Ethical Standard Deep Dive: Standard 20
Throughout the month of October, members of the AFP Ethics Committee will be addressing each of the standards in our Code of Ethics. Today, Robbe Healey, MBA, NHA, ACFRE, founding member of Aurora Philanthropic Consulting in West Chester, Pa., and chair of the AFP Ethics Committee, explores Standard 20 and accounting standards for gifts.
Standard 20: Members shall, when stating fundraising results, use accurate and consistent accounting methods that conform to the appropriate guidelines adopted by the appropriate authority.*
Robbe: Just because we deal with money, it doesn’t mean fundraisers and accountants function under exactly the same sets of rules and standards. There is significant overlap, but organizations may adopt their own policies and procedures, especially in the area of donor recognition.
But first, accounting. Best practices mandate your organization functions in a manner compliant with the Financial Accounting Standards Board (FASB), Accounting Standards Board (AcSB), or other appropriate body. Annually, the FASB or AcSB standard boards may add, delete or refine standards. An effective partnership with your CFO, Controller, and other financial professionals will ensure the development office and finance office are aware of all the standards, work together and consistently apply all relevant rules and standards. Examples of the standards we must collaboratively and consistently manage include valuation and recording of non-cash gifts, including but not limited to appreciated securities, professional services and real property; recording beneficiary value of planned gifts and timing of receiving, recording and receipting gifts, especially at the end of the calendar year.
Donor recognition offers organizations more flexibility. For example, the accounting treatment of a planned gift requires accurate calculation of the beneficiary interest, which is typically significantly less than the value of the assets donated to create the gift. If an organization understands the amount to be received in the future is likely to be different (typically less than the value of the assets donated), but for the purposes of donor recognition wishes to use the value of the assets donated rather than the projected future beneficiary interest, it can. To do this, there must be a policy which is board approved, clear and consistently applied.
The best time to understand a rule or standard is before you are at risk of making an error. Know and comply with the FASB or AcSB standards. Develop and gain board approval for any donor recognition or naming polices, before you are asked. Good donor stewardship demands both.
- Members recognize that fundraising results are recorded both for external financial and audited statement purposes, and for reporting and donor recognition purposes. Recording for external audited financial purposes must be in accordance with the appropriate AICPA guidelines*, or the requirements of the local legal framework, for the type of institution involved.
- In reporting fundraising results for external financial and audited statement purposes:
- (Irrevocable unconditional deferred contributions are recognized in the fiscal year in which they are made. The nonprofit organization should recognize contribution revenue and related assets and liabilities. Assets should be recorded at their fair market value. Contribution revenue should be recorded as the difference between the asset value and the net present value of the payout to the beneficiary. Reevaluations should occur each fiscal year and at the time the contribution matures.
- Unconditional pledges are recognized in the fiscal year in which they are made. The extent to which multi-year pledges are discounted should be determined with professional advice.
- Bequests are recognized at fair market value in the fiscal year in which they mature.
- Insurance policies that are owned by the organization should be recorded at their cash surrender value.
- Revocable deferred contributions or conditional contributions should be recorded when the contribution matures or when the condition is met.
- For reporting and donor recognition purposes:
- For campaign purposes, members may report results over more than one fiscal year.
- Irrevocable, legally enforceable deferred gifts are counted and reported at a discounted present value only, using IRS calculation methodologies, or the appropriate requirements of the local legal framework.
- Members may report revocable planned contributions and conditional contributions.
- Members may report insurance policies at face value.
- Members may report expectancies from bequests.
Examples of Ethical Behavior
- Reporting, as a footnote to financial statements, the number of deferred contributions for which there are signed documentation, without acknowledging financial value.
- Disclosing the accounting practices used in the financial statements.
- Developing organizational procedures to ensure that the accounting for contributions is consistent from year to year.
- Requesting donors who have made verbal pledges to sign and date written documentation of their pledge.
- Informing the reader when financial information has been reformatted.
Example of Unethical Behavior
- Reporting as contributions the value, stated or estimated, of a bequest prior to the distribution of the donor's estate.
- Reporting as contributions the face value of insurance policies, whether revocable or owned by the organization, prior to the termination of the policy.
- Reporting pledges in the year in which they are made and then counting the payment of the pledges in the years in which the payments are made.
* In the United States, members must conform to the guidelines adopted by the American Institute of Certified Public Accountants (AICPA). In countries outside the United States, comparable authority shall be utilized.