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8.6 Accounting requirements—parties are not financially interrelated
Publication date: 27 May 2020
us NFP guide
In a three-party contribution transaction where the organizations are not financially interrelated, the intermediary acts as an agent in transferring the resources from the donor to the third-party donee. In the “Transfers of Assets” subsections of ASC 958-605, “agency” is not used in its strict legal sense (that is, to describe a principal-agent relationship). Instead, it describes a relationship in which the intermediary is acting as an agent for both the donor and the third-party donee.
ASC 958-605-20
Agency transaction: A type of exchange transaction in which the reporting entity acts as an agent, trustee, or intermediary for another party that may be a donor or donee.
Agent: An entity that acts for and on behalf of another. Although the term agency has a legal definition, the term is used broadly to encompass not only legal agency, but also the relationships described in Topic 958. A recipient entity acts as an agent for and on behalf of a donor if it receives assets from the donor and agrees to use those assets on behalf of or transfer those assets, the return on investment of those assets, or both to a specified beneficiary. A recipient entity acts as an agent for and on behalf of a beneficiary if it agrees to solicit assets from potential donors specifically for the beneficiary’s use and to distribute those assets to the beneficiary. A recipient entity also acts as an agent if a beneficiary can compel the recipient entity to make distributions to it or on its behalf.
8.6.1 Not financially interrelated—accounting by the intermediary
When an intermediary receives cash or financial assets from a donor in an agency transaction, it does not recognize contribution revenue. Instead, the intermediary recognizes a liability to deliver the resources to the third-party donee (which will recognize the contribution revenue).
Excerpt from ASC 958-605-25-23
If an intermediary receives cash or other financial assets, it shall recognize its liability to the specified beneficiary concurrent with its recognition of the assets received from the donor. If an intermediary receives nonfinancial assets, it is permitted, but not required, to recognize its liability and those assets provided that the intermediary reports consistently from period to period and discloses its accounting policy.
If the donor imposes restrictions on the use of the assets, those restrictions do not impact the intermediary’s net asset accounting because the intermediary will record an offsetting asset and a liability. Both the liability and the assets are measured based on the fair value of the assets received. Once delivered to the third-party donee, the assets and liabilities are derecognized.
For contributed resources that are nonfinancial assets (such as gifts in kind), the intermediary establishes an accounting policy of either recognition of the asset and liability (gross) or nonrecognition (net). The selected approach must be applied consistently and disclosed in the notes.
8.6.1.1 Presentation of activity in intermediary’s financial statements
For most NFPs, cash inflows and outflows associated with ongoing major or central operations generally arise from transactions related to the change in net assets. However, cash contributions received in agency transactions, while inflows from core operating activities, are not revenue. Similarly, distributions made to third-party donees in agency transactions, while operating in nature, are outflows that are not expenses. Because intermediaries in agency transactions do not reflect revenues and expenses in the statement of activities, financial statement users may have difficulty understanding the magnitude of the intermediary’s agency (often fundraising) operations. ASC 958-605-45-10 therefore provides additional presentation alternatives that may address these challenges.
Excerpt from ASC 958-605-45-10
To the extent that an NFP's activities include raising and distributing cash, the total amounts raised and distributed may be evident from a statement of cash flows prepared using the direct method for reporting operating cash flows. In addition, generally accepted accounting principles (GAAP) do not preclude entities from providing supplementary information or additional disclosures. An NFP may provide a schedule reflecting fundraising efforts or campaign accomplishments or may disclose total amounts raised on the statement of activities, provided that amounts raised in an agent, trustee, or intermediary capacity are not shown as revenues.
The additional presentation alternatives mentioned in ASC 958-605-45-10 can be further described as follows:
- Focus on the cash flow statement. Cash flows associated with agency fundraising transactions are operating activities. The magnitude of amounts raised and distributed will be most evident under the direct method, under which major categories of operating cash receipts and payments are presented at their gross amounts (see NP 4.4.2). AAG-NFP 3.49 notes that organizations might consider placing this statement before the balance sheet, for emphasis.
If the cash flow statement is presented using the indirect method, inflows and outflows from agency transactions can be reported either gross or net pursuant to ASC 958-230-55-4. That is, when reconciling from the overall “change in net assets" measure reported in the statement of activities to net cash provided by or used in operating activities, an intermediary might show an adjustment for the amounts raised for third parties separate from an adjustment for amounts remitted to third parties. Alternatively, an entity might reflect a single adjustment reflecting the net amounts raised. - Provide additional disclosure within the statement of activities. While an intermediary cannot display amounts raised for and remitted to third-party donees as if they were “revenues” and “expenses,” ASC 958-220-55-10 provides illustrations of how such amounts might appropriately be displayed in a statement of activities.
- Provide supplementary information. Supplementary information refers to information presented outside the basic financial statements and notes that further amplifies or explains the activity or items presented in the statements and notes but is not required by GAAP. For example, an intermediary could provide a supplemental schedule of fundraising efforts or campaign accomplishments in material accompanying the financial statements.
In the balance sheet, if the intermediary chooses to group assets and liabilities by net asset classes, the assets and liabilities attributable to agency transactions would be included in the “net assets without donor restrictions” class (ASC 958-605-25-23).
8.6.2 Not financially interrelated—accounting by third-party donee
ASC 958-605-25-28 through ASC 958-605-25-30 provide guidance for recognition of an agency transaction by the third-party donee (beneficiary).
When an intermediary has received cash or financial assets on behalf of a donee, the donee recognizes an asset (for its rights to the assets held by the intermediary) along with contribution revenue. The asset recognized is either a receivable or a beneficial interest, depending on the nature of the gift.
8.6.2.1 Gift to intermediary recorded by third-party donee as receivable
If the third-party donee has the right to receive the transferred assets, it recognizes contribution revenue and a contribution receivable using the guidance for recognition and measurement of unconditional promises to give discussed at NP 7.3. Contribution revenue arising from unconditional promises to give with payments due in future years will normally increase donor-restricted net assets, even if the donor imposes no explicit time or purpose restrictions. This is due to the requirements surrounding the imposition of implied time restrictions on promises to give (see NP 7.3.2.2). Promises that are due within the same reporting period that the gift is made are not subject to implied time restrictions.
Example NP 8-13 illustrates the accounting when an intermediary receives cash or financial assets from a donor in an agency transaction.
EXAMPLE NP 8-13
Agency gift transaction—donee recognizes a receivable
Agency gift transaction—donee recognizes a receivable
Individual makes a one-time gift of $1,000 to Federated Fundraising Organization (FFO) through a workplace campaign. Individual designates his gift to Community Food Bank to support its food recovery program. FFO and Community Food Bank are independent organizations and are not financially interrelated. Individual does not grant variance power to FFO. FFO’s policy is to distribute designated gifts within 90 days.
How would the gift initially be accounted for by FFO and Community Food Bank?
Analysis
FFO does not have the ability (through variance power) to override Individual’s designation of a third-party donee; thus, both entities would account for the gift using the three-party contribution framework. Because FFO and Community Food Bank do not have a financially-interrelated fundraising relationship, this gift is an agency transaction.
FFO would recognize $1,000 of assets along with a liability to Community Food Bank. Community Food Bank would recognize $1,000 of contribution revenue and a receivable from FFO. The gift would increase Community Food Bank’s net assets with donor restrictions due to the donor-imposed purpose restriction (to use the resources for the food recovery program). Because the funds will be transferred in less than one year, Community Food Bank would not also need to imply a time restriction on the net assets.
8.6.2.2 Third-party donee recognizes a beneficial interest
If the donee has unconditional rights to some or all the cash flows generated by an identifiable pool of assets held by the intermediary, it recognizes a beneficial interest. A common example is a gift transaction in which a donor transfers assets to an independent third party (such as a charitable trust for which a bank, trust company, NFP foundation, or private individual acts as trustee) under the terms of a split-interest agreement or perpetual trust. The trustee will invest and administer the contributed assets for the term of the trust (a fixed period, the lifespan of a specified individual, or in perpetuity) and make periodic distributions.
In such arrangements, the third-party donee’s rights are to the cash flows associated with the distributions that will be made from the trust, rather than to the underlying assets in the trust. Thus, the donee’s asset is the irrevocable right to a portion of the stream of cash flows (in a split-interest agreement) or to the entire stream of cash flows (in a perpetual trust).
In a split-interest agreement, the assets contributed to the trust will be shared between the third-party donee and other (usually non-charitable) beneficiaries in an arrangement with a specified term. The third-party donee will have either the right to distributions during the agreement’s term (the lead interest) or the right to the assets remaining at the end of the agreement’s term (a remainder interest). Ultimately, all the contributed assets together with the associated investment return will be distributed among the beneficiaries, after which the trust terminates. For more information on various structures used for split interest gifts, see NP 8.7.
In perpetual trusts, the assets are invested in perpetuity for the benefit of one or more charitable beneficiaries. In contrast to a split-interest agreement (see NP 8.7), the distributions from a perpetual trust never end. The third-party donee has the irrevocable right to receive distributions from the income earned on the trust assets in perpetuity, but never receives the assets held in trust.
Beneficial interest—recognition and measurement
If the intermediary has variance power to redirect the benefits to another entity, or if the third-party donee’s rights to the benefits are conditional, the donee would not recognize a beneficial interest until it its rights to distributions become unconditional. Otherwise, when the third-party donee is notified of the trust's existence, the arrangement should be recognized as donor-restricted contribution revenue and, in accordance with ASC 958-605-30-14, as a beneficial interest measured at fair value.
In some cases, a third-party donee may have reliable evidence that a beneficial interest exists but, after making reasonable efforts, is unable to obtain the information that would be necessary to measure that interest (for example, the amount of assets held by the trust; the payout rate or amount; the ages of all life beneficiaries). According to AAG-NFP 6.22 and 6.23, best practice in those situations is to recognize the beneficial interest in the first year in which the needed information becomes available. Prior to that time, the donee should not report an asset, but instead disclose the known facts and circumstances pertaining to each potentially material beneficial interest or in the aggregate for individually immaterial interests that are material collectively. If the NFP made (and continued to make) reasonable efforts to obtain the necessary information, the initial recognition of the interest would not be reflected as a prior period adjustment to correct an error pursuant to ASC 250, Accounting Changes and Error Corrections.
In a split-interest agreement, the asset and contribution revenue initially recorded represents the donee’s entitlement to either the lead interest payments or the remainder interest payment, as appropriate. If fair value is measured using a present value approach, the discount rate would be based on the estimated life expectancy of the non-charitable beneficiary. For a perpetual trust, fair value generally can be measured using the fair value of the assets contributed to the trust, unless facts and circumstances indicate that the fair value of the beneficial interest differs from the fair value of the assets contributed to the trust.
At each reporting date, the donee would remeasure its beneficial interest at fair value using the same technique that it used upon initial measurement, as discussed at ASC 958-30-35-2 and ASC 958-605-35-3. Fair value measurement is addressed by ASC 820. Paragraphs 71 through 80 of the AICPA white paper, Measurement of Fair Value for Certain Transactions of Not-for-Profit Entities, (see Appendix A of chapter 6 of AAG-NFP) provides a comprehensive discussion of fair value measurement considerations for beneficial interests in both split-interest and perpetual trusts.
Beneficial interest—presentation
In the statement of activities, the changes in the fair value of the beneficial interest are recognized as change in the value of split-interest agreements (or something similar) and are reported as an increase or decrease in donor-restricted net assets. According to ASC 958-30-45-7, contribution revenue and changes in the value of split-interest agreements should be presented as a separate line item in a statement of activities or the related notes. The codification is silent with respect to presentation considerations for similar activity of perpetual trusts.
Distributions from perpetual trusts and split-interest agreements are accounted for differently. Distributions from split-interest agreement trusts are reported as a reduction in the beneficial interest (ASC 958-30-35-10). Reclassifications from net assets with donor restrictions to net assets without donor restrictions are reported as distributions are received (due to release of the time restriction), unless the distributions are otherwise further restricted by the donor. Annual distributions from a perpetual trust are reported as investment income that increases net assets with or without donor restrictions, depending on whether the donor imposed any time or purpose restrictions (ASC 958-605-35-3).
Example NP 8-14 illustrates the guidance for accounting for measurement of a beneficial interest associated with a split-interest agreement.
EXAMPLE NP 8-14
Agency gift transaction—donee recognizes a beneficial interest
Agency gift transaction—donee recognizes a beneficial interest
Donor transfers $100,000 to Trust Company Bank (Trustee) to establish a charitable remainder annuity trust irrevocably designating Museum as the charitable remainder beneficiary (third-party donee). The terms of the agreement require Trustee to invest the trust assets and pay $5,000 each year to Donor’s spouse (the annuitant) for the remainder of the annuitant's life. Upon death of the annuitant, the trust will terminate, and Trust Company Bank will transfer all remaining assets (the remainder interest) to Museum. Donor imposes no restrictions on Museum’s use of the assets.
How would Museum account for this gift?
Analysis
In this arrangement, the intermediary (Trustee) would maintain control of the contributed assets throughout the life of the trust established by Donor. Because Trustee does not have the ability to override Donor’s designation of a charitable beneficiary (third-party donee), the three-party contribution framework is used. Because Trustee and Museum are not financially interrelated, this gift would be an agency transaction.
Because Museum is the beneficiary of a split-interest agreement held by a third party and has an unconditional right to receive a portion of the specified cash flows (the remainder interest) from the assets held pursuant to that agreement, Museum would recognize an asset (a beneficial interest) and contribution revenue representing its entitlement to the remainder interest. The contribution revenue and beneficial interest asset would be measured at fair value. Because Museum will not receive its interest until the trust expires in the future, a time restriction exists, and the contribution revenue would increase donor-restricted net assets.
At each reporting period, Museum would remeasure the fair value of the beneficial interest (using the same valuation technique that it used to measure the asset initially). Museum would recognize the changes in fair value as “change in value of split-interest agreement” (or something similar), which would increase or decrease net assets with donor restrictions. When the trust terminates, the assets remaining in the trust are distributed to Museum. Museum would recognize the fair value of the assets distributed, decrease its beneficial interest, and increase donor-restricted net assets for any difference (as “change in value of split-interest agreements.”) Because Donor imposed no restriction on Museum’s use of the assets, a reclassification from net assets with donor restrictions to net assets without donor restrictions would be made when the distribution is received.
Question NP 8-1 addresses the timing of release of restrictions on a charitable remainder trust.
Question NP 8-1
If an NFP holds the remainder interest in a charitable trust administered by a third party, does the time restriction on the net assets expire (1) upon termination of the lead interest, at which point the trust is effectively dissolved; or (2) when the trust’s remaining assets are actually distributed to the NFP?
If an NFP holds the remainder interest in a charitable trust administered by a third party, does the time restriction on the net assets expire (1) upon termination of the lead interest, at which point the trust is effectively dissolved; or (2) when the trust’s remaining assets are actually distributed to the NFP?
PwC response
Assuming no other time or purpose restrictions exist, we believe the time restriction would expire when the lead interest terminates. At that point, the third party is obligated to distribute the remaining resources in accordance with the donor’s instructions.
8.6.3 Administrative fees charged by intermediary
An intermediary in an agency transaction might charge the donee an administrative fee to cover the cost associated with raising the gifts. Those fees usually are withheld from the gift proceeds that are transferred to the donee. In those situations, the donee should report the gross amount of the gift as contribution revenue and should recognize fundraising expense for the administrative fee withheld, as illustrated in an example provided at ASC 958-605-55-84 through ASC 958-605-55-87. Additional information can be found in TQAs 6140.21 and 6140.22 and AAG-NFP 5.21.
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