Joint Costs & Social Media
November 8, 2013 Dennis Morrone and Priti Singh
Social media have become an effective tool for nonprofits to raise awareness, change public attitudes and behaviors toward a social issue, attract donors, educate chosen constituents and publicize programmatic successes.
Given its proliferation and relevance to our busy lives, social media’s delivery of timely, impactful and concise messaging has become the preferred source of many individuals for receiving information. It has been shown to garner great response as nonprofits slowly draw away from direct mail programs. In light of the cultural shift, it is logical for nonprofits to embrace this technological innovation.
Nonprofits can fashion marketing techniques to educate the public, promote awareness and use this media as an effective method to meet their goals. Through careful, timely and intentional positioning, the chosen social media channel can be focused to appeal to a particular audience with amazing results.
All forms of social media are used by nonprofits, with possibly the greatest use within higher education to attract prospective students, stay connected with alumni and appeal to donors.
Questions prompted in cost accounting
As the use of social media pervades nonprofit operations, the costs — either purchased or contributed — associated with developing, producing and positioning social media present new accounting challenges. The nature of the expenses associated with social media should be understood, properly captured and accurately reflected in the organization’s statement of activities, and when appropriate, in the statement of functional expenses, too.
Social media are no longer just a fundraising tool. The dramatic increase in both the volume and the types of social media, as well as the increase in costs associated with its placement, require a more thoughtful and detailed analyses of how social media channels are being used. The intended use of social media will affect how the related costs are classified between programmatic and support activities. There are practical ways to expediently inventory and allocate social media costs among programmatic, administrative and fundraising activities.
Inventorying and allocating costs
The Financial Accounting Standards Board (FASB) and the Internal Revenue Service (IRS) provide definitions of fundraising expenses. FASB considers all activities undertaken to induce potential donors to contribute money, securities, services, materials, facilities, other assets or time as fundraising.
The IRS instructs nonprofits as follows: “Report as fundraising expenses all expenses, including allocable overhead costs, incurred in: (a) publicizing and conducting fundraising campaigns, and (b) soliciting bequests and grants from foundations or other organizations.”
Typical examples of fundraising expenses include:
- Postage and printing;
- Telephone and Internet charges;
- Staff time devoted to writing grant proposals and other costs related to applying for or renewing grants and reporting on grants received;
- Maintaining relationships with funding sources;
- Special events meant to result in contributions;
- Development and production of fundraising materials such as annual reports and broadcast and other forms of social media content, and related distribution;
- Collection of contributions; and,
- All indirect costs of the above, especially salaries and benefits of related personnel.
Program services are defined by FASB as “the activities that result in goods and services being distributed to beneficiaries, customers, clients or members in fulfillment of the purpose(s) or mission for which the nonprofit exists. Those services are the major purpose for and the major output of the nonprofit and often relate to several major programs.”
Supporting services are defined in the FASB ASC glossary as “all activities of a nonprofit, other than program services. Generally, they include management and general activities, fundraising activities, and membership-development activities.”
Most nonprofits incur costs pertaining to several separate and identifiable programs; the expenses for these activities should be disaggregated. Direct identification of specific expenses in furthering and accomplishing program objectives is the preferred method for assigning expenses to program services.
However, if direct identification and assignment of costs to program and support service categories is impractical or determined to be impossible, an allocation methodology — if rational, consistently applied and reasonable — is considered appropriate.
Appropriate social media methodology
Nonprofit managers should consider the cost effectiveness of scrutinizing individual expenses if the resulting cost accounting precision is not materially different from the application of a practical and more expedient allocation measure. A reasonable allocation of expenses among a nonprofit’s program and support service categories can be accomplished by applying a variety of methodologies.
Expense allocations may be based on related financial and nonfinancial data or a combination of both. For example, a methodology predicated on financial data would include an allocation of costs based on the salaries of the personnel across disciplines and departments within a nonprofit, coupled with the hours incurred to develop and display a particular form of social media.
Expense application methodologies based on nonfinancial data would include the number of respondents to a solicitation and the number of internet hits or searches for program-related materials, e.g., a call to action measurable by the nonprofit.
The costs associated with each type of social media are often hard to capture, particularly when media are donated, displayed in different venues and at different times, and are a composite of donated, purchased and internally developed content. This issue is further complicated when a nonprofit shares a form of social media with either another similarly focused organization or a commercial entity supportive of its programs.
The issues and complexities of social media costs are similar to the issues already addressed by the FASB in Accounting for Costs of Activities That Include Fundraising. FASB ASC 958-720 pertains to direct mail materials that include strong programmatic themes and explicit solicitation requests. This guidance established the prevailing practice for inventorying, assigning and allocating the costs to produce direct mail materials among program and supporting expense categories if three foundational criteria (purpose, audience and content) are present within the design and construct of the materials.
Applying principles of joint costs to social media
Accounting standards and related interpretations support the concept that social media messaging that includes program content and a donor solicitation — similar in construct to a direct mail campaign — is analogous to a joint activity. In that context, the costs related to the social media activity should be parsed and assigned to the relevant functional (program and support service) expense categories.
A public service announcement, Podcast, YouTube advertisement or radio message, for example, is a joint activity if the message is part fundraising and part programmatic.
This analysis applies regardless of whether the social media placement is purchased by or contributed to the nonprofit. Particular methodologies can include obtaining a transcript of the respective social media content and parsing the words for what is fundraising and what is programmatic. This would result in a percentage split among relevant functional expense categories that can be applied to other costs germane to that particular social media channel.
For example, if a celebrity was retained to read the message or to participate in some other manner in a social media post or broadcast, the cost of the talent could be assigned based on the percentage derived from analyzing the words dedicated to each function. Likewise, other hard costs (costs of studio time, publishing, copyediting, purchase/use of related equipment) incurred can be analyzed and assigned in a similar manner.
As with other joint activities, specific costs that can be directly assigned to a particular element or activity associated with the display or broadcast of social media should be reported accordingly.
Functional Expense: A 3-step process
1. Review your social media activities. First, nonprofit managers should ensure the organization has appropriate procedures to capture and inventory all contributed, purchased and internally developed social media activities an at least annual basis. Accounting recognition is required for all forms of social media. A complete listing is needed of the social media from which benefit was derived.
Formalized procedures are required to identify and document the use or receipt of social media content, and the venues in which it displayed. A written or verbal confirmation circularization process or other media agency protocol will help the agency to self-report any contributed media displayed on behalf of the nonprofit client.
2. Keep track of the costs. The measurement principles of social media activities — particularly, assigning an appropriate fair value to contributed media — pose the greatest challenge. The fair value of contributed media can be determined based on a published “rack” valuation for the time slot or the costs to develop such social media activities. Again, consideration should be given to the cost that would be incurred to purchase such media if not provided by donation. Nonprofits should be mindful that the determination of fair value would exclude any discounts assigned to by the vendors simply because of the recipient’s status as a nonprofit.
3. Establish a social media content policy. By applying the guidance discussed earlier, the nonprofit’s analysis and parsing of the nature of the social media content should follow a rational and systematic methodology consistently applied and memorialized in a formal written policy. E
Dennis Morrone is a partner, audit, Not-for-Profit Practice, for Grant Thornton LLP. Priti Singh is managing director, audit, Not-for-Profit Practice, Grant Thornton LLP.