By John Stephen Grice, Sr., and Thomas A. Ratcliffe
In Brief
Getting the Revenue into the Right Entity
It is common practice for not-for-profits to use intermediaries for fund-raising. An example would be a foundation that holds fund-raising events on behalf of a not-for-profit hospital. FASB Interpretation No. 42 was a half-hearted attempt to deal with the issue; now SFAS No. 136 makes the accounting quite clear.
If the foundation's donors give it variance power, the right to give the funds to other beneficiaries, the hospital has no revenue until the foundation directs the funds to the hospital. Otherwise, the issue turns to whether the hospital has an economic interest in the foundation. If so, gifts to the foundation become hospital revenue in the form of an increase in the net assets of the recipient organization. Without the economic interest, the hospital records the gifts to the foundation as assets and contribution revenue.
SFAS No. 136 provides a great deal of flexibility as to how the contributions are shown in the statement of activities.
In June 1999, FASB issued SFAS No. 136, Transfers of Assets to a Not-for-Profit Organization or Charitable Trust that Raises or Holds Contributions for Others. SFAS No. 136 establishes definitive guidance related to transactions in which one reporting entity, the donor, makes a contribution by transferring assets to a not-for-profit organization, the recipient organization, which accepts the assets from the donor and agrees to use those assets on behalf of, or transfer those assets or the investment return on those assets to, another organization specified by the donor. SFAS No. 136 also applies to transfers that are not contributions because the transfers are revocable, repayable, or reciprocal.
In June 1993, FASB issued SFAS No. 116, Accounting for Contributions Received and Contributions Made. In SFAS No. 116, FASB specifically states that the conclusions reached do not apply to transfers of assets where the reporting entity acts as an agent, trustee, or intermediary (rather than as a donor or donee). SFAS No. 136 clarifies the use of the terms "agent," "trustee," and "intermediary" and establishes standards for transfers to those organizations and other not-for-profit organizations that serve as recipient organizations.
The need for SFAS No. 136 arose after questions were asked about how a recipient organization should report receipts or disbursements of assets when those transfers were not considered contributions. Furthermore, questions were raised concerning whether beneficiary organizations should report their interests held by a recipient organization and, if so, how those interests should be reported.
It should be noted that SFAS No. 136 supersedes FASB Interpretation No. 42, Accounting for Transfers of Assets in Which a Not-for-Profit Organization Is Granted Variance Power. FASB did not reconsider the issues addressed in that interpretation; rather, the guidance is simply incorporated into SFAS No. 136. Exhibit 1 presents a flowchart summary of the major provisions of SFAS No. 136.
Intermediary. An intermediary is a recipient organization acting as a facilitator for the transfer of assets between a potential donor and a potential beneficiary but is not an "agent," "trustee," "donor," or "donee" as those terms are contemplated in SFAS No. 116. If an intermediary receives cash or other financial assets, the entity should recognize a liability to a specified beneficiary concurrent with the recognition of assets received from the donor. Both the liability and the assets should be measured at the fair value of the assets received. If an intermediary receives nonfinancial assets, the entity is permitted (but not required) to recognize an asset and liability.
Paragraph 180 of SFAS No. 116 illustrates the intended use of the term "intermediary." In that example, the organization facilitates a contribution between a potential donor (a lawyer willing to provide free legal services) and a potential donee (an entity in need of free legal services). The intermediary organization is not itself a donor or donee, nor is the organization a recipient of services provided by the donor to the donee.
Trustee. A trustee is a recipient organization where a duty exists to hold or manage assets for the benefit of a specified beneficiary in accordance with a trust agreement. SFAS No. 136 does not establish standards for a trustee's reporting of assets held on behalf of a specified beneficiary but does establish standards for the beneficiary's reporting of its interest in those assets.
Agent. An agent acts for, and on behalf of, another entity. A recipient organization acts as an agent for, and on behalf of, a donor if the organization receives assets from the donor and agrees to distribute those assets or the return on those assets to a specified beneficiary. Furthermore, a recipient organization acts as an agent for, and on behalf of, a beneficiary if it agrees to solicit assets from potential donors specifically to be used by the beneficiary and to distribute those assets to the beneficiary. A recipient organization also acts as an agent if a beneficiary can compel the organization to make distributions to the beneficiary or on behalf of the beneficiary.
Liability or Revenue?
Generally, a recipient organization that accepts assets from a donor and agrees to disburse them to a specified beneficiary is not a donee. In these circumstances, the organization should recognize a liability (not revenue) to the specified beneficiary concurrent with its recognition of cash or other financial assets received from the donor. Both the liability and the assets should be measured at the fair value of the assets received. A recipient organization that receives nonfinancial assets is permitted, but not required, to recognize an asset or liability.
A recipient organization that is directed by a donor to distribute the transferred assets or the return on those assets to a specified third-party beneficiary acts as a donee rather than an agent, trustee, or intermediary if the donor explicitly grants the recipient organization variance power. In these circumstances, recipient organizations should recognize contribution revenue (not a liability) pursuant to the provisions of SFAS No. 116. As defined in FASB Interpretation No. 42 (the same definition is utilized in SFAS No. 136), "variance power" is the unilateral power to redirect the use of transferred assets to another beneficiary. In this literature, "explicitly grants" means that the recipient organization's unilateral power to redirect the use of the assets is referred to in the instrument transferring the assets. Furthermore, "unilateral power" means that the recipient organization can override the donor's instructions without approval from the donor, specified third-party beneficiary, or any other interested party.
Economic Interest. In some circumstances, a specified beneficiary has an ongoing economic interest in the net assets of the recipient organization. Alternatively, a recipient organization may have an ongoing economic interest in the net assets of the specified beneficiary. If and when either of these relationships exists, a recipient organization (that is not a trustee) should recognize a contribution when it receives the assets, either financial or nonfinancial, from the donor that are specified for the beneficiary. For example, 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, should recognize contribution revenue when the organization receives assets from the donor.
Statement of Position (SOP) 94-3, Reporting of Related Entities by Not-for-Profit Organizations, defines "economic interest" as an interest in another entity where
1) the other entity holds or utilizes significant resources that must be used for the unrestricted or restricted purposes of the not-for-profit organization, either directly or indirectly, by producing income or providing services, or
2) the reporting organization is responsible for the liabilities of the other entity.
SFAS No. 136 uses the term with a similar meaning. However, an economic interest that arises solely upon dissolution of an entity is not an ongoing economic interest. SFAS No. 57, Related Party Disclosures, defines the term "affiliate" as a party that, directly or indirectly, controls, is controlled by, or is under common control by an entity.
Specified Beneficiary
A specified beneficiary should recognize its interest in the assets, financial or nonfinancial, held by a recipient organization as an asset unless the recipient organization has variance power. If the beneficiary and the recipient organization have a relationship that is characterized by one entity having an ongoing economic interest in the net assets of the other entity, the beneficiary should--
* recognize its interest in the net assets of the recipient organization, and
* adjust that interest for its share of the change in net assets of the recipient
organization.
The accounting approach stipulated here is very similar to the equity method of accounting, which is described in Accounting Principles Board (APB) Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. In all other circumstances, the beneficiary should recognize its interest in the assets held by the recipient organization as a receivable and contribution revenue utilizing the "unconditional promises to give" guidance found in SFAS No. 116. Importantly, if a recipient organization has variance power, the specified beneficiary should not recognize its potential interest in the assets held by the recipient organization.
Pursuant to the guidance in SFAS No. 116, for an unconditional promise to give to be recognized in the financial statements there must be verifiable documentation of a promise made and received. Paragraph 15 of SFAS No. 116 stipulates that receipts of unconditional promises to give with payments due in future periods should be reported as restricted support unless explicit donor stipulations or circumstances surrounding the receipt of a promise make it clear that the donor intended for the contribution to be used to support activities of the current period. Paragraph 20 of SFAS No. 116 stipulates that the present value of future estimated cash flows is an appropriate measure of fair value related to unconditional promises to give or receive cash.
Transfers
A transfer of assets to a recipient organization should be accounted for by the resource provider or recipient organization as an asset and liability if one or more of the following conditions is present:
* The transfer is subject to the resource provider's unilateral right to redirect the use of 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, and
* The resource provider specifies itself or its affiliate as the beneficiary, and the transfer is not an equity transfer.
A transfer of assets to a recipient organization is an equity transfer if all of the following conditions are present:
* The resource provider designates itself or its affiliate as the beneficiary,
* The resource provider and the recipient organization have a relationship that is characterized by one entity having an ongoing economic interest in the net assets of the other entity, and
* The resource provider does not expect repayment of the transferred assets (although payment of investment return on the transfer may be expected).
A resource provider should record an equity transfer as an interest in the net assets of the recipient organization (or an increase in that interest). A recipient organization should record an equity transfer as part of its change in net assets, separately from revenues, expenses, gains, and losses.
Financial Reporting and Disclosures
Arguably, organizations that solicit and collect cash, other assets, or services and distribute them for charitable purposes would understate the results of central operations if less than 100% of the results of fund-raising efforts were reported as contribution revenue. However, as previously discussed, if a recipient organization is acting as an agent, trustee, or intermediary, the assets received do not represent "rights" of the recipient organization. According to SFAS No. 136, although the recipient of the transferred assets has an inflow of assets from activities that constitute the entity's ongoing major or central operations, that inflow is accompanied by an offsetting liability to the specified beneficiary and, consequently, no revenue should be recognized. In an analogous situation, FASB concludes in SFAS No. 136 that just as a savings account deposit (which also is an inflow of assets from activities that constitute major or central operations of the entity) is not revenue to the bank that receives the money, these assets received should not be offset with revenue.
SFAS No. 136 discusses two possibilities for reporting fund-raising efforts "outside" the revenue section of the statement of activities. Specifically--
* to the extent that activities of an entity 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.
* generally accepted accounting principles do not preclude entities from providing supplementary information or additional disclosures. Consequently, an organization may provide a schedule reflecting fund-raising 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).
SFAS No. 136 also illustrates three methods of displaying fund-raising efforts in the revenue section of the statement of activities. The three methods discussed in SFAS No. 136 are illustrated in Exhibit 2. The methods presented are based on the following scenario:
An organization raises $6,000 of contributions, $100 of other support, and $4,000 accounted for as agent, trustee, or intermediary transactions because donors have specified beneficiaries without granting variance power. Of the $4,000 accounted for as agent, trustee, or intermediary transactions, the organization distributes $3,600 to specified beneficiaries and retains $400 as its administrative fees.
It should be noted that methods 2 and 3 in Exhibit 2 display the total amounts raised by the organization. According to SFAS No. 136, each method reports the recipient organization's $6,500 revenues in a manner that is easily understood by users of the financial statements.
SFAS No. 136 also requires "new" disclosures in the financial statements of reporting entities. If an organization discloses in its financial statements a ratio of fund-raising expenses to funds raised, it must disclose the method used to compute that ratio. Additionally, if an organization transfers assets to a recipient organization and specifies itself or its affiliate as the beneficiary, the following information must be disclosed:
* The identity of the recipient organization to which the transfer was made,
* Whether variance power was granted to the recipient organization and a description of the terms of the variance power,
* The terms under which amounts are distributed to the resource provider or its affiliates, and
* The cumulative amount recognized in the statement of financial position, and whether that amount is recorded as a refundable advance or an interest in
net assets.
Effective Date
When practitioners are preparing or reporting on financial statements of not-for-profit clients that raise or hold asset contributions for other organizations, they will notice significant changes and more specific guidance in the technical literature. Notably, the provisions of SFAS No. 136 will necessitate a change in how assets, liabilities, revenues, and expenses are reflected in currently prepared financial statements. In addition, SFAS No. 136 will require new disclosures in the financial statements of some reporting entities.
The provisions of SFAS No. 136 are effective for financial statements issued for fiscal periods beginning after December 15, 1999. Earlier application is encouraged. SFAS No. 136 may be implemented retroactively by restating beginning net assets for the earliest year presented in the financial statements. If SFAS No. 136 is not implemented retroactively, the financial statement effect associated with initial implementation should be reported as a cumulative effecttype change in principle. *
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