An illustration why interpreting functional allocation information is difficult: the Wounded Warrior Project financials

Apparently there is conflict going around on how to interpret the functional expense allocation information for Wounded Warrior Project.

All their info is laid out in their audited financial statements, which you can find here. Their annual report, audited financial statements, and 990s for the last eight years are all available on their website. Good on them for making all that info readily available. That is an example for all charities to follow.

How can three different calculations all be correct?

Prof. Brian Mittendorf discuss the different interpretations in his post, Reconciling Views of Spending by the Wounded Warrior Project. He explains why you can argue that any one of the following allocations of expenses accurately reflects their operations:

  • Prog G&A  F/R
  • 80%  4%   16%
  • 73%  6%   21%
  • 55%  6%   39%

The issue is how you believe donated advertising and joint costs of educational efforts should be handled. Change how to handle either of those factors and the ratios change.

How you answer those questions will drive which percentage you believe is most accurate.

Another factor entering the discussion: Do you believe a charity should spend a bunch of money now in order to build an infrastructure and reputation so that they can raise huge amounts of money for a long time into the future?

Current year income is $304M with expenses of $219M, leaving an $85M bottom line. Should they have spent that last year or should they spend it over the next few years?

Do you believe a charity should save a huge surplus today so it can sustain future programs when income fluctuates?

The word ‘sustainability’ is one you can use to frame up the answer to those questions.

It’s complicated

The WWP financial statements show how difficult and nuanced it is to interpret the functional allocation information. Also shows why the “overhead” word is misleading.

The deeper issues of what time horizon to use in analyzing numbers is visible above. Do you look at this year or do you look at what their plans are and what happens over several years?

What do I think?

I think the 80%/4%/16% numbers reflect the proper allocation under GAAP. Nothing more; nothing less. There is an audit opinion around those amounts, so I will strongly argue that is the correct GAAP calculation.

What do you think?

What’s the best way to look at the organization? Lots and lots of detail is laid out in the financials and tax returns so you can do your own analysis.

Make up your own mind.

Check out the professor’s explanation why each option is correct based on how you interpret the above issues.

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