[mdiegert]

Cost allocations are especially important for maximizing revenue from cost reimbursement grants. Developing and consistently executing allocations requires time and expertise which a small nonprofit might not have. Documentation of the assumptions used is critical.

Examples: A nonprofit can maximize its funding by making sure that shared staff are allocated correctly. I have used “time spent” as an allocation method when it makes more sense than FTEs or program participants. Sometimes you can carve out some of the cost of various M&G personnel if the hours spent directly on the program can be documented. For shared office space I use FTEs rather than square footage because that method is so much less labor intensive.

Another suggestion: revenue recognition of grant contracts is complicated and often the nonprofit finance person is not familiar with all of the rules. I recommend having the auditors review the grant contract to determine if the grant is conditional or unconditional as this determines if the revenue has to be recognized all at once or as the expenses are incurred.

[mdiegert]

I would go with the liability option. You know from the getgo that 50% of every ticket sale is owed to the winner so there would be no justification to call it revenue. And I don’t think it is necessary from the financial statement reader’s point of view to see the payout as an expense.

[mdiegert]

I agree with Wade’s response, but an exception might be if your application had promised that certain named individuals who might be experts in a particular field were to be compensated with the grant funding.

I think it is always a good idea to ask your auditors what they think. During fieldwork they will review your contracts and form opinions about how the provisions should be interpreted. So I really recommend asking them to look at the contract when you get it. That way you can get their opinion now and avoid having to make adjusting entries after the year has ended.

Also, sometimes there might be a provision in the contract that would preclude recognizing subsequent years all at once. I had a 5-year federal grant once that involved a mini-application process each year. We had to submit a budget and get the funder’s approval before we could proceed the next year. That was before the new rules took effect, but I think there is a good chance that our auditors would have viewed that as a condition requiring that we record the revenue one year at a time.

Sometimes asking the funder is a good idea but I’m not sure that all funders know or understand the revenue recognition rules, so they may not be able to give you technical advice. But if you have questions about what they intended when they wrote the provisions of the contract then it would be worthwhile to contact them.

[mdiegert]

I recently retired as CFO from a $20 million human services agency. We had approximately $1.5 million in reserves that came mostly from bequests and unexpected items like retroactive rate adjustments on state contracts.

We worried that perhaps we shouldn’t be in the securities markets, but with the help of a savvy board treasurer we concluded that it was a necessity to guard against inflation. I think it’s helpful to think about nonprofit investing a bit like retirement investing. Even in retirement, it is not unusual to have IRAs in high quality, diversified stock and bond portfolios.

Our agency put out a request for proposals to area money managers and wound up with a regional company that has a family of mutual funds with varying levels of risk. We put the majority of our money in a high quality fund with an asset allocation of 30% stock and 70% fixed income. The historical rate of return was around 5% – far better than less than 1% for a savings account – and the turnaround time for withdrawals was a couple of days.

We also had an endowment made up of donor-restricted and quasi-endowment funds. Again, with the help of our board, we learned that we could add a portion of our reserves to our endowment assets but had to label that portion “quasi-endowment” since it could be dissolved at any time with board action. Since endowments, by definition, are long-term assets, we invested this money in a less conservative fund with a 50-50 asset allocation.