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8.4 Framework for three-party contribution transactions
Publication date: 27 May 2020
us NFP guide
The framework for reporting three-party contribution transactions provides incremental guidance on whether the intermediary or the third-party donee should report the contribution revenue. In addition, it requires third-party donees to recognize an asset representing their rights to the resources held by the intermediary, as described in ASC 958-605-25-28.
A specified beneficiary shall recognize its rights to the assets (financial or nonfinancial) held by a recipient entity as an asset unless the recipient entity is explicitly granted variance power (see paragraph 958-605-25-25). Those rights are any one of the following:
- An interest in the net assets of the recipient entity (see paragraph 958-605-25-32)
- A beneficial interest
- A receivable
In these transactions, the threshold determination is whether the intermediary and the third-party donee have a financially-interrelated fundraising relationship. The guidance for performing that analysis is provided by ASC 958-20, Financially-interrelated entities.
Figure NP 8-2 depicts this decision process associated with this analysis.
Figure NP 8-2
Decision framework – accounting for three-party contribution transactions
Decision framework – accounting for three-party contribution transactions
If the intermediary and the third-party donee are not financially interrelated, the intermediary acts as an agent in transferring the contribution between donor and donee. In that case, the intermediary recognizes a liability to the third-party donee, and the third-party donee recognizes a beneficial interest in the specific assets along with contribution revenue.
If the organizations are financially interrelated, the intermediary’s role differs from that of an agent. In that case, the intermediary recognizes the contribution revenue, and the third-party donee recognizes an interest in the intermediary’s net assets.
8.4.1 Identifying “financially-interrelated” relationships
As described in ASC 958-20-25-1, a financially interrelated relationship typically exists when a foundation is established to raise funds for a specific entity or entities.
Excerpt from ASC 958-20-25-1
A foundation that exists to raise, hold, and invest assets for the specified beneficiary or for a group of affiliates of which the specified beneficiary is a member generally is financially interrelated with the not-for-profit entity or entities it supports.
Often, such organizations share a collective mission, which is to further the services provided by the supported entity.
In a standard agency relationship involving fundraising (discussed at NP 8.6), the intermediary typically has an unavoidable obligation to transfer the assets raised to the third-party donee. In a financially-interrelated relationship, a foundation might have discretion to choose to transfer the assets to the donee, invest them on behalf of the donee, or spend them for a purpose that benefits the donee. Because it has this discretion, it is entitled to recognize the contribution revenue for gifts raised on behalf of the third-party donee.
The framework also requires the third-party donee to recognize an asset representing its rights to the resources held by the intermediary. According to the FASB’s original basis for conclusions for this guidance, the rationale is that, when the parties are financially-interrelated, the nature of the third-party donee’s asset is essentially equivalent to an investor’s residual interest in an investee over which the investor has significant influence. Thus, the third-party donee’s rights are residual rights in net assets of the foundation, rather than rights to specific assets held by the foundation.
The qualifications for financial-interrelationship are modeled on concepts associated with the equity method of accounting in ASC 323. The required characteristics in ASC 958-20-15-2 are an ability to influence operating and financial decisions (NP 8.4.1.1), coupled with an ongoing economic interest in net assets (NP 8.4.1.2). Both characteristics must be present.
Excerpt from ASC 958-20-15-2
A recipient entity and a specified beneficiary are financially interrelated entities if the relationship between them has both of the following characteristics:
- One entity has the ability to influence the operating and financial decisions of the other.
- One entity has an ongoing economic interest in the net assets of the other.
8.4.1.1 Ability to influence operating and financial decisions
In ASC 323, ownership by an investor of 20% or more of an investee’s voting stock leads to a presumption that the investor can exercise significant influence. The four types of relationships listed in ASC 958-20-15-2(a) serve a similar purpose. The existence of any of them establishes a presumption that one of the entities in the fundraising relationship has the ability to influence the operating and financial decisions of the other.
Excerpt from ASC 958-20-15-2(a)
…the ability to influence the operating and financial decisions of the other [entity]…may be demonstrated in several ways, including the following:
- The entities are affiliates.
- One entity has considerable representation on the governing board of the other entity.
- The charter or bylaws of one entity limit its activities to those that are beneficial to the other entity.
- An agreement between the entities allows one entity to actively participate in policymaking processes of the other, such as setting organizational priorities, budgets, and management compensation.
As used in this guidance, “affiliate” refers to a party that controls, is controlled by, or is under common control with the entity (i.e., the ASC Master Glossary definition of affiliate).
8.4.1.2 Ongoing economic interest in net assets
This characteristic is defined in the ASC Master Glossary.
ASC Master Glossary
Ongoing economic interest in the net assets of another: A residual right to another not-for-profit entity's (NFP's) net assets that results from an ongoing relationship. The value of those rights increases or decreases as a result of the investment, fundraising, operating, and other activities of the other entity.
According to the definition, one organization’s rights to the assets held by the other must be a residual right, and the relationship between them must be ongoing. Typically, the nature of the economic interest will be such that the third-party donee will have rights to resources (net assets) held by the foundation, but the opposite scenario could also exist. Either scenario would qualify as an ongoing economic interest for purposes of the financially interrelated assessment.
- Residual right—instead of having rights to specific assets held by an intermediary (as would be the case in a traditional agency relationship), the third-party donee’s rights to the assets held by the foundation are residual. This means that its rights to assets are similar to those of a holder of common stock in a corporation. Upon dissolution of the foundation, the donee would have rights to assets only after the foundation’s liabilities were paid in full (meaning that the donee’s rights are subordinate to the rights of creditors). It also means that the value of those rights increases or decreases as a result of the foundation’s activities.
- Ongoing—the fundraising relationship does not arise from a one-time special event or from events that occur during a limited time period; rather, it continues over time.
Note that the “ongoing economic interest in net assets” described here differs from the concept of “economic interest” used in evaluating consolidation (see NP 5). “Economic interest” is broader and potentially more event-driven – for example, it could refer to an obligation of one NFP to pay another NFP’s liabilities upon dissolution. See AAG-NFP 5.32 for additional information.
8.4.1.3 Examples of how to evaluate financial interrelationship
Example NP 8-6 illustrates the analysis of financial interrelationship for a foundation established to raise funds for a single entity.
EXAMPLE NP 8-6
Evaluating financial interrelationship – foundation with a single beneficiary
Evaluating financial interrelationship – foundation with a single beneficiary
University Foundation’s (Foundation’s) articles of incorporation state that it was established solely to solicit donations and to hold and manage such assets for the exclusive benefit of University. Do University and Foundation have a financially-interrelated fundraising relationship?
Analysis
Yes, the relationship between them meets both criteria for financial interrelationship.
- Because University Foundation’s articles of incorporation limit its activities to those that are beneficial to University, University is deemed to have the ability to influence Foundation’s operating and financial decisions (ASC 958-20-15-2(a)(3)).
- The articles of incorporation limit Foundation’s activities to those that benefit University, so the relationship between them is ongoing. Because University is the sole beneficiary of all of Foundation’s activities, the results of all of Foundation’s activities accrue to the benefit of University. Thus, University has an ongoing economic interest in Foundation’s net assets.
Example NP 8-7 illustrates the analysis for a foundation established to raise funds for two independent NFPs.
EXAMPLE NP 8-7
Evaluating financial interrelationship – foundation with two beneficiaries
Evaluating financial interrelationship – foundation with two beneficiaries
Arts Foundation’s articles of incorporation state that it was organized to raise funds 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 organization.
At the time Arts Foundation was established, the three organizations entered into an agreement outlining certain aspects of how Arts Foundation would be operated. Among other things, the agreement stated that:
- representatives from the three organizations would meet annually to determine Arts Foundation’s campaign priorities for the next year and agree on its operating budget,
- gifts not designated by donors for either Civic Ballet or Community Theater would be split equally between Civic Ballet and Community Theater, and
- Civic Ballet and Community Theater would bear equal responsibility for covering Arts Foundation’s operating costs.
Do Civic Ballet and Arts Foundation have a financially-interrelated fundraising relationship?
Analysis
Yes, the relationship meets both criteria for financial interrelationship.
- Because the inter-entity agreement allows Civic Ballet to participate in decisions such as setting campaign priorities for Arts Foundation and establishing its budget, Civic Ballet is deemed to have the ability to influence Arts Foundation’s operating and financial decisions (ASC 958-20-15-2(a)(4)).
- Because Arts Foundation’s articles of incorporation limit its activities to those that benefit the two beneficiaries, the relationship between the Arts Foundation and Civic Ballet is ongoing. Because the inter-entity agreement establishes how the supported entities will share the revenues and expenses of Arts Foundation, Civic Ballet’s rights to resources raised increases or decreases as a result of Arts Foundation’s activities. Therefore, Civic Ballet has an ongoing economic interest in Arts Foundation’s net assets.
Community Theater also would have a financially-interrelated fundraising relationship with Arts Foundation, for the same reasons.
ASC 958-20-55-3 through ASC 958-20-55-17 provide additional examples, including an example when the foundation and beneficiaries are affiliates.
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