Overcoming the “Overhead Myth” with New Financial Reporting Requirements

By John D'Amico  |  February 26, 2019

Have you heard of the Overhead Myth campaign, started in 2013 by Better Business Bureau’s Wise Giving Alliance, Charity Navigator and GuideStar®? Its aim is to change the practice of judging a nonprofit’s performance solely on its overhead ratio to a more balanced view that takes into account a range of other factors, including transparency, governance, leadership and results.

As a reminder, overhead ratio is the percentage of a nonprofit organization’s expenses that are spent on administrative (commonly called management & general) and fundraising costs, collectively called “supporting services.” It is calculated by adding administrative and fundraising costs and dividing by total expenses.

Until now, nonprofits were only required to report their expenses by functional category on their financial statements (Program, Management & General, Fundraising) and not by the well-known business categories of expenses (salaries, occupancy costs, interest, depreciation, etc.), the so called “natural categories”. The only way to determine what a nonprofit’s expenses were comprised of was by accessing their IRS Form 990. However, the new financial reporting requirements for nonprofits as promulgated by FASB’s Accounting Standards Update (ASU) 2016-14 will now require all nonprofits to report their expenses by both function and by natural category, all in one place on their financial statements. This will enable nonprofits to better tell their financial stories, as readers of their financial statements (including donors) will now see the types of expenses that make up the organization’s program, administrative and fundraising costs.

In our opinion, this is a welcome change and one that adds value through common sense expense reporting. Charities are encouraged to go a step further and include a thorough discussion of all their programs in their annual financial statements and on IRS Form 990. This enables a fuller understanding of what the charity is doing and what they are trying to accomplish, and helps donors make well-informed decisions on how a charity is performing rather than relying on justify the overhead ratio. A real win-win.

For more information, visit the organizations involved with the Overhead Myth campaign:  

www.give.org for information on BBB Wise Giving Alliance. 
www.guidestar.org/update to learn about the free GuideStar Nonprofit Profiles. 
www.charitynavigator.org to find out more about their star-rating charity evaluations.

This blog post is excerpted from, “The “Overhead Myth” – Finding Better Ways to Judge Nonprofit Performance” by John D’Amico, which originally appeared in the Q3 issue of Marks Paneth’s Nonprofit and Government Times. Click here to read the full article.

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About John D'Amico

John D'Amico, CPA, is a Director with the Professional Standards Group at Marks Paneth LLP and provides quality control services to the firm's Nonprofit, Government & Healthcare Group. He specializes in quality reviews of nonprofit organizations' audits and is part of a team that reviews all attest engagements, provides consultation on accounting and attestation matters, tests and monitors the firm's quality review policies and procedures. He also develops and delivers training material related to accounting... READ MORE +

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