Avoid accumulating funds that could be used for current program activities. To meet this standard, the charity's unrestricted net assets available for use should not be more than three times the size of the past year's expenses or three times the size of the current year's budget, whichever is higher.
An organization that does not meet Standards 8, 9 and/or 10 may provide evidence to demonstrate that its use of funds is reasonable. The higher fund raising and administrative costs of a newly created organization, donor restrictions on the use of funds, exceptional bequests, a stigma associated with a cause, and environmental or political events beyond an organization's control are among factors which may result in expenditures that are reasonable although they do not meet the financial measures cited in these standards.
Information Needed from Charity to Determine Compliance:
The charity provides financial statements, as also required by Standard 11, and a budget as also required by Standard 14.
The Alliance calculates the ratio of available assets as follows:
- Using the charity's audited or reviewed financial statements,
- The Alliance identifies the total unrestricted net assets figure on the Statement of Financial Position. These are net assets that do not have any donor-imposed restrictions. (Usually, audited financial statements have three categories of net assets: unrestricted, temporarily restricted, and permanently restricted.)
- The Alliance then identifies the reported total expenses in the past fiscal year as shown in the audited financial statements. If the charity's current budget is available, the Alliance will also identify the total expenses (i.e., planned expenses for the current year). The higher of these two amounts (most recent actual annual expenses or anticipated current year expenses) will be used for the ratio.
- The Alliance divides total unrestricted net assets by total expenses to determine if this ratio is equal to or less than 3.
- If the ratio is greater than 3, the Alliance reviews the total unrestricted net assets figure. If this figure includes any fixed assets (i.e., land, building, equipment, etc.), the ratio is re-calculated by subtracting the value of these assets (net of any related indebtedness) from the total unrestricted net assets figure. The Alliance may seek additional information in this case, since the audit report and the IRS Form 990 do not usually identify the value of fixed assets that are included in the unrestricted net assets category.
- If the charity does not have audited or reviewed financial statements, the Alliance uses the IRS Form 990 to calculate this ratio.
- Using the IRS Form 990, the Alliance calculates the ratio of available assets to most recent or anticipated total expenses, using the unrestricted net assets figure on line 67 and total expenses on line 17, as described above.
- If the charity does not have audited or reviewed financial statements or IRS Form 990, the Alliance uses the latest available unaudited financial statements, using a ratio as described in (a) above.
- If the charity does not have audited or reviewed financial statements, but completes IRS Form 990-EZ,
- the Alliance will be unable to verify the charity's compliance with this standard since the 990-EZ does not include a breakdown of the charity's net assets into the unrestricted, temporarily restricted, and permanently restricted categories.
On a case-by-case basis, if necessary, the Alliance will request additional information from the charity to determine that the charity meets this standard.
A charity that does not meet this standard and believes there is an extenuating circumstance should inform the Alliance of its position on the issue.