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ASC 230-10-45-14 requires that receipts from contributions and investment returns that are donor restricted for long-term purposes must be reported as financing cash inflows, rather than operating cash flows.

Excerpt from ASC 230-10-45-14

All of the following are cash inflows from financing activities:…

  1. Receipts from contributions and investment income that by donor stipulation are restricted for the purposes of acquiring, constructing, or improving property, plant, equipment, or other long-lived assets or establishing or increasing a donor-restricted endowment fund

When an NFP uses the indirect method, the reconciliation of changes in net assets to net cash flow from operating activities must eliminate receipts from cash contributions and investment returns that are donor restricted for long-term purposes from operating cash flows. Example NP 4-1 illustrates the cash flow presentation of such contributions.
EXAMPLE NP 4-1
Indirect method – contribution restricted for long-term purpose
Performing Arts Center (PAC) receives a cash contribution of $50,000 that is donor-restricted for upgrading the acoustical system. PAC prepares its cash flow statement using the indirect method. How would this contribution be reflected?
Analysis
Because the gift was donor-restricted for a long-term purpose, PAC cannot reflect the $50,000 of cash proceeds received as inflows from operating activities. Instead, PAC must reflect those proceeds as a cash inflow from financing activities. In addition, PAC must eliminate the $50,000 of contribution revenue when reconciling the change in net assets to net cash flows provided by or used in operating activities.

Many contributions that are donor restricted for long-term purposes arise from promises to give (sometimes called “pledges”). As discussed at NP 7.3.2, unconditional promises to give cash are reported as receivables with a corresponding increase in net assets with donor restrictions in the period the promise is received. For purposes of the statement of cash flows, it is important to bear in mind that such transactions only give rise to a cash flow when or as the pledge is collected, not at the time the contribution income is recognized. If a pledge that is donor-restricted for long-term purposes is partially collected during the same year it is made, only the amount actually collected should be reported as a cash inflow (classified as financing due to the long-term purpose restriction), as illustrated in Example NP 4-2.
EXAMPLE NP 4-2
Indirect method – collections on pledge restricted for long-term purpose
On March 31, Performing Arts Center (PAC) receives a pledge of $50,000 that is donor restricted for upgrading the acoustical system. The pledge is payable in two installments: $20,000 is due on June 1 (two months after execution of the gift agreement), and the remaining $30,000 is due the following March 31 (on the first anniversary of the gift).
PAC has a June 30 year end and prepares its cash flow statement using the indirect method. How would this contribution be reflected in the statement of cash flows for the year the pledge is received?
Analysis
Although the pledge gave rise to contribution income of $50,000 in the year it was received, the related cash inflows will occur in the periods that the installment payments are collected. Because the donor restrictions relate to a long-term purpose, the payments collected represent cash inflows from financing activities, rather than inflows from operating activities. Therefore, the pledge will generate $20,000 of financing cash inflows during the current year and $30,000 of financing cash inflows in the following year.
PAC might choose to present this activity in the statement of cash flows by reflecting the receipt of the pledge and the subsequent collections as separate activities. In that event, PAC would reflect a $50,000 adjustment in the reconciliation of the change in net assets to cash flows provided by or used in operating activities in order to eliminate the noncash contribution income. PAC would also reflect a financing cash inflow of $20,000 for the first installment payment collected on the pledge. Thus, the statement of cash flows would display the activity associated with the pledge as follows:
Cash flows from operating activities:
Adjustments to reconcile change in net assets to net cash provided by operating activities:
Noncash contribution received
$(50,000)
Cash flows from financing activities:
Proceeds from contributions restricted for long-term purposes
$ 20,000
Alternatively, when reconciling the change in net assets to cash flows provided by or used in operating activities, PAC might focus on changes in the balance of the pledge receivable (the operating asset). In that case, PAC would reflect a $30,000 adjustment to eliminate the net increase in pledges receivable (in effect, eliminating the income associated with the portion of the pledge that remains uncollected). For the portion of the pledge that was collected, PAC would reflect a $20,000 adjustment to transfer the inflows from the operating to the financing category. Thus, the statement of cash flows would display the activity associated with the pledge as follows:
Cash flows from operating activities:
Adjustments to reconcile change in net assets to net cash provided by operating activities:
Increase in contributions receivable
$(30,000)
Proceeds from contributions restricted for long-term purposes
(20,000)
Cash flows from financing activities:
Proceeds from contributions restricted for long-term purposes
$ 20,000
We view either presentation as acceptable.

4.5.1 Impact of donated investments on the cash flow statement

For tax-planning purposes, some donors will contribute gifts of appreciated securities in lieu of making cash gifts. Subsequent to the gift, the donated investment might be retained by the NFP in its investment portfolio or, as is more often the case, it may be liquidated. If a decision is made to liquidate the investment, the proceeds from converting the investment to cash are classified as inflows from investing activities, as required by ASC 230-10-45-12(b). FSP 6.7.1.3 provides general guidance on the classification of cash flows associated with sales of investments.
However, if the organization has a policy which requires liquidation of donated investments upon receipt, and is able to liquidate the investments “nearly immediately” after receipt, the receipt and liquidation processes are aligned to such an extent that the gift is economically similar to a gift of cash. Because the NFP is not making “investment decisions” in these circumstances, ASC 230-10-45-21A stipulates that the proceeds from the sale of the donated investments would be classified as operating or, if restricted for a long-term purpose, as financing using the same classification framework applied to cash donations.

ASC 230-10-45-21A

Cash receipts resulting from the sale of donated financial assets (for example, donated debt or equity instruments) by NFPs that upon receipt were directed without any NFP-imposed limitations for sale and were converted nearly immediately into cash shall be classified as operating cash flows. If, however, the donor restricted the use of the contributed resource to a long-term purpose of the nature of those described in paragraph 230-10-45-14(c), then those cash receipts meeting all the conditions in this paragraph shall be classified as a financing activity.

The exception applies if both of the following criteria are met:
  • The NFP does not decide whether to hold or sell the investments received, but directs them for sale as a matter of policy without any limitations. In applying this exception, the policy must provide no discretion for the NFP. For example, the exception would not apply if an NFP provides specific instructions to a broker to only sell the donated assets at or above a specified price. This would indicate that the NFP is making an investing decision.
  • The investments are converted to cash “nearly immediately,” which is generally a matter of days.

Under the exception, proceeds from the sale of the donated investments are classified as operating cash inflows unless the donor restricted the gift for a long-term purpose. If the gift was donor restricted for a long-term purpose, the proceeds are classified as financing inflows, consistent with the discussion in NP 4.5. Note that the exception does not permit the proceeds of liquidation to be reported as proceeds from cash contributions; they must still be identified as proceeds from the sale of investments.
Example NP 4-3 illustrates how the exception impacts reporting in a cash flow statement prepared using the direct method.
EXAMPLE NP 4-3
Direct method ─ securities donation program
Museum maintains a securities donation program for the convenience of donors who wish to make gifts of appreciated marketable securities. Donors are instructed to send such gifts directly to a special brokerage account that will immediately convert the securities to cash and remit the proceeds to Museum. Museum received the following gifts through this program:
Gifts restricted by donors for endowment
$ 7,500
Gifts without long-term donor restrictions
5,000
$ 12,500
How should Museum classify this activity in a statement of cash flows prepared using the direct method?
Analysis
Acquiring investments by donation is a non-cash investing activity pursuant to ASC 230-10-50-4. However, Museum’s donation program qualifies for the exception described in ASC 230-10-45-21A that allows the proceeds from donated investments that are “nearly immediately” liquidated to be classified as either operating or (if donor-restricted for a long-term purpose) financing cash inflows. Thus, the statement of cash flows would display the activity associated with the donated securities program as follows:
Cash flows from operating activities:
Proceeds from sales of contributed investments
$5,000
Cash flows from financing activities:
Proceeds from sales of contributed investments restricted for long-term purposes
$7,500
The proceeds from sale of the $5,000 of securities donated without long-term purpose restrictions would be included in Museum’s net cash flows from operations, while the proceeds from sale of the $7,500 of securities that are restricted for the endowment (a long-term purpose restriction) would be reported as financing cash inflows.

If an NFP chooses to report operating cash flows using the indirect method, its “change in net assets” measure must be adjusted to eliminate the effects of noncash revenues and expenses. Diversity in practice exists regarding reporting a noncash adjustment to eliminate contribution revenues associated with donated investments that convert to cash “nearly immediately.” Some NFPs report two adjustments within the reconciliation: (1) a noncash adjustment to eliminate contribution income arising from all donated investments and (2) an adjustment to add the proceeds from sale of securities that convert “nearly immediately” to cash and are classified as operating activity. Other NFPs view donations of these investments as, in essence, equivalent to cash transactions. Therefore, they make no adjustment to eliminate noncash contribution income. These NFPs report a reclassification adjustment to “transfer” the proceeds from sales that are subject to long-term donor-imposed restrictions into financing activities, similar to the adjustments made to transfer cash contributions with long-term donor-restrictions into the financing category.
Example NP 4-4 illustrates the presentation alternatives for donated securities in a cash flow statement prepared using the indirect method.
EXAMPLE NP 4-4
Indirect method ─ securities donation program
Museum maintains a securities donation program for the convenience of its donors that wish to make gifts of appreciated marketable securities. Donors are instructed to send securities to a special brokerage account set up to immediately convert the securities to cash and remit the proceeds to Museum. Museum received the following gifts through this program:
Gifts restricted by donors for endowment
$ 7,500
Gifts without long-term donor restrictions
5,000
$ 12,500
How would Museum classify this activity in a statement of cash flows prepared under the indirect method?
Analysis
Acquiring investments by donation is a non-cash investing activity pursuant to ASC 230-10-50-4. However, Museum’s donation program qualifies for the exception described in ASC 230-10-45-21A that allows the proceeds from donated investments that are “nearly immediately” liquidated to be classified as either operating or (if restricted for a long-term purpose) financing cash inflows. Thus, the proceeds from sale of the $5,000 of securities donated without long-term purpose restrictions would be included in Museum’s net cash flows from operating activities while the proceeds from sale of the $7,500 of securities that are restricted for the endowment (a long-term purpose restriction) would be reported in financing activities.
If Museum chooses to treat all donated securities as a noncash activity (consistent with ASC 230-10-50-4), the operating activities section would reflect a $12,500 reduction in the reconciliation of the change in net assets to net cash provided by or used in operating activities to eliminate the income from the noncash gifts, along with a $5,000 cash increase for the proceeds from the immediate liquidation of the securities donated without long-term purpose restrictions, as follows:
Cash flows from operating activities:
Adjustments to reconcile change in net assets to net cash provided by operating activities:
Noncash contributions of securities
$(12,500)
Proceeds from sales of contributed investments
$5,000
Cash flows from financing activities:
Proceeds from sales of contributed investments restricted for long-term purposes
$ 7,500
Alternatively, Museum might view donated securities that are converted “nearly immediately” to cash as being, in essence, cash transactions, in which case no adjustment to reduce the change in net assets for the impact of noncash donations is made. Under that approach, Museum would reflect an adjustment in the reconciliation of the change in net assets to net cash provided by or used in operating activities to transfer the proceeds from sales of the $7,500 in investments that are donor-restricted for the endowment out of operating cash flows and into financing activities, as follows:
Cash flows from operating activities:
Adjustments to reconcile change in net assets to net cash provided by operating activities:
Proceeds from sales of contributed investments restricted for long-term purposes
($7,500)
Cash flows from financing activities:
Proceeds from sales of contributed investments restricted for long-term purposes
$ 7,500

4.5.1.1 Donated investments—noncash investing disclosure

As mentioned in ASC 958-230-55, separate disclosure of noncash investing activities is required by ASC 230-10-50-3.

Excerpt from ASC 230-10-50-3

Information about all investing and financing activities of an entity during a period that affect recognized assets or liabilities but that do not result in cash receipts or cash payments in the period shall be disclosed.

In practice, NFPs have approached the disclosure of noncash investing activities in different ways. Some NFPs disclose all donated investments received during the period–a literal application of ASC 230-10-50-4. Other NFPs only disclose donated investments received that were not liquidated in the same period (and thus, did not result in cash receipts during the period). Either approach is acceptable, but once an NFP has adopted a policy regarding disclosure of donated investments, that policy should be applied consistently from period to period.

PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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