The present value of the future cash flows (an “income approach” under ASC 820
) is the valuation technique typically used when measuring the fair value of a contribution due more than one year from the date of the promise. AAG-NFP 5.181 indicates that no market exists for promises to give cash. Because no observable market exists, the donee must make suppositions about the assumptions market participants would use in deciding what to pay for the right to receive the cash flows inherent in the promise.
In developing expectations related to future cash flows, ASC 958-605-30-4
states that the NFP would consider factors associated with the receivable’s collectability (such as the donor’s creditworthiness, the NFP’s past collection experience, and the NFP’s policies concerning the enforcement of promises to give), as well as the possibility that the donor could make payments at times other than the scheduled dates.
The future cash flows are discounted to reflect the time value of money. The assumptions used in selecting a discount rate should be consistent with the assumptions inherent in the cash flows. For example, if probability-weighted cash flows are used, a discount rate that reflects uncertainty in expectations about future defaults should not be used, because the cash flows already reflect assumptions about the uncertainty of future defaults. Under ASC 958-605-30-5
, unless an NFP has elected the fair value option, the discount rate is established when the unconditional promise to give is initially recognized and not revised subsequently.
The discount rate shall be determined at the time the unconditional promise to give is initially recognized and shall not be revised subsequently unless the entity has elected to measure the promise to give at fair value in conformity with the Fair Value Option Subsections of Subtopic 825-10.
Example NP 7-1 is derived from ASC 958-605-55-22
and illustrates the use of a present value technique for initial recognition and measurement of unconditional promises to give cash that are expected to be collected after more than one year.
EXAMPLE NP 7-1
Initial recognition of unconditional promises to give cash
An NFP receives a promise of a gift of $100 to be paid in five years. The anticipated future cash flows from the promise are $70, and the present value of the future cash flows is $50. How should the NFP record the contribution receivable and revenue using a present value technique to measure fair value?
The NFP would record the following entry:
Dr. Contribution receivable
Cr. Contribution revenue – donor-restricted
Cr. Discount on contribution receivable
Note that because expectations related to collectability are considered in initial measurement, the amount initially recognized for the contribution receivable is less than the gross amount promised.
Subsequent to initial recognition, contributions receivable are reported at amortized cost, unless the NFP has elected subsequent fair value measurement of the receivable under ASC 825-10
(refer to NP 7.3.4
). According to AAG-NFP 5.193
, this is similar to accounting for trade receivables due in one year or more. If the expectation of uncollectibility of the cash flows increases (and thus, the NFP believes the expected future cash flows will be lower than initially estimated), it would establish an allowance for uncollectible receivables. Note that the allowance for uncollectible contributions receivable only includes amounts determined to be uncollectible after initial recognition; it does not include the amounts that were determined to be uncollectible in the initial measurement process as stated in ASC 958-310-50-2
. Downward revisions in the initial expectation of collectability are reported as a loss or an expense (bad debt) corresponding to the appropriate net asset class. According to ASC 958-310-45-3
, because expenses may only be reported in net assets without donor restriction, uncollectible amounts should be reported as losses if they are decreases in net assets with donor restriction. Since most contributions receivable are donor-restricted because of the implied time restriction (see NP 6.7.1
), revisions in the initial expectation of collectibility of contributions receivable should be reported as losses rather than expenses.
Unless the NFP has elected subsequent fair value measurement under ASC 825-10
, the discount computed at initial recognition is not revised to reflect market conditions at each measurement date. Instead, it is amortized over the receivable’s scheduled term, typically using the interest method, as described in ASC 835-30-35-2
, although AAG-NFP 5.195
indicates that other methods could also be used if the results are not materially different. ASC 958-310-35-6
requires the increase in the receivable due to the interest amortization to be reported as additional contribution income (rather than as interest income). The increase in the carrying amount of the receivable increases the net asset class in which the promise was originally reported.