There may be times when it is best not to accept a donation. Pause here for all those who work in fundraising to catch their breath and get over the initial shock. It would be heartbreaking to turn down funds when that is what most charities and not-for-profits seek out, but when a donation comes with strings attached, it is crucial to consider the impact of those restrictions. The saying “don’t look a gift horse in the mouth” is the worst piece of advice for organizations who are offered a restricted donation. But do not lose hope. There are steps to take before having to resort to refusing a gift. So first, let us imagine the scenario. Someone comes to you with the offer of a gift of money, but they want to have a say in how it is used.
First, be sure to get their restrictions down in writing so you can be clear as to what they want. If they wish to put the money towards a project that does not exist yet, be very clear on your end with the board whether this project falls within the purpose of your organization and your articles of incorporation. Funds for a breakfast program for school kids is a worthy cause but maybe not given to a charity targeting seniors programs. If the funds specify a project that does not fall within your organization’s purview, perhaps you are not the right organization to accept them.
Or perhaps the project falls within your purpose, but you do not have the capacity to run such a project at this point. It can be risky to accept funds for a project you may never run as the funds must be used for their intended purpose. This is the absolute truth. You cannot use designated funds for any purpose other than how they are designated. Period. Full stop.
Talk to the donor and see if you can lay out, in writing again, a backup plan if the project can never take place. Potentially, you commit to donating the funds to another charity who can or is running such a program or perhaps the donor agrees that the funds can be changed to another program or purpose within your organization after a certain amount of time. But make sure it is clear what happens if the original intent cannot be fulfilled. Suppose the donor does not accept any of the adjustments. In that case, it may be wise not to accept the donation as you cannot return funds, and by taking them, you agree to fulfill their terms and are obligated to do so once you have accepted the donation. For more information about returning a donation, see the CRA link below.
Now on a more positive note, let us imagine a scenario where the intended purpose falls within your organization’s mission, and vision AND you are able and willing to run such a project. How do you record the funds? There are two primary methods for recording, the deferral method and the restricted fund method. If you are already doing one, stick with that method, as changing methods requires a lot of work after the fact. But if this is brand new to you and you have not needed to set up your books under one method or the other yet, consider the scenarios below and pick what might be best for you.
This method, in a nutshell, is accepting the money but recording it in a deferred revenue liability account. This acts as a holding account and does not impact your revenue or net income when it is accepted. It is a liability because it indicates that you owe something, in this case, the work associated with the restrictions. When you begin the project and start accumulating expenses towards it, you “recognize” the amount out of deferred into regular revenue. This is to match the revenue to the cost incurred for the project. Deferred revenue should only be for externally restricted donations and not used as a way to avoid showing a significant income in any given year.
Restricted Fund Method
This method essentially has many columns in your financial statements where you track projects separately, and their combined value is your overall income/expenses for the year. It means project A and project B both have a donation revenue account, and the restricted donation will be received into revenue under the specific project. Combined, the organization may have a net income of $100 for the year but broken down into the funds, project A has a net income of $150, and project B has a loss of $50.
These are rudimentary and slightly over-simplified explanations of the two methods to provide a sense of the two main options. When trying to consider first whether to accept the donation and second which method to use, keep in mind how your organization operates and how you want to proceed in the future because both decisions have long-term impacts. As always, RLB would be happy to assist you in making informed decisions.
Looking for more information on Deferral vs Restricted Fund Method? Learn more here.