Some charities appear to the public as one organization, when they are actually legally considered a group of separately incorporated entities. The most common case we see is a national charity that has regional chapters set up across the country. In this situation, the national group is one entity, and either the local offices are each individual entities (as with the American Lung Association which has multiple offices in addition to its National Headquarters) or the chapters are all together as a second entity (such as Susan G. Komen for the Cure which has 114 affiliates that are set up as one organization aside from its National Headquarters). Another structure often seen in the sector is a charity and its closely affiliated foundation (as in the case of the Anti-Defamation League and the Anti-Defamation League Foundation). These are a few examples of affiliate structures. In fact, there are many different reasons for charities to set up separate affiliates, and thus, there are many different structures.
The important thing to know about charities with affiliates, in relation to how we rate charities, is that each individual entity files its own Form 990. Since Charity Navigator rates charities based on the 990 data, we would end up rating each affiliate separately. In other words, we would evaluate parts of an organization as if it were distinct from the whole. Therefore, whenever possible, we prefer to rate the organization and its affiliates on a consolidated basis, providing donors with an evaluation of the whole organization rather than separate ratings of its parts.
We currently evaluate roughly 60 charities in this way. In order to evaluate affiliated charities as a single entity, we need a single 990 that represents the entirety of the organization but avoids double counting intercompany transactions made between component orgs (such as a grant made from one to another, which would correctly show up as revenue in one and expense in the other but doesn’t actually represent an organizational change in revenue or expense). This document, a consolidated pro-forma 990, closely approximates the data presented in a charity’s consolidated audited financials, as financial data for all affiliates is included and intercompany transactions are eliminated. However, the accounting standards required by GAAP (financial statements) and the IRS (Form 990) differ. The main differences are in how the IRS and GAAP treat donated services and unrealized gains and losses. For donated services, GAAP specifies that the value of these services should be included as both revenue and expenses, but the IRS requires that they be excluded. For unrealized gains and losses, GAAP allows these gains and losses to be reported as positive or negative revenue, but the IRS requires that they be reported as an adjustment to net assets or fund balances.
For Charity Navigator to issue a single evaluation for a charity and its affiliates, we require that the organization provide us with five years of consolidated pro-forma Forms 990. It is true that the pro-forma Form 990 given to us is not the same Form 990 that the charity files with the IRS. Rather, it is a form compiled for and provided directly to Charity Navigator. That said, this pro-forma document is derived entirely from the multiple Form 990s data. This is data that came from the charity's professionally audited books, that the organization’s executive director affirmed to be factual, and that was then, under oath, submitted to the IRS as the truth and also delivered to the charity’s state attorney general as required by law.
Still, we believe additional scrutiny, by our team of professional analysts, is warranted when we apply our analysis to pro-forma 990s. First, we ensure that the numbers on the affiliates’ Forms 990 filed with the IRS exactly match the numbers on the consolidated pro-forma before intercompany eliminations are done. Second, we review the intercompany balance eliminations that are reported on the pro-forma document. Intercompany transactions must be eliminated in the pro forma consolidated 990 so that they are not double counted. This is why just adding the figures from the individual 990's filed with the IRS would not be accurate. When necessary, we ask for more detailed explanations regarding the amounts that were eliminated. Third, our staff compares the data found in the consolidated audited financials to the consolidated pro-forma 990 data to ensure the difference between the two are only due to the differences in the financial reporting requirements of those two documents. We ask the charity for additional information if we find any unexpected differences in the two reports.
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