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?


“Top 10 questions that Ministers, Missionaries, and Church Treasurers Ask Tax Preparers”

Corey Pfaffe, CPA, provides answers to those top 10 questions at MinistryCPA.

The questions, with links to each answer, can be found here.

You can download a superb 12 page PDF of the full set of answers here.

If you are a pastor, missionary, church treasurer, or on the finance staff of a charity, I recommend you check out Prof. Pfaffe’s superb explanations. Get professional advice to apply the information to your situation or if you need to go beyond the very straightforward answers.

There is a bonus question: (more…)

3 more Q&As on a church paying for services – do you see a pattern of answers saying payments are normally taxable and typically to an employee?

If you do a bit of research on paying people being compensation or whether to treat them as employee or independent contractor, you will see an obvious trend in the discussions.  

If someone is providing services to your church and you pay them, there is usually going to be some taxable income.  It is fairly unusual for those services to be in the category of independent contractor.  

Corey Pfaffe has three more Q&A discussions posted at MinistryCPA blog.  All deal with whether amounts paid to a person for services are taxable and whether such payments should be reported on a W-2 as an employee or on a 1099 as an independent contractor: (more…)

What should you capitalize along with the contract price of the equipment you just bought?

“All expenditures incurred in acquiring the equipment and preparing it for use,”

is the very short answer from Danny Oertle in his post at Nonprofit GPS, Not-for-Profit Organizations Acquiring New Fixed Assets – What Should You Capitalize?


Another article on donated meds and overhead ratios – the impact of substitution on our thinking process

An Op-Ed in the Los Angles Times by Jack Shakely, president emeritus of the California Community Foundation, discusses the impact of donated medicines on the functional allocation:  The worst way to judge a charity.

A friend of his was grouching about another NPO buying meds for $0.10 a pill and booking them as GIK revenue at $7.00.  Mr. Shakely looked at the organization’s web site and found they claim 90% of the contributions go to program, with 5% to G&A. That leaves 5% for fundraising.

He then wonders why we are putting so much emphasis on the functional allocation as the main measure of an NPO.


Cash flow classification for donated securities that are liquidated upon receipt

A nice clarification from the EITF…

One of the fuzzy places in the accounting literature for nonprofits is how to handle donated securities that are liquidated when they are received.

Here is the approach that most organizations take – Since they are not in the business of the investing in the stock market they transfer donated securities to their broker and liquidate them in an orderly manner.

How should those be presented on the cash flow statement? There’s divergence in practice, but I think the most common way is to reflect the liquidation has an investing inflow.

Exposure draft from the FASB will make the presentation consistent.


Q: Are overhead ratios the perfect measure of NPO efficiency and effectiveness?

A: No way.

This is the conclusion of Saundra Schimmelpfennig in her e-book, Lies, White Lies, and Accounting Practices; Why nonprofit overhead doesn’t mean what you think it means

Many people believe that the ratio of supporting services to total expenses is the ideal way to measure the efficiency of a nonprofit organization.

Even at a conceptual level, that is a flawed idea.

At a practical level, Ms. Schimmelpfennig explains it is so easy to play games with the functional allocation that the overhead ratios should be viewed skeptically.