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8.5 Accounting requirements—parties are financially-interrelated
Publication date: 27 May 2020
us NFP guide
When a foundation (or any type of charitable organization) and a third-party donee—are in a financially-interrelated fundraising relationship, the foundation recognizes contribution revenue (an increase in its net assets) for contributions it receives on behalf of the third-party donee. The recognition principles used are those described in NP 6 and NP 7 for two-party contribution transactions.
Classification of the increase in net assets as donor-restricted or unrestricted is discussed at NP 8.5.1.
When the foundation distributes resources (or obligates itself to transfer the funds), it reduces its assets (or recognizes a liability) and recognizes an expense unless the third-party donee is an affiliate. In the latter situation, the distribution is reported as an equity transfer, as discussed in AICPA TQA 6140.19 and NP 3.4.8.
Distributions that are expenses should be reported by their functional expense classifications. If the distribution (regardless of whether it is an equity transfer or an expense) fulfills the purpose restriction of the donor contribution, the expiration of the restriction is recognized as a release from restriction on the foundation’s statement of changes in net assets.
AAG-NFP 13.129 through AAG-NFP 13.131 provides additional commentary on distributions.
8.5.1 Classification in the statement of net assets of the foundation
The foundation’s classification of net assets associated with gifts for financially-interrelated beneficiaries depends on whether the foundation supports a single beneficiary or more than one beneficiary.
- Single beneficiary
A foundation with a single beneficiary puts itself in the shoes of the beneficiary and classifies the contribution revenue as the beneficiary would have done if it had received the contributions directly from the donor. Therefore, contribution revenue arising from gifts that are subject to donor-imposed time or purpose restrictions with which the beneficiary must comply (for example, a gift that is restricted for the purchase of equipment by the beneficiary) would increase the foundation’s donor-restricted net assets. Otherwise, the contributions received would increase the foundation’s net assets without donor restrictions.
- More than one beneficiary
If a foundation has more than one beneficiary, revenue arising from gifts received on behalf of a specific beneficiary increases donor-restricted net assets because the foundation must use the contribution for the benefit of that entity (see AICPA TQA 6140.16). Gifts that are not donor-designated for a specific beneficiary are considered gifts to the foundation itself. If those gifts are subject to time or purpose restrictions with which the foundation must comply, they increase donor-restricted net assets; otherwise, they increase net assets without donor restrictions. ASC 958-20-55-9 through ASC 958-20-55-10 illustrate this accounting for a foundation that supports a group of affiliates.
8.5.2 Financially interrelated—accounting by third-party donees
A third-party donee’s rights to the assets held by a financially-interrelated foundation are residual rights; that is, they increase or decrease as a result of the foundation’s investing, fundraising, operating, and other activities. Therefore, a third-party donee recognizes its rights by reflecting an asset that represents its interest in the foundation’s net assets (rather than recognizing an interest in specific assets held on its behalf by the foundation).
Periodically, the third-party donee must adjust that interest for its share of any change in the foundation’s net assets during a reporting period. In a statement of activities, this is reported as a single line item using a caption such as “increase (decrease) in interest in net assets of foundation.” As described in ASC 958-20-25-2, this is similar to the share of the earnings or losses of an investee reported by an investor in common stock of a business enterprise under the equity method. For an NFP HCO or other NFP that reports a performance indicator, the portion of any increase that relates to net assets without donor restrictions generally is reported as a single line item in the performance indicator sub-total in the statement of operations, while the portion that increases net assets with donor restrictions is reported as a single line item below the performance indicator within the statement of changes in net assets.
Excerpt from ASC 958-20-25-2
If a beneficiary and a recipient entity are financially interrelated entities, the beneficiary shall recognize its interest in the net assets of the recipient entity. Recognizing an interest in the net assets of the recipient entity and adjusting that interest for a share of the change in net assets of the recipient entity is similar to the equity method, which is described in Subtopic 323-10.
The third-party donee’s share of the change in the foundation’s net assets must be reported as a change in the appropriate class or classes of net assets. In some situations, the entire change will relate to the beneficiary’s net assets with donor restrictions. In others, the beneficiary will need to apportion the change between changes in net assets without donor restrictions and changes in net assets with donor restrictions. The appropriate classification varies based on whether the foundation’s separate legal existence creates an implied time restriction on the beneficiary’s net assets (see NP 8.5.2.1), and on whether the foundation supports a single beneficiary or more than one beneficiary (see NP 8.5.2.2 and NP 8.5.2.3).
Helpful nonauthoritative guidance on classification matters can be found in a series of AICPA TQAs titled Classification of a Beneficiary’s Interest in the Net Assets of a Financially-Interrelated Fund-Raising Foundation in the Beneficiary’s Financial Statements. For NFP HCOs and other NFPs that report a performance indicator, the relevant TQAs can be found in TQA Section 6400.35 through 6400.43. For all other NFPs, see TQA Section 6140.13 through 6140.18.
When the third-party donee receives distributions from the foundation (or the foundation obligates itself to transfer the resources), it recognizes the assets received or promised, and decreases its interest in the net assets of the foundation. This is discussed in NP 8.5.2.4.
8.5.2.1 Classification—implied time restriction on donee’s interest
In evaluating the net asset classification of its share of the net assets of the financially-interrelated foundation, the donee needs to consider whether its access to the contributed resources is impacted by the fact that they are held by a separate legal entity. In other words, because distributions of those resources by the foundation will occur in future periods, the beneficiary may need to imply a time restriction on any net assets held by the foundation.
The key consideration is the third-party donee’s ability (or inability) to influence the timing and amount of the distributions it will receive from the foundation. If the donee controls the foundation, or if it otherwise has such a close working relationship with the foundation that it can, in essence, access the foundation’s assets at will, it would not be appropriate to imply a time restriction. Otherwise, a time restriction should be implied in addition to any other donor-imposed restrictions that may exist. For more information on implied time restrictions, see TQAs 6400.36 -.37 (for NFP HCOs) and TQAs 6140.14 -.15 (for all other NFPs).
If the foundation and the third-party donee are affiliates (and thus, are part of the same reporting entity), the donee should consider the specific facts and circumstances when determining whether a time restriction should be implied (see TQA 6400.38 for facts and circumstances that might be considered). As previously noted, a beneficiary that has legal control of its foundation would be able to access at will any assets held by the foundation. However, if the foundation and the beneficiary are commonly controlled, the beneficiary may or may not have that ability, depending on the facts and circumstances.
An implied time restriction arising from these circumstances differs in certain respects from an implied time restriction that exists because a promise to give is due in a future period. As discussed in NP 6.7.2.4, if both purpose and time restrictions exist with respect to a gift, time restrictions (including implied time restrictions associated with promises to give that are due in future periods) normally must be met before expenditures can be made that would satisfy the purpose restriction, and thus result in a reclassification of net assets from donor restricted to unrestricted. However, net assets that are subject to implied time restrictions because the beneficiary cannot determine the timing and amount of distributions from the foundation can be considered available to support expenditures made before the expiration of the implied time restriction (see footnote 13 of TQA 6140.18 and footnote 11 of TQA 6400.41). The key consideration is whether the donor’s purpose restriction was specific to that particular expenditure. If the foundation has no choice but to distribute the funds based on the expenditure by the donee that met the donor restriction, the implied time restriction is considered met.
8.5.2.2 Classification—donee is foundation’s sole beneficiary
The net asset classification of the share in net assets of a financially-interrelated foundation is also impacted by whether the donee is the foundation’s sole beneficiary or the foundation has multiple beneficiaries.
If the third-party donee is the foundation’s sole beneficiary and no time restriction is implied (i.e., the third-party donee can influence the timing of distributions from the foundation), the share of net assets in the foundation is apportioned between “change in donor-restricted net assets” and “change in net assets without donor restrictions” in a manner that mirrors the classification of the activities in the foundation’s statement of activities for the period. In other words, the impact on net assets will be the same as if the donee had received the contributions directly from the donor.
If a time restriction is implied, contributions to the foundation would increase the third-party donee’s donor-restricted net assets.
Example NP 8-8 illustrates these considerations.
EXAMPLE NP 8-8
Impact of implied time restrictions on sole beneficiary that reports performance indicator
Impact of implied time restrictions on sole beneficiary that reports performance indicator
Hospital Foundation’s articles of incorporation state that it exists solely to solicit donations and to hold and manage such assets for the exclusive benefit of Hospital. As a result, the organizations are financially interrelated. During the reporting period, Foundation had the following activity:
Contribution revenue
|
$50,000
|
($30,000 donor-restricted; $20,000 unrestricted)
|
Investment income
|
7,000
|
($4,000 donor-restricted; $3,000 unrestricted)
|
Administrative expenses
|
(5,000)
|
|
Change in net assets
|
$52,000
|
How would this activity impact the net assets reported in Hospital’s financial statements?
Analysis
Hospital’s classification of the change in its interest in Hospital Foundation’s net assets depends in part on whether Hospital can influence the timing and amount of distributions it receives from Hospital Foundation.
If the organizations have such a close working relationship that Hospital can, in essence, access at will the assets held for it by Hospital Foundation, no time restrictions should be implied. In that case, in the apportionment of the change in its share of Hospital Foundation’s net assets between donor-restricted and unrestricted activity, Hospital would mirror the classification of those activities used in Hospital Foundation’s financial statements, as follows:
Dr. Interest in net assets of Foundation
|
$52,000
|
|
Cr. Increase in interest (net assets with donor restrictions)
|
$34,000
|
|
Cr. Increase in interest (net assets w/o donor restrictions)
|
$18,000
|
Because Hospital reports a performance indicator, the portion that increases net assets without donor restrictions would be included in its performance indicator in its statement of operations. The portion that increases net assets with donor restrictions would be excluded from the performance indicator and reported in its statement of changes in net assets.
On the other hand, if Hospital cannot influence the timing and amount of distributions it receives from Hospital Foundation, it must imply a time restriction on the change in its interest in Hospital Foundation’s net assets. In that scenario, the entirety of the change in interest in net assets would increase Hospital’s donor-restricted net assets, as follows:
Dr. Interest in net assets of Foundation
|
$52,000
|
|
Cr. Increase in interest (net assets with donor restrictions)
|
$52,000
|
Thus, the entire change would also be excluded from Hospital’s performance indicator and would only be reported in Hospital’s statement of changes in net assets.
The implied time restriction would be released when Hospital Foundation distributes the resources to Hospital (or notifies Hospital of its plans to distribute those resources).
8.5.2.3 Classification—foundation has multiple beneficiaries
In contrast to the situations in NP 8.5.2.2, a foundation that is financially interrelated with more than one beneficiary might receive gifts that are not designated for any particular beneficiary. In those situations, a beneficiary recognizes only the share of the foundation’s net assets arising from gifts that are specified for their benefit.
As discussed in NP 8.5.1, gifts that have a specified beneficiary are classified as donor-restricted net assets by the foundation. From the perspective of the beneficiary, however, if these gifts have no other donor-imposed (i.e., time or purpose) restrictions, they increase the beneficiary’s net assets without donor restrictions, if no implied time restriction exists. If an implied time restriction exists, the resources held by the foundation will increase the beneficiary’s donor-restricted net assets until they are distributed.
Figure NP 8-3 compares how the presence or absence of implied time restrictions affect the net asset classification of the interest in net assets of the foundation for beneficiaries that share a single fund-raising foundation.
Figure NP 8-3
Beneficiaries net asset classification—shared foundation
Beneficiaries net asset classification—shared foundation
Specified beneficiaries’ net asset classifications
|
||||
|---|---|---|---|---|
Foundation’s net asset classifications
|
No implied time restriction
|
Implied time restriction
|
||
Gifts received on behalf of a specified beneficiary (with donor-imposed time/purpose restrictions)
|
Donor restricted
|
Donor restricted
|
Donor restricted
|
|
Gifts received on behalf of a specified beneficiary (no time/purpose restrictions)
|
Donor restricted
|
Without donor restrictions
|
Donor restricted
|
|
Gifts that will be divided among beneficiaries based on formula arrangement (no time/purpose restriction)
|
Without donor restrictions
|
Without donor restrictions
|
Donor restricted
|
|
Gifts that will be distributed to beneficiaries at discretion of foundation (no time/purpose restrictions)
|
Without donor restrictions
|
Not recognized by beneficiaries as they have no present rights to these resources
|
||
Gifts that will be distributed to beneficiaries at discretion of foundation (with donor-imposed time/purpose restrictions)
|
Donor restricted
|
|||
Example NP 8-9 illustrates the accounting and reporting considerations for multiple beneficiaries that share a common fundraising foundation.
EXAMPLE NP 8-9
Beneficiary accounting when financially-interrelated foundation is shared
Beneficiary accounting when financially-interrelated foundation is shared
The articles of incorporation of City Cultural Foundation (CCF) state that it is organized to solicit donations and to hold and manage such assets for the benefit of City Opera and Metropolitan Symphony. CCF and City Opera are financially-interrelated organizations, as are CCF and Metropolitan Symphony. City Opera and Metropolitan Symphony are unrelated.
Donor A contributes $1,000 to CCF for City Opera with no other restrictions on its use. Donor B contributes $5,000 to CCF without donor restrictions and without designating a recipient. How would CCF, City Opera, and Metropolitan Symphony each account for this activity in their financial statements?
Analysis
City Cultural Foundation
CCF would recognize the contributions as follows:
Dr. Cash
|
$6,000
|
|
Cr. Contribution revenue (donor-restricted)
|
$1,000
|
|
Cr. Contributions revenue (unrestricted)
|
$5,000
|
The gift from Donor A involves an explicitly-identified donee and thus, is a three-party transaction. Because CCF and City Opera are financially-interrelated, CCF would report contribution revenue of $1,000 that increases net assets with donor restrictions (as it can only be used for City Opera). Donor B did not specify a beneficiary for the $5,000 gift and therefore the gift is outside of the three-party transaction framework. (As a result, the financial-interrelationship of CCF with City Opera and Metropolitan Symphony is irrelevant with respect to the accounting for that gift.) This is a two-party transaction in which CCF is the donee. CCF can choose to allocate this gift to one of the entities or divide it between them, as it wishes. Therefore, CCF would reflect $5,000 of contribution revenue that increases net assets without donor restrictions.
City Opera
Because Donor A specified that the gift be used for the benefit of City Opera, City Opera would include in its net assets its share of the net assets of CCF resulting from the gift received from Donor A.
Although the gift would be included in CCF’s donor-restricted net assets, the resources have no explicit donor-imposed restrictions from City Opera’s perspective and thus, might appear to be an increase in City Opera’s net assets without donor restrictions. However, because the resources are held by CCF, City Opera must consider whether an implied time restriction exists.
If City Opera has such a close working relationship with CCF that it can, in essence, access at will the resources held for it by CCF, no time restriction should be implied. In that case, the gift would increase City Opera’s net assets without donor restrictions, as follows:
Dr. Interest in net assets of CCF
|
$1,000
|
|
Cr. Increase in interest (net assets without donor-restrictions)
|
$1,000
|
On the other hand, if City Opera cannot influence the timing and amount of distributions it receives from CCF, it must imply a time restriction on all of CCF’s net assets held for its benefit. In that case, the gift would increase City Opera’s donor-restricted net assets, as follows:
Dr. Interest in net assets of CCF
|
$1,000
|
|
Cr. Increase in interest (donor-restricted net assets)
|
$1,000
|
The implied time restriction would be released when CCF distributes the resources to City Opera (or notifies City Opera of its plans to distribute those resources).
Because Donor B’s gift did not specify a beneficiary, City Opera has no rights to it. Therefore, City Opera would make no entry with respect to Donor B’s gift.
Metropolitan Symphony
Metropolitan Symphony would make no entries, as it has no claim on either gift.
TQA 6014.16 also illustrates a fact pattern involving beneficiaries that share a foundation.
As can be seen from the table in Figure NP 8-3, a beneficiary would not normally reflect an interest in net assets that belong to the foundation itself. However, if the foundation’s articles of incorporation or an agreement between the foundation and the beneficiaries state that that undesignated gifts must be divided among the beneficiaries according to a prescribed formula, each beneficiary would also reflect an interest in its share of the foundation’s own net assets, computed in accordance with that agreement or formula. In these situations, the need for an implied time restriction is also considered.
Example NP 8-10 illustrates the consideration by beneficiaries of undesignated gifts that will be shared based on a formula.
EXAMPLE NP 8-10
Beneficiaries entitled to undesignated contributions based on a formula
Beneficiaries entitled to undesignated contributions based on a formula
Arts Foundation’s articles of incorporation state that it was organized to solicit donations and to hold and manage such assets for the benefit of two independent NFPs: Civic Ballet and Community Theater. Arts Foundation is not controlled by either of the supported organizations. Arts Foundation and Civic Ballet are financially-interrelated organizations, as are Arts Foundation and Community Theater. An agreement among the three organizations states that gifts not designated by donors for either Civic Ballet or Community Theater must be split equally between them.
Donor makes a gift of $5,000 to Arts Foundation that is not designated for either Civic Ballet or Community Theater and has no other donor-imposed restrictions. How would Arts Foundation and Civic Ballet reflect this gift?
Analysis
Arts Foundation would recognize contribution revenue of $5,000 that increases net assets without donor restrictions. Because the inter-entity agreement specifies that gifts without donor restrictions should be split equally between Civic Ballet and Community Theater, each beneficiary would recognize their rights to $2,500 of Arts Foundation’s net assets arising from the gift.
As the donor imposed no restrictions on the gift, the gift would initially appear to be an increase in Civic Ballet’s net assets without donor restrictions. However, because the resources are held by Arts Foundation, Civic Ballet must consider whether an implied time restriction exists.
If Civic Ballet determines that a time restriction should be implied, the gift would increase its net assets with donor restrictions, as follows:
Dr. Interest in net assets of Arts Foundation
|
$2,500
|
|
Cr. Increase in interest (donor-restricted net assets)
|
$2,500
|
If no implied time restriction exists, the gift would increase Civic Ballet’s net assets without donor restrictions, as follows:
Dr. Interest in net assets of Arts Foundation
|
$2,500
|
|
Cr. Increase in interest (net assets without donor restrictions)
|
$2,500
|
8.5.2.4 Distributions from a financially-interrelated foundation
When a third-party donee receives a distribution from a foundation (or the foundation obligates itself to transfer the resources) from the net assets of the foundation that relate to its interest, the accounting is similar to that used by an equity method investor for distributions received from the investee. The third-party donee would recognize the assets received or receivable and decreases its interest in the net assets of the foundation. This accounting is applied by the beneficiary regardless of whether the foundation accounted for the distribution as an equity transfer (for common control situations) or as expense (see NP 8.5.1).
If the third-party donee has implied a time restriction on its net assets associated with the interest in the foundation (discussed at NP 8.5.2.1), the time restriction on the portion of net assets attributable to the distribution will expire at the time of the distribution, triggering a release of that restriction (see TQA 6140.15 and TQA 6400.37).
Example NP 8-11 illustrates the accounting by the foundation and the beneficiary when funds are distributed by the foundation.
EXAMPLE NP 8-11
Distribution from foundation to sole beneficiary
Distribution from foundation to sole beneficiary
University Foundation’s articles of incorporation state that it exists solely to solicit donations and to hold and manage such assets for the exclusive benefit of University. The organizations are financially interrelated. University does not control University Foundation.
University Foundation distributes $35,000 of cash to University. $30,000 relates to net assets with donor restrictions and $5,000 relates to net assets without donor restrictions. How would University Foundation and University each account for the distribution?
Analysis
University Foundation would reduce its assets and recognize an expense for the distributions, as described in NP 8.5.1. In addition, a $30,000 reclassification from net assets with donor-restrictions to net assets without donor restrictions would be made in connection with the restricted resources transferred. University would decrease its interest in the net assets of the University Foundation for the $35,000 distribution received. The journal entries would be as follows:
University
|
University Foundation
|
|||||
Dr. Cash
|
$35,000
|
Dr. Distribution to University
|
$35,000
|
|||
Cr. Interest in University Foundation’s net assets
|
$35,000
|
Cr. Cash
To record distribution to University
|
$35,000
|
|||
To record distribution received from Foundation
|
||||||
Dr. Donor-restricted net assets
|
$30,000
|
|||||
Cr. Net assets without donor restrictions
|
$30,000
|
|||||
To record release of donor restrictions
|
||||||
If University had implied a time restriction on its interest in the net assets without donor restrictions held at University Foundation, it would also make the following reclassification entry to reflect the release of the implied time restriction:
University
|
||
Dr. Donor-restricted net assets
|
$35,000
|
|
Cr. Net assets without donor restrictions
|
$35,000
|
|
To reflect the release of the implied time restriction due to receipt of distribution
|
||
If the third-party donee is not the foundation’s sole beneficiary, a portion of the foundation’s net assets will be attributable to the third-party donee, a portion will be attributable to other financially-interrelated beneficiaries, and the remainder will belong to the foundation. If the third-party donee receives a distribution from resources that belong to the foundation, it reports that distribution in its statement of activities or statement of operations as contribution revenue recognized in accordance with the Contributions Received subsections of ASC 958-605, rather than as a decrease in its interest in the net assets of the foundation. This is illustrated in Example NP 8-12.
EXAMPLE NP 8-12
Distribution from shared foundation
Distribution from shared foundation
The articles of incorporation of City Cultural Foundation (CCF) state that it is organized to solicit donations and to hold and manage such assets for the benefit of City Opera and Metropolitan Symphony. CCF and City Opera are financially-interrelated organizations, as are CCF and Metropolitan Symphony. CCF is not controlled by either organization.
CCF distributes $35,000 to City Opera. The distribution consists of $30,000 of funds raised that were donor-designated for City Opera and $5,000 of resources from CCF’s undesignated net assets. How would CCF and City Opera each reflect these distributions?
Analysis
CCF would reduce its assets and recognize an expense for the distribution, as described in NP 8.5.1. In addition, a $30,000 reclassification from net assets with donor restrictions to net assets without donor restrictions would be made in connection with the restricted resources transferred that were donor-designated for City Opera.
City Opera would decrease its interest in the net assets of the foundation for the $30,000 portion of the distribution relating to gifts that were donor designated for City Opera and reflect contribution revenue for the $5,000 portion of the distribution that came from CCF’s own funds.
The journal entries would be as follows:
City Opera
|
City Cultural Foundation
|
|||||
Dr. Cash
|
$35,000
|
Dr. Distributions
|
$35,000
|
|||
Cr. Interest in net assets of CCF
|
$30,000
|
Cr. Cash
|
$35,000
|
$35,000
|
||
Cr. Contribution revenue
|
$5,000
|
To record distribution to City Opera
|
||||
To record distribution received from CCF
|
||||||
Dr. Donor-restricted net assets
|
$30,000
|
|||||
Cr. Net assets w/o donor restrictions
|
$30,000
|
|||||
To reflect the release of the restriction from the distribution of donor-restricted resources
|
||||||
If City Opera had implied a time restriction on its interest in the net assets without donor restrictions held at CCF, it would also make the following reclassification entry to reflect the release of the implied time restriction on the $30,000 portion of the distribution:
City Opera
|
||
Dr. Donor-restricted net assets
|
$30,000
|
|
Cr. Net assets without donor restrictions
|
$30,000
|
|
To reflect the release of the implied time restriction related to distribution received
|
||
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