Donor-advised funds (DAFs) are a popular charitable giving vehicle, but their unique structure raises important accounting considerations for not-for-profit organizations. This article explores how DAFs should be accounted for as well as other factors for not-for-profits to consider.

What is a DAF?

A DAF is a separately identified fund or account maintained and operated by a 501(c)(3) organization, commonly referred to as a “sponsoring organization.” When donating to a DAF, the donor (or their representative) retains advisory privileges with respect to distribution of those funds (the “original donor”), i.e., what charity/charities to donate those funds to. The original donor would receive a charitable contribution deduction at the time the donation is made (subject to limitations) to the sponsoring organization if the DAF is a publicly supported organization. The original donor would also maintain anonymity, as the DAF would be considered the donor to those earmarked charities. A DAF does, however, take away the original donor’s control, beyond the advisory privileges.

What are the financial statement implications of contributions from DAFs?

The complication of receiving donations from a DAF (usually at the behest of an individual that originally contributed to the DAF) is that, as stated in the previous paragraph, the DAF is considered to be the (ultimate) donor in these situations. Despite the fact that the original donor may in certain instances request that the donated funds be used for a particular purpose, since the funds are actually coming from the DAF, unless the DAF specifically restricts  the funding, the end result is that the funds are recorded without donor restrictions . The original donor retains advisory privileges but has given up all legal control over to whom the funding is to be expensed by the DAF. These funds should therefore be presented as net assets without donor restrictions on the financial statements of the charity when it receives the contribution from the DAF. Since the DAF funds are controlled by the DAF itself and not by the individual advising the DAF on where to make the contribution, these funds also cannot be used as payment of existing pledge(s) receivable from the original donor for not-for-profit organizations Also, a pledge receivable should not be recorded unless there is documentation received from the DAF confirming their promise to give. Since the funds are under the control of the DAF, the original donor’s intent cannot result in a binding pledge on behalf of the original donor to the not-for-profit organization to which the donation is being made.

See Accounting Standards Codification, Topic 958, for further guidance on how contributions should be recorded by not-for-profit organizations under U.S. Generally Accepted Accounting Principles.

Are there also tax implications? 

Yes, there are also a wide variety of tax implications. Donations made to DAFs are under close scrutiny from the IRS and legislators, and this appears to be an area ripe for changes. There are many benefits to utilizing a DAF, including (1) the receipt of a tax deduction in the year the funding is donated to the DAF, (2) the funds can grow tax-free, and (3) the sponsoring organization handles all of the administration of these funds. The IRS has recently issued draft changes to regulations that would further clarify the rules regarding DAFs providing funding to not-for-profit organizations (REG-142338-07).

What does this mean for not-for-profit organizations receiving donations from donor-advised funds?

Since there are a number of accounting, financial statement, and tax presentation considerations related to these contributions, not-for-profit organizations should consult with their auditors and accountants to determine proper accounting financial statement and tax reporting of these amounts. CohnReznick is here to help with any questions you may have about donor-advised funds.