Donor-advised funds: Accounting implications related to pledges

Nov 20, 2023
Revenue recognition Financial reporting Presentation & disclosures Business tax

Donor-advised funds (DAFs) are a popular method for charitable giving.

The IRS describes a DAF as:

A separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a "sponsoring organization." Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor's representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.

For financial accounting purposes, a question exists with respect to whether a donor’s use of a DAF to service a promise to give (pledge) precludes the receiving charity from recording the promise. For one-time gifts (not pledges in advance), the use of a DAF is no different than a donor writing a check. The charity records the unconditional gift when received (in the appropriate net asset class) and the process is complete. For promises to give, the use of DAFs is viewed in the nonprofit industry as more problematic.

As stated in the above IRS description, the sponsoring organization, not the donor, legally controls the DAF. As such, the donor cannot commit the DAF to make an enforceable promise to give to a charity or assume that the DAF will cover 100 percent of the donor’s personal commitment.

While a donor still cannot bind the DAF to establish a promise to give/pledge, the donor can enter into a personal pledge agreement with a charity, and the charity can record it as any other pledge, assuming the requisite criteria in U.S. generally accepted accounting principles (GAAP) are met (unconditional promise, record at estimated fair value, etc.). Knowing that a donor has or will request a DAF to make a payment in settlement of a promise to give or pledge should not prevent a charity from recording a receivable. However, if the donor implies in any way that payment of a pledge is conditioned on the DAF making payment on their behalf, or the pledge explicitly includes wording that suggests the commitment resides with the DAF rather than with the individual (such as “assuming my DAF honors my directions to make payments” or other similar language), the pledge would not qualify to be recorded as it would be conditional on the DAF honoring the directive. As with any donor agreement, individual facts and circumstances will vary and should be taken into account by the charity when deciding whether a promise to give should be recorded consistent with GAAP.

This analysis is based on nonbinding guidance issued by the IRS on December 4, 2017 in Notice 2017-73, which addresses several aspects of a donor’s use of a DAF, including the fulfillment of donor pledges. The notice states that the use of a DAF to fulfill a personal pledge payment would not be treated as a “more than incidental benefit” under section 4967 of the Internal Revenue Code (i.e., this would be allowable and not taxable to the donor) if the following requirements are satisfied:

  • The DAF sponsoring organization makes no reference to the existence of a charitable pledge when making the distribution from the donor’s DAF;
  • No donor/advisor receives, directly or indirectly, any other benefit that is more than incidental on account of the DAF distribution; and
  • The donor/advisor does not claim a charitable contribution deduction for the DAF distribution, even if the charity receiving the distribution mistakenly sends the donor/advisor a tax acknowledgement.

The IRS and Treasury Department continue to indicate in their annual Priority Guidance Plans, including the most recently issued 2023-2024 Priority Guidance Plan, that they intend to provide additional guidance on donor advised funds and their stakeholders, including donors and management.

Charities should consider their policies for recording pledges so that legally enforceable promises to give are appropriately recorded, which may include pledges from certain donors who regularly use a DAF to settle a pledge.

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