Donor-advised funds (DAFs) have become one of the fastest-growing charitable giving vehicles in the United States. Nonprofits of all sizes now regularly receive grants from DAFs sponsored by institutions such as Fidelity Charitable, Schwab Charitable, and community foundations affiliated with National Philanthropic Trust. From an accounting standpoint, however, a donation received through a DAF is often misunderstood. This article explains how to properly account for these contributions under U.S. GAAP (ASC 958).

A donor-advised fund is a charitable giving vehicle administered by a sponsoring organization. A donor makes an irrevocable contribution to the DAF sponsor and retains advisory privileges over how those funds are later distributed to their desired charities. When an organization receives a check from a DAF, the legal donor is the sponsoring organization (the DAF) and not the individual who recommended the grant. Under ASC 958, the donor is the party that transfers assets and has the ability to impose restrictions. Thus, the DAF sponsor (e.g. Fidelity Charitable) is the legal donor. A common mistake is for the nonprofit to record the individual as the donor instead of the DAF sponsor.

A nonprofit may also mistakenly book the pledge based on the donor's intent rather than the sponsor's commitment. Because GAAP requires legal enforceability, the pledge should only be booked if the nonprofit receives a written commitment from the DAF sponsor itself or upon receipt of the assets/funds if no commitment from the DAF is received. In addition, any restrictions on the use of funds must come from the DAF sponsor and not from the individual donor's advisory request. Because of this, if grant agreement from the DAF sponsor includes any purpose or time restrictions in the grant letter, the nonprofit should follow the normal process of recording the donation as restricted or unrestricted contributions. In addition, if the grant includes a barrier and a right of return, the nonprofit should consider the funds as conditional contributions and only recognize revenue once the condition(s) is substantially met. However, most DAF grants currently being awarded are done so without restrictions or conditions, so revenue is recognized when the organization has control of the funds or receives formal notification from the DAF sponsor.

Because the DAF sponsor is considered the legal donor, organizations must not only ensure that their finance teams are properly accounting for these donations according to the guidelines listed above, but they must also ensure their development teams understand the legal donor distinction. As DAF giving continues to grow, nonprofits must follow proper classification under ASC 958 and carefully evaluate these donations for legal donor, restrictions, conditions, and enforceability of commitments.