|DAVID T. MEETING, CPA, DBA, is a professor of accounting at Cleveland State University. His e-mail address is email@example.com . RANDALL W. LUECKE, CPA, CMA, CFM, is vice-president–administration and treasurer of CSA International, Cleveland. His e-mail address is firstname.lastname@example.org .|
espite the best intentions, standards sometimes create more confusion than they resolve. For example, not-for-profit organizations that collect or solicit contributions on behalf of other NPOs have had difficulty determining when they are donors or donees or agents, trustees or intermediaries.
Accordingly, it has been difficult for them to decide what to report as assets, liabilities, contribution revenues and donation expenses. This confusion is largely a result of paragraph 4 of FASB Statement no. 116, Accounting for Contributions Received and Contributions Made, issued in 1993. That paragraph says the statement does not apply to asset transfers in which the reporting entity acts as an agent, trustee or intermediary rather than as a donor or donee.
Community foundations and other interested parties asked FASB to provide an interpretation of paragraph 4. Other NPOs, including institutionally related foundations and federated fundraising organizations, asked FASB to expand the scope of its project to describe the circumstances under which they could report assets received as contributions. Some entities expressed concern that a broad interpretation of paragraph 4 would require them to not account for many of their activities as contributions received and made, resulting in understated revenues and expenses. Recording only some fundraising activities as contributions could understate the amounts raised and make many key financial ratios that NPOs use meaningless, resulting in misleading financial statements.
A TWO-PART SOLUTION
In September 1996 FASB issued Interpretation no. 42, Accounting for Transfers of Assets in Which a Not-for-Profit Organization Is Granted Variance Power. The interpretation says an organization that receives assets acts as a donee and donor if the resource provider (the donor) specifies a third-party beneficiary and explicitly grants the recipient organization variance power (defined below).
FASB considered other situations in a second phase of the project, which became Statement no. 136, Transfers of Assets to a Not-for-Profit Organization or Charitable Trust That Raises or Holds Contributions for Others. Issued in June 1999, it establishes accounting standards for transactions in which a donor (the resource provider) makes a contribution by transferring assets to an NPO or charitable trust (the recipient organization), which accepts those assets and agrees to use them on behalf of an entity the donor specifies (the beneficiary) or to transfer the assets—plus any investment returns—to that entity. The standard also covers transactions that are not contributions because the transfers are reciprocal, repayable or revocable.
Appendix A of Statement no. 136 includes a flowchart that illustrates the decision-making process an NPO will follow in implementing the statement and outlines journal entries the resource provider, the recipient organization and the specified beneficiary will make. The flowchart is excerpted in the exhibit . Since it is effective for fiscal years beginning after December 15, 1999, most NPOs will implement Statement no. 136 in the fiscal year that begins in July. As a result, understanding how it resolves past confusion is critical for NPOs and their CPAs.
ASSET TRANSFERS THAT ARE NOT CONTRIBUTIONS
Asset transfers from a resource provider to a recipient organization are not contributions if one or more of these conditions exist:
The transfer is subject to the resource provider’s unilateral right to redirect use of the assets to another beneficiary.
The transfer is accompanied by the resource provider’s conditional promise to give or is otherwise revocable or repayable.
The resource provider controls the recipient organization and specifies an unaffiliated beneficiary.
The resource provider specifies itself or its affiliate as beneficiary and the transfer is not an equity transaction.
The resource provider records the first three circumstances as a debit to refundable advance and a credit to an asset or payable; the recipient organization records them as a debit to an asset and a credit to refundable advance. The specified beneficiary makes no entry since there has been no contribution—the resource provider retains control over the assets.
The first circumstance allows the resource provider to redirect use of the assets to another beneficiary. Hence, the recipient organization may have to return or redirect the assets and the specified beneficiary organization could receive nothing. The second circumstance is not a contribution because Statement no. 116 says conditional donations are not contributions until the condition has been met. A revocable or repayable transfer is not a donation. In the third circumstance, the resource provider transfers assets to a recipient organization it controls and specifies an unaffiliated beneficiary. The resource provider “controls” the recipient organization. Since the resource provider retains control of the transferred assets, no actual contribution has been made. Until the transferred assets are beyond the resource provider’s control, the recipient organization should continue to record the transaction as a debit to an asset and a credit to refundable advance.
When the resource provider specifies itself or its affiliate as beneficiary, the accounting treatment depends on whether the transaction is an equity transaction. The transfer of assets from a resource provider to a recipient organization is an equity transaction if all of these conditions are present:
The resource provider specifies its affiliate or itself as the beneficiary.
The resource provider and the recipient organization are financially interrelated.
Neither the resource provider nor its affiliate expects payment of the transferred assets, although they may expect payment of the transferred assets’ return on investment.
The recipient organization and the specified beneficiary are financially interrelated when their relationship has both of these characteristics:
One organization can influence the operating and financial decisions of the other. Influence may be demonstrated in several ways:
The organizations are affiliates.
One organization has considerable representation on the governing board of the other.
The charter or bylaws of one organization limit its activities to those that benefit the other.
An agreement between the organizations allows one to actively participate in the other’s policymaking processes.
One organization has an ongoing economic interest in the net assets of the other.
If the transfer of assets to the recipient organization does not meet the equity transfer criteria, the organization records an asset and a liability to the resource provider. The resource provider debits an asset and credits an asset or payable. This transaction is not a contribution because the resource provider or an affiliate is the specified beneficiary (the resource provider has given nothing away).
If the transfer meets the requirements for an equity transaction, the entries are determined by whether the specified beneficiary is an affiliate of the resource provider or the provider itself. When the beneficiary is an affiliate, the resource provider debits an equity transaction such as interest/investment in affiliate and credits an asset or payable. The equity transaction is reported as a separate line item in the statement of activities. The recipient organization debits an asset and credits an equity transaction, which it reports as a separate line item on its statement of activities. The recipient organization needs to communicate the impact of this transaction to the specified beneficiary so it can properly reflect that impact in its financial statements. The beneficiary debits interest in net assets of recipient organization and credits equity transaction, which is reported as a separate line item in its statement of activities. This transaction is not a contribution because the specified beneficiary is an affiliate.
When the resource provider is also the beneficiary, it debits interest in net assets of recipient organization and credits an asset or payable. The recipient organization debits an asset and credits an equity transaction. The recipient reports the equity transaction as a separate line item in its statement of activities. The beneficiary is also the resource provider in this circumstance and no additional entries are needed. This transaction is not a contribution because the specified beneficiary is the resource provider (the resource provider has given nothing away).
These transactions usually result in either refundable advances or equity transactions. In transactions where that is not the case, the accounting by the recipient organization and the specified beneficiary depends on whether the recipient has variance power, as explained below.
WITH VARIANCE POWER
A recipient organization has variance power if the donor “explicitly grants” the organization the unilateral power to redirect use of the transferred assets from the specified unaffiliated beneficiary to another. Explicitly grants means the recipient organization has the unilateral power to change the use of the assets. Unilateral means the recipient organization can override the donor’s instructions without approval from any interested party, including the donor and specified beneficiary.
A transfer of assets from the resource provider to a recipient organization with variance power results in contribution revenue for the recipient organization. That organization debits an asset and credits contribution revenue. The resource provider debits an expense and credits an asset or payable. The specified beneficiary makes no entry—the recipient organization has variance power to transfer the assets to another beneficiary without any other organizations’ approval.
WITHOUT VARIANCE POWER
When an asset transfer occurs and the recipient organization and specified beneficiary organization are financially interrelated, the resource provider debits an expense and credits an asset or payable. The recipient organization (if it is not a trustee) debits an asset and credits contribution revenue. Statement no. 136 does not specify entries when the recipient organization is a trustee. When the beneficiary has an unconditional right to receive all or part of the specified cash flows from a charitable trust or other identifiable pool of assets, it must recognize the beneficial interest. The specified beneficiary debits interest in net assets of the recipient organization and credits the change in interest in recipient organization. This beneficial interest should be measured and subsequently remeasured at fair value using a valuation technique such as the present value of estimated future cash flows. The specified beneficiary usually records its entry periodically and updates it each statement period.
When the recipient organization has no variance power and is not financially related to the specified beneficiary, the accounting treatment depends on whether the assets transferred are cash and financial assets or nonfinancial assets. FASB found that cash and financial assets meet the definition of an asset and nonfinancial assets do not. According to FASB Concepts Statement no. 6, Elements of Financial Statements, “Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events.” FASB concluded that a recipient organization should recognize an asset if it is able to obtain and control the economic benefits of the assets—even if it has only temporary use of them. If the transferred assets are cash, the recipient organization can use the cash for its own purposes or invest it and receive the investment return. Similarly, most financial assets can be used temporarily for the recipient’s purposes. FASB said the recipient organization should recognize an asset and a liability to transfer the assets in the future to the specified beneficiary.
The nature of nonfinancial assets (land, building, materials, supplies) usually limits the recipient’s ability to use them for its own benefit. If the assets are of a type that can be used up (such as materials or supplies), the recipient organization is likely to deliver the same assets to the beneficiary. If the materials or supplies increase in value during the holding period, the benefits of that increase accrue to the beneficiary rather than to the recipient organization. Nonfinancial assets also have to be valued. FASB requires a recipient organization to recognize receipts of cash and financial assets as assets and liabilities and to permit—but not require—recognition of nonfinancial assets.
When cash or financial assets are transferred to the recipient organization, the resource provider debits an expense and credits an asset or payable. The specified beneficiary debits a receivable or beneficial interest and credits contribution revenue. If the recipient organization is a trustee, Statement no. 136 does not specify entries. If it is not a trustee, the organization debits an asset and credits a liability.
When the assets transferred to the recipient organization are nonfinancial, the resource provider debits an expense and credits an asset or payable. The recipient organization may make an entry for the fair value of assets received and recognize a liability for the same amount; however, the organization is not required to do so. The specified beneficiary makes an entry debiting a receivable or beneficial interest and crediting contribution revenue.
Beneficiary accounting. A beneficiary with an unconditional right to receive all or part of the specified cash flows from an identifiable pool of assets or a charitable trust must recognize the beneficial interest—measured and subsequently remeasured at fair value using a valuation technique such as the present value of future cash flows. When the recipient organization has variance power, the specified beneficiary does not recognize its “potential” for future distributions—the beneficiary may not receive any assets in the future. It recognizes assets and donation revenue only when the recipient organization transfers assets to the beneficiary.
An NPO that transfers assets to a recipient organization and specifies its affiliate or itself as the beneficiary must disclose the following information for each period it presents a statement of financial position:
The identity of the recipient organization to which the transfer of assets was made.
Whether the recipient organization was granted variance power (if it was, include a description of the terms of the power).
The terms under which amounts will be distributed to the resource provider or its affiliate.
The aggregate amount recognized in the statement of financial position for those transfers and whether that amount is recorded as an interest in the net assets of the recipient organization or as another asset.
If an NPO discloses on the face of its statement of activities or in the notes to its financial statements a ratio of fundraising expenses to amounts raised, it must disclose how it computed the ratio. This requirement applies to all NPOs—even those not involved in the asset transfers described in Statement no. 136—and will allow financial statement readers to compare how various NPOs compute the ratio.
The following illustrations demonstrate NPOs’ implementation of Statement no. 136. The notations in parentheses refer to abbreviations used in the exhibit: RO is recipient organization; RPD is resource provider or donor; and SB is specified beneficiary.
Example 1. The Community Fund (RO) receives a $1 million contribution from an estate (RPD). The terms of the bequest dictate that the fund transfer the contribution—as well as any investment income—to the Free Clinic (SB). The fund has no economic interest in the clinic and the donor has not granted the fund variance power. Upon receipt of the contribution, the fund will recognize both the $1 million asset (cash) on its statement of financial position as well as a corresponding liability reflecting its obligation to transfer the asset to the clinic. If the asset generates any investment income while the fund holds it, the value of both the asset and the liability will increase by the amount of that income.
The fund will not recognize the $1 million contribution as income, nor will it recognize the eventual asset transfer to the Free Clinic as a donation. In this illustration the fund serves as an intermediary between the donor and the beneficiary. The Free Clinic should record the donation and any investment income it generates as a receivable and recognize the same amount as contribution revenue.
Example 2. Assume the same set of facts as above except the donor (RPD) grants the Community Fund (RO) variance power. The fund has the authority to override the donor’s instructions. Under these circumstances, the fund will recognize the asset in its statement of financial position and as contribution revenue in its statement of activities. The fund will not record a liability to the Free Clinic (SB) because it retains the ability to redirect the assets elsewhere. The clinic will not record a receivable from the fund—or contribution revenue—because it is not assured of receiving the assets. If the fund ultimately decides to transfer the assets to the clinic, it will record the donation as an expense and the clinic will recognize contribution revenue of the same amount.
Example 3. Alice Morgan (RPD) contributes $5 million to the United Way of Greater Los Angeles (RO), stipulating that each year the investment income from the donation be awarded to a worthy NPO that provides family planning services for low-income families. In making the donation Morgan specifies that at any time in the future she may redirect the use of the assets—and related investment income—to a specific beneficiary (SB) of her choosing. Under such circumstances, United Way will treat the $5 million contribution as a refundable advance and will not consider the donation to be contribution revenue. As long as the donor has not exercised her right to redirect the use of the assets, each year United Way will select a beneficiary that meets Morgan’s stipulated criteria. United Way also will recognize the year’s investment income as an asset (cash) and a payable to the selected beneficiary. The beneficiary concurrently will recognize a receivable from United Way and contribution income.
Example 4. Albert Spitz (RPD) contributes $100,000 to the Presbyterian Health System Foundation (RO) to establish a home care program at Presbyterian Hospital (SB). Both the foundation and the hospital are wholly owned members of the Presbyterian Health System, Inc., a holding company. The foundation will record the $100,000 asset (cash) and recognize contribution revenue that increases temporarily restricted net assets because the foundation and the hospital are financially interrelated. The hospital will debit “Interest in the net assets of Presbyterian Health System Foundation” and credit “Change in interest in Presbyterian Health System Foundation.”
MAKING THE TRANSITION
Statement no. 136 is effective for fiscal periods beginning after
December 15, 1999. Since many NPOs operate on a fiscal year that
begins July 1, this means they will apply it for the first time this
month. The statement incorporates Interpretation no. 42, which
continues to be effective for fiscal years ending after September 15,
Entities can apply the statement in two ways:
Retroactively, by restating opening net assets for the earliest year presented or, if no prior years are presented, for the year the statement is first applied. In the first period of application, the entity should disclose the nature of any restatement, its effect on the change in net assets and each class of net assets for all periods presented.
Currently, by reporting the effect of initially applying the statement as a change in accounting principle similar to the cumulative effect of a change in accounting principle. Entities should use a retroactive computation to determine the amount of the cumulative effect.
BENEFITS AND BURDENS
Statement no. 136 accomplishes FASB’s objective of clarifying paragraph 4 of Statement no. 116. Organizations that are resource providers (donors), recipient organizations and specified beneficiaries have new accounting guidance they must adopt in the new fiscal year. Statement no. 136 adds a burden for recipient organizations because they now must communicate to beneficiary organizations the amounts received on their behalf. To the extent recipient organizations fail to do this on a timely basis, the burden shifts to beneficiary organizations to secure the necessary information needed to accurately complete their financial statements. Recipient organizations also must communicate to affiliated beneficiary organizations the change in ownership interest that the beneficiary organization has in the recipient organization.