Allocation Methodologies

03 Apr 2018

Did you know that there are new FASB standards that are now in effect for nonprofits?

The new guidelines went into place beginning December 15, 2017 for the calendar year 2018 and Fiscal Year beginning July 1st, 2018. For the first time since 1993 the reporting standards have been updated. It is an effort to make the financial statements more transparent and straightforward. Its goal is to give stakeholders a clearer picture of the overall entity’s financial statements.

The first major change will involve the classification of net assets, currently there will be only two classes instead of the previous 3 classes. The new classification will be as follows: Without donor restriction, which is the old unrestricted net asset class and with donor restriction which is the old permanently restricted and temporarily restricted net asset classes. Not-For-Profits must present total net assets with donor restriction, total net assets without donor restriction, and total net assets in the statement of financial position. The main idea is to keep track of donor imposed restrictions along with presenting more pertinent information on the financial statements in regard to the amounts and types of donor restrictions. It will have a cleaner look on the financials with only two columns necessary. The restrictions on net assets, however, will still need to be outlined within the footnotes.

The second big change is to the presentation of liquidity within the statement of financial position. Nonprofits will now need to present a classified statement of financial position (splitting short term and long term assets and liabilities). In addition, there will now be a reconciliation in the footnotes that shows what resources are available for use in the following year. In addition, there will be a need for additional disclosures about the particular management strategies in relation to having cash available to meet regular annual expenses. This will help prospective readers of the financials achieve a greater awareness of the financial position of the Not-For-Profit.

The last major change will be the presentation of expenses. All not-for-profit organizations will now be required to present a statement of functional expenses, not just health and welfare organizations. There will also be an explanation needed as to the methodologies used to allocate expenses. Not-For-Profits will have a choice to disclose this in the footnotes or in the actual financial statements themselves.

In addition to directly charging expenses, organizations should establish formal allocation methodologies to track their expenditures. GAAP requires all costs be reasonable, allowable, allocable, and the methodologies should be consistently applied. The allocation methods used one year should be used the next, unless a noteworthy event has occurred that will warrant such a change.

Not-for-Profits must develop a methodology for allocation of indirect costs (ex. rent, utilities, telephone, repairs and maintenance) and then execute strategy to put the methodology into place.

For instance, an acceptable allocation methods for expenses such as utilities, rent, household supplies, and other occupancy related costs, would be square footage.

All non-profits must have documentation of their cost allocation methods for both people inside the organization, auditors, and prospective readers of the financial statements and review the allocations quarterly. Remain consistent in their cost allocation methods from year to year, and program to program.

Remember the most important points about Cost Allocations:

  • Directly apply costs where possible.
  • Always have documentation for allocation of hours, square footage and indirect costs.
  • Consider time studies for payroll related costs.
  • Review your methodologies quarterly to make sure they are still reasonable.
  • Consistently apply methodologies where appropriate.
  • Make sure allocation methodologies are simple, reasonable, and supportable.

This article was also featured in our newsletter NFP Advisor Vol. 17