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7.6 Other contributed services and use of facilities
Publication date: 30 Apr 2022
us NFP guide
An NFP might receive other contributions for use in carrying out its programs that are not related to the NFP’s workforce, supplies, or costs of sales. An NFP might receive the use of space or might give another NFP the use of space (i.e., provide the free use of facilities to other NFPs). An NFP might also receive utilities free of charge or at reduced rates.
These arrangements are regarded as a form of donated noncash assets (similar to the situations discussed in NP 7.4). Example NP 7-11 illustrate the application of these principles to gifts of utilities and is derived from ASC 958-605-55-43.
EXAMPLE NP 7-11
Month-to-month contribution of utilities
Month-to-month contribution of utilities
Foundation receives a contribution of electric utilities from Utility. The electricity is given on a continuous basis subject to the donor's cancellation (that is, Utility could cancel the arrangement at any time). Utility would normally charge a consumer $400 for the amount of electricity used by Foundation during the month of May.
How should Foundation account for this contribution?
Analysis
Because this is a month-to-month arrangement that Utility could discontinue at its discretion, the contribution would be recorded on a monthly basis. Foundation would record the following entry for the month of May:
Dr. Utilities expense
| $400
| |
Cr. Contribution revenue
| $400
| |
Foundation would recognize the fair value of the contributed electricity as both contribution revenue and expense in the period it is received and used, estimating fair value using rates normally charged to a consumer of similar usage requirements. Because the services are received and used simultaneously, the contribution revenue would increase net assets without donor restrictions.
Unconditional promises to provide the use of space or facilities can be one of an NFP’s more difficult accounting challenges, especially as it relates to the determination of the appropriate fair value of the contribution at inception of the arrangement as well as the continuing accounting during the term, and presentation on the balance sheet and statement of activities. This is particularly relevant if the arrangement contains lease payments that are below market. In that case, the actual cash lease payments (even if below market) should be accounted for as a lease under ASC 842, and the difference between those lease payments and the fair market rents for the property should be accounted for as a contribution under ASC 958-605. For an arrangement when no consideration is paid by the NFP, even though it may be similar to a lease, the arrangement does not meet the definition of a lease under ASC 842 and should be accounted for entirely as a contribution. While ASC 958-605-55-24 notes the similarity of such arrangements to leases, it prescribes a not-for-profit-specific accounting model for such unconditional promises to give the use of long-lived assets for which the donor retains title.
Unconditional promises to give the use of long-lived assets (such as a building or other facilities) for a specified number of periods in which the donor retains legal title to the long-lived asset may be received in connection with leases or may be similar to leases but have no lease payments. For example, an NFP may use facilities under a lease agreement that calls for lease payments at amounts below the fair rental value of the property. In circumstances in which an NFP receives an unconditional promise to give for a specified number of periods, the promise should be reported as revenue and as a contribution receivable for the difference between the fair rental value of the property and the stated amount of the lease payments. In other words, if a donor promises that the NFP can use a facility for 10 years, the NFP has received a multiyear promise to give and should report the fair value of that promise as a contribution with a donor-imposed restriction in Year 1. Amounts reported as contributions shall not exceed the fair value of the long-lived asset at the time the NFP receives the unconditional promise to give. The contribution receivable may be described in the financial statements based on the item whose use is being contributed, such as a building, rather than as contributions receivable.
One of the key elements of the guidance is that the fair value of the contribution cannot exceed the fair value of the underlying long-lived asset. As noted in AAG-NFP 5.164, the comparison of fair value should be measured at the date of the unconditional promise to give. NFPs should also separate other potential elements of the contribution from the fair value of the underlying asset (such as a commitment to pay executory costs or environmental remediation).
The AICPA whitepaper “Leasing Activity for Not-for-Profit Entities under ASU 2016-02” summarizes the key aspects of ASU 2016-02 (codified in ASC 842) and also includes three examples, with journal entries, for a contribution of fully-donated space (which is also illustrated in Example NP 7-12), a below-market lease that meets the criteria as a financing lease, and a below-market lease that meets the criteria of an operating lease.
ASC 958-605-55-24 also notes that the contribution receivable may be described in the donee’s financial statements based on the nature of the item being contributed, such as a building, rather than as contributions receivable. For below-market leases, we also believe the contribution receivable could be combined with the right-of-use asset, with proper disclosure.
Example NP 7-12 illustrates the accounting for free use of space and is derived from ASC 958-605-55-46.
EXAMPLE NP 7-12
Promise to contribute use of office space
Promise to contribute use of office space
Charity receives the use of 10,000 square feet of prime office space from Local Business for free. Local Business has unconditionally promised the use of the space, rent free, for five years. Annual rents for comparable office space in the area is $15 per square foot and is projected to remain stable for the next five years.
How should Charity account for this arrangement?
Analysis
Charity has received a multiyear promise to give and should report the fair value of that promise as a contribution that increases net assets with donor-imposed restrictions on day 1 (at the time of the gift). The donor-imposed restriction is an implicit time restriction on the use of the space over the next five years.
The value of the annual rent for each of the five years is $150,000 (10,000 x $15) or $750,000 over the five years. After considering appropriate performance risk and discount rate assumptions, the fair value is determined to be $715,000. The entry to initially record the promise to give would be:
Dr. Contribution receivable
| $750,000
| |
Cr. Discount on contribution receivable
| $35,000
| |
Cr. Contribution revenue—restricted
| $715,000
| |
The discount rate determined at the time the promise is initially recognized would not be revised. The interest method would be used to amortize the discount. Charity would report the amortization as additional contribution revenue that increases net assets with donor restrictions.. The entries to record this activity in the first year of the arrangement would be:
Dr. Rent expense
| $150,000
| |
Cr. Contribution receivable
| $150,000
| |
To reflect annual rent expense
| ||
Dr. Discount on contribution receivable
| $7,000
| |
Cr. Contribution revenue – restricted
| $7,000
| |
To reflect amortization of discount
| ||
Dr. Net assets released from restriction (Donor-restricted net assets)
| $150,000
| |
Cr. Net assets released from restriction (Net assets without donor restrictions)
| $150,000
| |
To reflect expiration of implied time restriction
| ||
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