A Problem with Restricted Gifts

Recently a client asked us for help keeping track of restricted gifts. This organization has a program where they raise money for other charitable organizations in the community. The client said people are making contributions restricted for specific organizations and even for specific purposes. For example, they received a gift from one donor for a particular childcare center to be used for diapers. Other donors gave money to buy books for the library and clothing for a women’s career counseling service. She asked, “How can I possibly keep track of all of these gifts?”

We replied “You don’t. Instead create a gift acceptance policy that says you don’t accept these types of contributions and that defines what types of contributions you will accept.”

Gifts for Specific Beneficiary Are Not Gifts

Besides, gifts restricted by a donor for a specific beneficiary organization are not contributions. Instead such gifts are held on behalf of a named beneficiary by the receiving organization which serves as an intermediary. The funds would be recorded to the balance sheet as a liability until paid through to the named beneficiary organization. They would not be recorded as contributions.

For a gift to qualify as a contribution to the organization and for the grant award to a beneficiary organization to qualify as grant expense, the organization receiving the gift must have the power to determine the beneficiary. This ability to determine the beneficiary of gift funds received is called variance power. (FASB Accounting Standards Codification ASC 958-605-25-25.)

Common Types of Restricted Purposes

Your gift acceptance policy should define the types of restricted gifts that your organization will accept. Organizations typically accept gifts restricted for various purposes. Often we see these restricted gifts fall into two categories:

  1. Gifts for a specific project or program, such as a $10,000 grant for a summer theater program, that have a specific start and end date.
  2. Ongoing restricted gift funds, such as a scholarship fund that receives gifts of varying sizes from many donors on an ongoing basis.

Decide in advance what types of restricted funds you will manage. (Preferably include your bookkeeper in this conversation.) Do you maintain any ongoing restricted gift funds? If so, what are the restricted purpose(s) of each fund and how are these funds administered? Will you accept individual large gifts with reporting requirements to be used for a particular program of the organization? Are you raising funds for a specific project such as a capital campaign? You should have a list of currently acceptable restricted purposes.

Back to Our Client’s Gift Dilemma

Perhaps our client above could establish a “Community Grant Fund” and accept gifts into this fund throughout the year restricted for regifting to other community organizations. They would need to define their process for identifying recipients and  awarding grants out of this fund. Now if someone wants to give $100 for the local nursery to cover expense for diapers they could say, “That’s wonderful you want to support the nursery. We accept gifts for our Community Grant Fund. Our board of directors awards the funds to many worthy charitable organizations in the area based on an annual assessment of needs. We’d love to accept your gift for our Community Grant Fund to be used for this purpose. If you want to specifically support the nursery, please make your donation directly to the nursery.”

Policies, like diapers, sometimes need changing. If your gift acceptance policy does not define the restricted purposes for which you will accept contributions, perhaps it’s time for a change!



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