Charities Continue to Struggle With Accounting Rules When Tallying Gifts

At first glance, WGBH Education Foundation appears to be a fund-raising success story. In 1996, the fund-raising arm of the Boston public-broadcasting station received $91.1-million, an increase of almost 160 per cent over the amount it raised in 1995. It ranks No. 72 on the Philanthropy 400 — and is the leader among the public-broadcasting stations on the list.

In reality, the station did not have a fund-raising year that was very different from 1995. What changed was that WGBH switched accounting methods to comply with new standards that all non-profit organizations are expected to follow. The station for the first time included pledges and deferred gifts — $77-million worth — in its fund-raising figures, donations it previously did not count until the money was actually in hand.

WGBH is not alone in reporting large increases in the amount of money raised for 1996. The Salvation Army, for example, the nation’s largest charity, saw its fund raising jump from $741.7-million in 1995 to more than $1-billion last year, largely because of the accounting changes.

Charities nationwide have been gradually adjusting their accounting methods to incorporate rules issued in 1993 by the Financial Accounting Standards Board, a private organization. But many non-profit leaders strongly object to the rules, which they say do not fairly measure a charity’s finances.

Under the new guidelines, if a charity received a $1-million gift in 1996 that is to be paid over five years, for instance, the group must count the entire sum on its 1996 books. In addition to asking charities to count pledges as revenue, the standards board said that when calculating private support, organizations also must include the value of the time donated by volunteers. What’s more, charities may no longer count money earmarked by donors for other organizations — often called “donor designated” funds — as their own.

The accounting-standards board said it issued the rules because it thought that the old guidelines did not accurately reflect the financial position of many charities. It noted that donations, especially the earmarked ones, were often counted by both the fund-raising group that received the donations and by the designated charity.

Charities were expected to start using the new Financial Accounting Standards Board rules for fiscal years that began after December 15, 1994, while organizations with less than $5-million in assets or $1-million in annual expenses were given an additional year to comply.

However, because the new rules are difficult to put in place — and because many charities object to them — not all organizations are complying with them fully yet.

To further complicate matters, the Internal Revenue Service does not require charities to follow the guidelines in filling out their informational tax returns, so some organizations do while others don’t.

The Financial Accounting Standards Board provision that has provoked the most objections is the one that requires charities to exclude “donor designated” gifts from their fund-raising totals. Kate L. Moore, chief financial officer of United Way of America, says that the public will get an inaccurate picture of the amount of money raised by United Ways, fund-raising federations, and other such organization unless donor-designated funds are included in the total.

She also says that the new restrictions will make it appear that United Ways are spending a lot on fund raising compared with how much they bring in. “It costs as much to raise a designated gift as it does an undesignated gift,” Ms. Moore says.

In response to objections from charities, the accounting-standards board has agreed to review the provision and issue some clarifications next year.

For organizations that have changed their books to reflect the new accounting rule, the “donor designated” change has made many of them look less successful than they did in the past.

The United Way of Frank- lin County, for instance, which ranked No. 251 on the Philanthropy 400, reported that it raised $28.9-million last year, 10 per cent less than in 1995. If those figures reflected money earmarked for other charities — as they have in the past — charity officials say that the total would have been $34.7-million, an increase of almost 10 per cent.

The numbers are even starker for other United Ways. In Philadelphia, the United Way reported a decrease of almost 40 per cent, placing it at No. 246 on the Philanthropy 400. The United Way of New York City (No. 151) appears to have suffered a 23-per-cent drop-off from 1995. In both cases, the decreases are largely due to changes in the way that the charities count gifts.

“It’s just not a true reflection of what is being generated by the United Way in any community,” says Brian A. Gallagher, president of the Franklin County United Way.

Some organizations have managed to avoid recording major fund-raising declines or increases because of pledges. The Carter Center (No. 314) and Emory University in Atlanta (No. 4) offer donors an arrangement called an “exchange transaction.” The donor makes a down payment on the contribution, which is recorded in the institution’s private-support figures. The non-profit organization then submits a report to the donor that is supposed to document progress that has been made in honoring the donor’s conditions. Since the donor has the option of saying that insufficient progress has been made — and of withholding the rest of the gift — Emory and Carter Center officials say that it is appropriate to use a different approach in recording the gift than they would if it came in the form of a pledge earmarked for a specific use.

Charity officials may have different interpretations of the new accounting standards, but most agree that implementing them has been a time-consuming and frustrating process.

The Salvation Army says it had to dedicate a tremendous amount of time and money to help its more than 10,000 local chapters comply with the new accounting rules.

Lieut. Col. Larry E. Bosh, national treasurer of the Salvation Army, says, “We have a committee of seven that has been working on this for four years, saying, ‘What does this mean?’ ” Mr. Bosh says. “It’s just crazy.”

He adds: “We’re trying to be positive. It’s just a lot more effort than we ever envisioned.”

Susan Gray contributed to this article.