SFAS No. 136.
Issued in 1993, SFAS No. 116, Accounting for Contributions Received and Contributions Made, established accounting rules for donors and donees. However, SFAS No. 116 specifically excluded from its coverage asset transfers to agents, trustees, or intermediaries. Thus, an accounting void existed for these third-party not-for-profit organizations (NPOs) that solicit or collect contributions on the behalf of others, and confusion reigned concerning what these entities should report as revenue, income, assets, and liabilities. Responding to this confusion, FASB issued in June 1999 SFAS No. 136, Transfers of Assets to a NPO or Charitable Trust that Raises or Holds Contributions for Others. This article explains the key components of the new standard.
Definitions and Scope of the Standard
Fully understanding SFAS No. 136 requires knowledge of the terms used in the standard; the primary items include
* Resource provider (RP)--the entity or person transferring assets to a NPO or charitable trust.
* Recipient organization (RO)--the NPO that accepts assets from the RP and agrees either to use those assets on behalf of a specified beneficiary or to transfer those assets, the earnings on those assets, or both to the beneficiary.
* Specified beneficiary (SB)--the NPO specified by the RP to receive a donation in some form by way of the RO.
* Intermediary--is an RO that acts as a facilitator for the transfer of assets between an RP and an SB and is neither an agent or trustee nor a donor or donee.
* Trustee--is an RO that holds and manages assets for the benefit of a SB in accordance with a charitable trust agreement.
* Agent--is an RO that acts on behalf of a RP by receiving assets from that RP and using those assets on behalf of or transferring those assets, the earnings on those assets, or both to an SB. An agent may also be an RO acting on behalf of a beneficiary if the RO agrees to solicit assets from potential donors and to distribute the assets to the beneficiary.
SFAS No. 136 establishes accounting guidelines for all parties involved in an asset transfer (i.e., the RP, RO, and SB). An exception is that the standard does not apply to an RO acting as a trustee; however, it does provide reporting guidelines for an SB's rights to those trust assets. Perhaps the key accounting question relates to whether an asset transfer from a RP to a RO represents a contribution. Also, if a transfer fails to qualify as a contribution, then what accounts are affected for the various parties?
Asset Transfers Qualifying as Contributions
Generally, three types of asset transfers qualify as contributions. The first occurs when the RP grants variance power to the RO, and the second exists when the RO is financially interrelated with the SB. The third occurs when the SB is not related to the RO but has unconditional rights to the assets held by the RO.
Variance Power with the RO
Variance power occurs when the RP grants the RO sole authority to redirect the use of transferred assets from the SB to another beneficiary of the RO's choosing. SFAS No. 136 treats asset transfers, whether financial or nonfinancial, carrying variance power for the RO as contributions from the RP to the RO. As such, the RP records the transfer by debiting expense and crediting assets, while the RO debits assets and credits revenue. The entries are recorded at the fair value of the assets transferred. The SB makes no entry for the transfer because it has no ongoing rights in the assets.
RO and SB Financially Interrelated
Even if the RO does not obtain variance power, the transfer still qualifies as a contribution if the RO and SB are financially interrelated. Such a relationship exists when both of the following criteria are met:
1. One entity has the ability to influence the operating and financial decisions of the other. This ability may be demonstrated in many ways (e.g., the entities are affiliates, one entity has considerable representation on the board of the other, the bylaws of one entity limit its activities to those that are beneficial to the other, or an agreement exists between the entities allowing one entity to set policy for the other).
2. One entity has an ongoing economic interest in the net assets of the other.
If the above conditions are met, the RP debits expense and credits assets, while the RO debits assets and credits revenue. The transaction is recorded at the fair value of the assets transferred. Assuming the RO holds no variance power, the SB has an interest in the assets received by the RO because of the financial interrelationship between the two entities. As such, the SB debits "interests in the net assets of the RO" and credits "change in net assets of the RO." This accounting treatment for the SB closely resembles the equity method of recording investments under APB Opinion No. 18. The "interest in the net assets of the RO" is measured and subsequently remeasured at fair value using a technique such as the present value of estimated future cash flows.
SB with Unconditional Rights
Sometimes, the RO has no variance power and is not financially interrelated with the SB. Typically, in this case, the SB holds an unconditional right to receive all or a part of the specified cash flows relating to the assets transferred to and held by the RO. Under this circumstance, the asset transfer qualifies as a contribution from the PP to the SB. The RP debits expense and credits assets for the fair value of the assets transferred to the RO. The SB records the transfer by debiting either receivables or "interests in the net assets of the RO," depending on how the SB is to receive the future benefits, and credits revenue. The SB measures the transaction using a fair value technique such as the present value of estimated future cash flows. Both the RP and SB record the asset transfer whether the assets are financial or nonfinancial.
SFAS No. 136 requires the RO to record the asset transfer in this case only if the assets are financial (e.g., cash and securities). The entry would include a debit to assets and a credit to payables due to the SB for the fair value of the assets received. For transfers of nonfinancial assets (e.g., supplies, inventory, fixed assets, etc.), the RO may record the transaction but is not required to do so. FASB reasoned that financial assets should be recorded by the RO because these assets may be used temporarily for the RO's purpose while awaiting distribution to the SB. Typically, nonfinancial assets do not afford the RO this luxury and, thus, do not have to be recorded by the RO.
Asset Transfers Not Qualifying as Contributions
An asset transfer to a RO fails to qualify as a contribution if one or more of the following conditions exist:
1. The PP holds unilateral power to redirect the use of the assets to another beneficiary.
2. The transfer is based on the RP's conditional promise to give or is otherwise revocable or repayable.
3. The RP controls the P0 and specifies an unaffiliated beneficiary.
4. The RP specifies itself or its affiliate as beneficiary and the transfer is not an equity transaction.
If the transfer meets any of the first three criteria, the RP debits refundable advance and credits assets, while the RO debits assets and credits refundable advance. The refundable advance represents an asset for the RP and a liability for the RO. The SB makes no entry for the transfer because it holds no ongoing interests in the assets.
If the RP specifies itself or its affiliate as beneficiary (i.e., the fourth criterion), the accounting treatment depends on whether the transfer represents an equity transaction. A transfer is considered an equity transaction if all the following criteria are met:
1. The RP specifies itself or its affiliate as beneficiary.
2. The RP and RO are financially interrelated.
3. Neither the RP nor its affiliate expects payment of the assets, although payment of earnings on the assets may be expected. If the transfer fails to meet any one or more of these equity transaction criteria, the PP debits refundable advance and credits assets, while the RO debits assets and credits refundable advance. No entry applies to the SB, except the one already recorded by the PP (i.e., if the PP is also the SB).
If the transfer meets all the equity transaction criteria, the accounting depends on whether the PP specifies itself or its affiliate as beneficiary. If the PP is the beneficiary, it debits "interest in the net assets of the RO" and credits assets. The RO debits assets and credits an equity transaction, which is simply a line item in its statement of activities separate from revenues, expenses, gains or losses. Since the PP is also the SB, no entry applies for the SB other than the one already recorded as PP. If the PP specifies its affiliate as beneficiary, the PP debits an equity transaction and credits assets, while the RO debits assets and credits an equity transaction. The SB debits "interest in the net assets of the RO" and credits an equity transaction.
As can be seen, SFAS No. 136 provides accounting requirements for several types of asset transfers to NPOs that solicit, hold, or use assets for beneficiaries. Table 1 presents a few examples of applying this new standard.
Disclosures and Implementation
If an NPO discloses in its financial statements a ratio of fundraising expenses to amounts raised, it must also disclose how it computed the ratio. This requirement applies to all NPOs, not just those involved in asset transfers, and will allow financial statement users to evaluate and compare how the different NPOs compute this ratio. Additionally, if an NPO transfers assets to a RO and specifies itself or its affiliate as beneficiary, it must disclose the following information:
1. The identity of the RO.
2. Whether variance power was granted to the RO and a description of the terms of the power if so granted.
3. The terms under which amounts will be distributed to the RP or its affiliate.
4. The aggregate amount recognized in the statement of financial position and whether that amount is recorded as "interest in the net assets of the RO" or as another asset (e.g., refundable advance).
SFAS No. 136 became effective for financial statement years beginning after December 15, 1999. Since a majority of NPOs have fiscal years ending on June 30, it will impact most NPOs beginning July 1, 2000. The standard may be implemented retroactively by restating beginning net assets for the earliest year presented in the financial statements. Alternatively, it may be implemented as a change in accounting principle under the rules of APB Opinion No. 20. In this case, the cumulative effect of the change is reported in the year of adoption with no restatement of prior periods' financial statements.
Charles E. Jordan is a Professor of Accounting at the University of Southern Mississippi. He earned his doctorate from Louisiana Tech University and has published numerous articles dealing primarily with issues related to financial accounting and accounting education.
Stanley J. Clark is an Associate Professor of Accounting at the University of Southern Mississippi. He earned his doctorate from the University of Kentucky and has conducted numerous continuing education seminars on financial accounting topics.
Examples of Applying SFAS No. 136
Example one: Big Company (RP) donates $500,000 in securities to Private College Foundation (RO) and stipulates that the earnings on the transferred assets be used to fund scholarships at Private College (SB). Big Company does not grant the foundation variance power but retains the right to revoke the gift. The foundation and the college are separate, yet financially interrelated, NPOs.
Solution: Because Big Company (RP) may revoke the gift, no contribution exists. Big Company debits refundable advance and credits assets, while the foundation (RO) debits assets and credits refundable advance. Private College (SB) makes no entry.
Example two: Assume the same facts as example one except Big Company does not retain the right to revoke the gift.
Solution: Although the foundation (RO) does not have variance power, it is financially interrelated with Private College (SB). As such, the transfer represents a contribution, and Big Company (RP) debits expense and credits assets, while the foundation debits assets and credits revenue. Private College debits "interest in the net assets of Private College Foundation" and credits "change in interest in net assets of Private College Foundation."
Example three: Acme Company (RP) donates $1,000,000 in securities to Cancer Research Foundation (RO) and stipulates that the foundation transfer the assets to St. Francis Hospital (SB) over a period of time. The foundation is not granted variance power and is not financially interrelated with the hospital. Further, Acme Company relinquishes all rights to the transferred assets.
Solution: This transfer represents a contribution because the hospital (SB) has an unconditional right to receive the assets. Acme Company (RP) debits expense and credits assets, while the hospital debits a receivable (from the foundation) and credits revenue. The foundation (RO) simply acts as an intermediary and debits assets and credits a payable to the hospital.
Example four: Assume the same facts as example three except that Acme Company grants variance power to the foundation.
Solution: Because the foundation (RO) holds variance power over the assets, a contribution has occurred not to the hospital (SB) but to the foundation. Acme Company (RP) debits expense and credits assets, while the foundation debits assets and credits revenue. The hospital makes no entry.
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|Author:||Jordan, Charles E.; Clark, Stanley J.|
|Publication:||The National Public Accountant|
|Date:||Sep 1, 2001|
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