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Major Programs

Does your organization have more than one major program service?

You get a chance to show off the accomplishments of your organization’s top programs in Form 990. Part III of Form 990 contains three generous spaces to write a description of accomplishments for your organization’s top three programs. If you really have a lot going on, you can add even more information about additional programs in a continuation sheet, Schedule O.

If you prepare audited financial statements, presenting major programs is not only an opportunity, it’s a requirement per Generally Accepted Accounting Principles (GAAP).

For example, an organization that helps people with epilepsy shows two programs in its audited Statement of Activities:

  1. Case management
  2. Prevention and education

An organization that helps seniors lists three major program areas:

  1. In-home services (assistance with housekeeping, meal preparation and personal care)
  2. Nutrition services (meals delivered to homebound seniors and group lunches at neighborhood sites)
  3. Other services (includes a medical equipment bank and guardianship programs)

Good News and Bad News

Here’s the good news: Form 990 and GAAP based financial statements give you a platform to tell the world about the wonderful things your organization is doing.

Here’s the bad news: You also have to report expenses by each major program area. Getting to those expenses seems to be the hard part!

Functional Expenses

As you may know, Form 990 and GAAP require nonprofits to present expenses by functional area.  These areas can be grouped as follows:

  1. Programs
    1. Major Program A
    2. Major Program B
  2. Support Services
    1. Management & General
    2. Fundraising

Functional vs. Natural Expenses

Expenses must be presented in a matrix by natural classification and functional area.

Natural classification of expenses follows the organization’s chart of accounts. Expenses are coded to accounts such as salaries, rent, utilities, supplies, professional fees and grants awarded to others.

Functional classification of expenses follows the above outline of functional expenses, including the organization’s major program areas if more than one program. In QuickBooks, use Classes to track functional areas.

For example, a purchase may be coded to the Supplies account and to the Class for a particular program. In QuickBooks this means coding expenses two ways, by both Account and Class.

Form 990 and GAAP Requirements for Functional Expenses

Form 990 requires all program expenses to be grouped together in Part IX – Statement of Functional Expenses, while allowing a breakout of program descriptions and related expenses in Part III – Program Service Accomplishments. Also program service fees earned must be disclosed.

GAAP requires major programs to be presented separately. Previously this information was required in the form of a Statement of Functional Expenses by “voluntary health and welfare” organizations. Now presentation of this information is required for all nonprofits (Accounting Standards Update 2016-14). The method of presenting functional expenses has been made more flexible.

Carving Out Program Expenses

So often we work with organizations that need help carving out program expenses from support service expenses. This process entails identifying support service expenses and quantifying them separately. (See our blog post series on overhead.) That leaves the pool of program service expenses – which, assuming the organization operates more than one major program, must be divided into multiple programs.

Identifying Major Programs

The AICPA’s Audit & Accounting Guide for Not-for-Profit Entities offers a few pointers to help you with identifying major programs. The following factors, based on ASC 280-10-50 paragraphs 1 – 19, can indicate a separate program:

  • Program objectives
  • Nature of services
  • Constituents served (can be further broken out by geographic location or other demographics)
  • Magnitude of the program compared to other organization programs
  • Budgetary categories
  • Oversight, regulatory, grant or other compliance requirements over a particular program

Some organizations with one program or simple-to-account-for programs only code expenses to accounts and leave the functional expense breakout for their accountant. But for organizations that are getting a tad more complex, where management wants more control over how expenses are assigned, or where information by functional area during the year would be useful for management purposes, a more robust accounting approach is needed.

What are your organization’s major programs?

Right now – jot down the top three program services conducted by your organization. Now write a few lines about the achievements of these programs for the past year. Next project achievements for the coming year. What sorts of activities must happen to achieve these results? These are the things that need to be tracked in terms of activities and expenses.

Common Costs

Sometimes we find that certain costs are common to all programs. For example an organization that offers therapeutic horseback riding has a program for autistic children and another for veterans with PTSD. The same horses are used for both programs Therefore expenses of boarding, feed and veterinary care for the horses are common to both programs. It is useful to create a class in QuickBooks called Program Common Costs for such expenses. Then at year end the total of program common costs can be allocated to the individual programs.

Be careful to distinguish program common costs from organization-wide common costs. Executive director’s compensation and technology are two examples of organization-wide common costs benefiting both programs and support services.

Tips for Communicating Major Programs

Be prepared to communicate the major programs of your organization in Form 990 and in audited financial statements.

  1. Identify your organization’s top three major programs.
  2. Prepare a statement of program service accomplishments of 125 words or less for each of these programs. (That’s approximately the number of words that will fit in the allotted space for each program on Form 990, Part III, lines 4a, 4b and 4c. Excess copy can be continued on Schedule O, but that can be hard to find for the 990 reader. Make it easy for readers to see your achievements. Don’t make them work for it!)
  3. If you have more programs, write a description of program service accomplishments for these programs as well. (This information will go in Form 990, Part III, line 4d, Other Programs, which is completely contained on Schedule O.)
  4. Create a plan to allocate expenses to programs and, within the program expense bucket, how you will allocate expenses to major program areas.

Now you are prepared to show off your organization in its best light on Form 990 and in your organization’s audited financial reports!

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