Clarification of Controversial Accounting Rule Fails to Quiet Critics

The Financial Accounting Standards Board has attempted to clarify one of its most complicated — and controversial — accounting rules for non-profit groups.

But the explanation it has offered does little to appease United Ways and other organizations that have raised objections to the rule.

At issue is whether non-profit groups can count, as part of their contribution income, the donations that they receive that are earmarked for other charities. United Ways, for example, sometimes receive so-called donor-designated gifts, which they collect and then pass on to charities specified by the donors.

Under the FASB rules, which were put in place in 1993, charities generally have not been permitted to include gifts earmarked for other groups in their fund-raising revenues on their audited financial statements. The 1993 changes were intended to make it easier to compare one non-profit group’s financial statements with another’s. Charities are not required by law to follow the standards issued by the accounting board, a private group, but most organizations do comply with them.

For many charities, the rule on earmarked gifts signaled a significant departure from past practices. Some charities, hopeful that the standards board would reverse its opinion, have held off making the changes.

Those hopes, however, appear to be going unrealized.

In a draft issued this month, the standards board said that only organizations that have “an ongoing economic interest in the net assets” of the intended beneficiary of earmarked gifts can count the gifts as contribution revenue on their books. That means the fund-raising arm of a single institution — such as a university or hospital foundation — would be allowed to count the gifts it receives in behalf of the organization it supports.

But for United Ways and other charities that raise money in behalf of groups to which they have no formal ties, donor-designated gifts must be reported only as assets and liabilities — not as revenue.

The distinction is a particularly important one for charities whose primary mission is fund raising.

United Ways and others worry that the change will give a distorted picture of their work by underplaying their fund-raising successes. They also argue that they should be allowed to count designated gifts because they have to incur the expenses associated with raising the money.

“We are disappointed,” said Chris Amundsen, United Way of America’s chief administrative officer. “This proposal significantly affects how a fund-raising organization’s overhead is calculated.” The national organization plans to submit to FASB a written complaint about the clarification. During the next two months, the accounting board will accept comments and will consider making modifications before the interpretation becomes final.

Although fund-raising charities were unsuccessful in persuading FASB to change its accounting standards, the draft of the interpretation included a summary of comments from an unnamed FASB board member who shares United Way’s opinion that such groups should be permitted to count earmarked gifts as revenue.

“That board member believes that excluding donor-designated contributions from a statement of activities impairs the usefulness of that statement,” the draft stated.

Valerie A. Fields, controller of the American Friends of the Hebrew University, predicted that the changes would confuse rather than aid people. “The whole new presentation muddies it for people,” she said. Ms. Fields said she was still trying to figure out exactly how the FASB draft would affect the New York charity, which raises money for the Israeli university.

The Financial Accounting Standards Board has said it would accept written comments on the proposal through September 15. The final recommendations are scheduled to take effect for fiscal years beginning after June 15, 1999.

To order a free copy of “Transfers of Assets Involving a Not-For-Profit Organization That Raises or Holds Contributions for Others,” contact the Financial Accounting Standards Board, Order Department, 401 Merritt 7, P.O. Box 5116, Norwalk, Conn. 06856-5116. Copies are also available through FASB’s World-Wide Web site at http://www.rutgers.edu/accountig/raw/fasb/draft/draftpg.html