What specific accounting rules cause different evaluators to report different program‑spending percentages for the same charity?
Executive summary
Different evaluators report different program‑spending percentages because accounting rules and reporting practices let nonprofits allocate costs in multiple, legitimate ways—most importantly through joint cost allocation, treatment of donated goods/services, functional expense classifications, and choices between audited statements and Form 990 line items—while rating agencies apply divergent criteria and normative cutoffs when they translate those figures into a single "program percentage" for donors [1] [2] [3].
1. Joint costs and the slippery line between fundraising and program activity
Accounting standards permit charities to classify certain “joint” activities—public education that is paired with solicitation, or outreach that also raises funds—so that part of the expense is reported as a program cost rather than fundraising, and watchdogs warn this can inflate stated program percentages relative to donor expectations (CharityWatch; Charity Navigator explain how joint costs appear on Form 990) [1] [4].
2. Functional expense allocation rules and managerial judgment
Nonprofits must present a Statement of Functional Expenses that allocates each cost to program, management, or fundraising, but accounting guidance and practical ambiguity mean organizations exercise judgment—how much of a staff member’s time is “program” versus “administration,” for example—so similar transactions can be classified differently across charities or even across years (North Texas Nonprofit Resources; Foundation Group) [5] [6].
3. Donated goods and gifts‑in‑kind change the denominator and numerator
Proper accounting requires recognizing the fair value of certain donated goods and services as both revenue and expense when used, which can materially alter program ratios; an organization receiving large in‑kind program assets will show higher program expenses even if cash outlays are low, and watchdogs note this inconsistency complicates comparisons (Nonprofit Quarterly) [2].
4. Differences between Form 990, audited financials, and management accounts
Form 990 line items are a public baseline but may differ from audited financial statements or internal management accounts in presentation and level of detail; rating organizations often rely on the 990 (page 10/Statement of Functional Expenses) yet apply adjustments or conservative treatments—Charity Navigator even points users to specific 990 lines to find joint costs—so the same charity can look different depending on which report an evaluator trusts (Charity Navigator; North Texas Nonprofit Resources; Nonprofit Council) [4] [5] [3].
5. Watchdog methodologies, thresholds and philosophical choices
Evaluators do not merely report a single ratio; they interpret it through policy lenses—some require a 70–75% program threshold for “full credit,” others recommend at least 65% or use bonus points for low overhead—so a charity can earn high marks at one service and be flagged by another purely because of differing benchmarks and what each treats as legitimate program spending (Warren Averett; North Texas Nonprofit Resources; Syracuse University summaries) [7] [5] [8].
6. Accounting for fundraising events, third‑party fundraisers, and special grants
How a charity accounts for event costs net of revenues, payments to professional fundraisers, or grants that underwrite administrative costs can change ratios; some organizations deduct direct event costs from proceeds (which affects the reported fundraising expense), and outside fundraising firms’ fees can be reported differently—practices watchdogs call opaque and that can make program percentages diverge (Nonprofit Quarterly; Foundation Group; CharityWatch) [2] [6] [1].
7. The normative debate and hidden agendas
There is a persistent normative fight: some watchdogs and donors prioritize low overhead as a proxy for efficiency, while nonprofits and other experts argue overhead is necessary infrastructure; rating groups’ public messaging and benchmark choices reflect implicit agendas—either donor protection (tight thresholds) or impact‑focused nuance (allowing higher overhead)—so differences in reported program percentages often reflect these evaluative philosophies as much as raw accounting (America’s Charities; Nolo; Council of Nonprofits) [9] [10] [3].
Conclusion: read the line items, not the headline percentage
Because accounting rules allow legitimate variation—joint cost allocation, donated goods accounting, functional classification, and differing statement sources—and because evaluators apply different thresholds and adjustments, the single program‑spending percentage is a starting point, not a definitive measure; donors and analysts must inspect Form 990 line 26 and the Statement of Functional Expenses, understand joint costs and in‑kind items, and note each evaluator’s method to reconcile divergent figures (Charity Navigator; CharityWatch; Nonprofit Quarterly) [4] [1] [2].