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your non-profit’s future?

Is there a foundation in
your non-profit’s future?

Non-profit organizations nationwide face many challenges. One of the most significant challenges is an organization’s ability to raise money from the private sector in the form of contributions, fund-raising events and bequests. These private-sector sources provide the funds necessary for non-profits to provide program services that are not funded by government sources and service fees.
Fortunately, for the non-profit sector, there is a significant amount of accumulated wealth in the United States. Current estimates project that a staggering $15 trillion of wealth will transfer between generations in the next 25 years.
Many non-profits have responded to these factors with increased private fund-raising and development efforts. The past 20 years also have seen a significant increase in the number of foundations established by non-profit organizations.
There are several key items to consider in deciding whether a separate foundation corporation should be formed. A separate foundation can: protect the assets accumulated by the non- profit from potential loss resulting from litigation; provide focus to the fund- raising and development efforts of the non-profit; increase the ability to attract and retain board members who are interested in fund-raising activities; improve the public image of the non-profit; and segregate assets for financial-reporting purposes.
Foundations are fairly easy to establish. Developing and maintaining a successful foundation is a more difficult task. After a foundation is established, it is difficult to evaluate success. This is generally due to the fact that much of the fund-raising and development efforts are directed at planned or deferred gifts. Planned- and deferred- giving results may not occur for many years after the effort is made by foundation management to contact and recruit the prospective donor.
Planned-giving efforts are like planting acorns: You have to wait a long time in order to see results. That means that in the short run, a foundation must pay for itself. Generally, most organizations plan for a start-up period for any foundation of up to 18 months. After start-up, the foundation should be able to generate sufficient annual income to offset its operating expenses. The old rule that “you have to spend money to make money” applies also to successful foundations. After achieving break-even financial results, most organizations should achieve a return on investment of anywhere from 3 to 5 times or more the amount of annual operating expenses for the foundation.
There is an alternative to a separately established foundation. The Rochester area is fortunate to have at least two community foundations: the United Way of Greater Rochester Inc. and the Rochester Area Foundation. In this model, the donor still receives a tax deduction for his/her contribution. But in a community foundation, the donor has the flexibility of designating numerous organizations and special purposes for the use of the donation itself or the income therefrom. Community foundations can represent a very effective and efficient vehicle for donors to make contributions for a variety of purposes.
A key decision to make in the formation of any foundation is the issue of who controls the foundation’s activities. Until recently, the most common definition of control focused on whether or not there were common board members between the sponsoring organization and the foundation. If more than 50 percent of the board members were common to both boards, then the financial statements of the foundation needed to be combined with those of the sponsoring organization for financial-reporting purposes. Another common provision evidencing control was the ability to appoint board members to the foundation board.
However, in the last five years the Financial Accounting Standards Board has issued several pronouncements that have a significant effect on reporting foundation financial activities.
The first pronouncement changed the definition of control from a factual assessment to a more subjective assessment. Under the new pronouncement, if the organization has an economic beneficial interest in the foundation and there is substantial evidence of control over foundation activities, then the financial statements of the foundation must be reported together with those of the sponsoring organization. This new definition significantly increases the number of situations where financial statements must be combined.
Another proposal from the FASB has generated a significant amount of negative response from the non-profit community. The proposal, as written, essentially would redefine the accounting rules for foundations that raise funds as an agent, intermediary or trustee for another organization.
If the foundation raises money specifically for another entity, then the revenue would be recorded in that entity’s financial statements with a corresponding receivable from the foundation. The foundation itself would record a liability to the sponsoring organization for all funds collected as an agent or intermediary.
This proposal essentially has the undesirable result of including substantially all foundation activities in the financial statements of the sponsoring non-profit.
Whether you have a foundation established or are considering the formation of a new entity, it is important to be aware of the current financial-reporting requirements. In addition, you must perform a thorough assessment of the advantages and disadvantages of a separate foundation.
(Gerald J. Archibald, a CPA, is a partner in the regional accounting firm of Bonadio & Co. LLP. He is active professionally and personally in an array of non-profit organizations.)


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