Variance power definition
/What is Variance Power?
Variance power is the power to redirect the use of transferred assets to a different beneficiary. The donor of an asset grants variance power to the recipient by making a variance power statement in the documentation authorizing the asset donation. In this situation, the pass-through organization can record the donation as revenue and the subsequent forwarding of funds to the third party as an expense. This should result in a net reported profit of zero for the pass-through organization.
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Example of Variance Power
The Smith Family Foundation donates $500,000 to the Community Development Fund (CDF), a nonprofit organization that specializes in administering charitable grants. In the donation agreement, the Smith Family Foundation specifies that the funds are intended to support affordable housing projects but also grants variance power to the CDF. This means that while the funds are initially earmarked for affordable housing, the CDF has the authority to redirect the funds to other community development programs (such as education or healthcare) if affordable housing projects are no longer viable or needed.
Since the CDF has variance power, it records the $500,000 as revenue when the donation is received. Later, when it transfers the funds to a qualified third-party housing project, it records a $500,000 expense. The result is a net effect of zero on the CDF’s reported profit, accurately reflecting its role as a pass-through organization with discretion over the funds due to variance power.