicate the results.

44

Allocating Costs: Drivers (Cont.)

• Examples of drivers
• IT costs for HQ and regional offices for a national
• IT costs for HQ and regional offices for a national
• rganization

― Number of employees per location ― Square footage used per location ― Payroll costs per location

45

Allocating Costs: Where To Allocate

Program services allocations: The cost pool is 100% allocated to all program services. (OMB) Reciprocal allocations: The cost pool is allocated only to the extent that the driver allows costs to be allocated from the pool (GAAP) from the pool. (GAAP)

46

Allocating Costs: Best Practices

Use the same driver for multiple line items, in order to keep your analysis as simple as possible. Be consistent. Use the same driver and allocation methodology every year. If you have a good reason to change drivers then recalculate the prior year for change drivers, then recalculate the prior year for comparability.

47