Revenue Recognition GIK Summit – 2009 Presented by Gregg Capin, CPA, Partner CapinCrouse LLP

Revenue Recognition Contributions Made to Third Parties Impact of Donor Intent Accounting Guidance –Contributions Received and Made (FASB 116) –Transfers of Assets (FASB 136) –Key terms –Reporting AERDO Standard #5

Contributions Made to Third Parties Examples – A federated fundraising organization or community foundation raises funds for other NPOs. Donors may direct their gift to a specific charity A supporting foundation, to one charity or a group of related organizations, raises funds and receives gifts specified for the individual organizations

Contributions Made to Third Parties Examples – A food pantry or shelter appeals for support for an unrelated social service agency that it believes is worthy of support An international organization receives gifts specified for a school, seminary, or hospital with which it works

Contributions Made to Third Parties Concerns - Recipient Organization (Middleman) - Reporting as contributions and net assets, assets that are held by the reporting organization but that are not under its discretion and control Beneficiary (Ultimate recipient) - Not reporting net assets that either benefit the reporting organization, are under its control, or that it has a right to receive or direct the use thereof, even though others hold them

Impact of Donor Intent Giving - donors initiate transfers and respond to appeals resulting in transfers of assets, including giving, with different terms, conditions, or restrictions based on their intent Gift use – charities assume fiduciary responsibilities, including the responsibility to use all contributions exclusively to fulfill their specific exempt purposes, consistent with their mission, and to honor donor intent and fulfill donor restrictions

Impact of Donor Intent Legal standing - historically, once a gift was complete, most courts held that donors no longer had standing to enforce gift terms. However, recent cases affirm a trend to allow private legal action when gift use is inconsistent with donor intent and restrictions (e.g. Princeton case)

Impact of Donor Intent Public perception – the trustworthiness of a charity and the charitable sector in general A survey authorized in connection with the Princeton case about use of gifts for purposes other than as restricted by the donor found: –97% consider it “very” or “somewhat” serious if a charity spends donated money for other purposes –78% said they “definitely” or “probably” would stop giving to a charity that accepts gifts for one purpose and uses them for another

Impact of Donor Intent Understanding between a donor and charity – whether implicitly derived or explicitly stated Responsibility of a charity to fulfill the intended purpose – whether the charity is acting as an agent or intermediary or, if a donee, whether the contribution is limited for a specific purpose or period of time or available any exempt purpose

Accounting Guidance FASB Statement No. 116, Contributions Received and Contributions Made FASB Statement No. 136, Transfers of Assets to a Not-for-Profit Organization or Charitable Trust That Raises or Holds Contributions for Others AICPA Audit and Accounting Guide for Not-for- Profit Entities (NPO Guide)

Transfers of Assets Some not-for-profits act as agents, trustees, or intermediaries, helping donors to make a contribution to another entity or individual. In general, if a donor specifies a beneficiary, the recipient organization should not recognize a contribution. [FASB No. 136] –Resource provider (original donor) –Recipient (middleman) –Beneficiary (ultimate recipient/owner)

Contributions Paragraph 5 of FASB Statement No. 116, defines a contribution as: “… an unconditional transfer of cash or other assets to an entity or a settlement or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner. Other assets include securities, land, buildings, use of facilities or utilities, material and supplies, intangible assets, services, and unconditional promises to give those items in the future.”

Contributions Paragraph 7 of FASB Statement No. 116, defines a donor-imposed condition as: “..... a future and uncertain event whose occurrence or failure to occur gives the promisor a right of return of the assets transferred or releases the promisor from its obligation to transfer assets promised.”

Contributions Paragraph 7 of FASB Statement No. 116, defines a donor-imposed restriction as: “…a donor-imposed restriction limits the use of contributed assets; it specifies a use that is more specific than broad limits resulting from the nature of the organization, the environment in which it operates, and the purposes specified in its articles of incorporation or bylaws or comparable documents for an unincorporated association.”

Variance Power The ability of a recipient organization to exercise control over the donation to direct or redirect it without prior consent of the donor to an entity or individual other than the specified beneficiary or beneficiaries Example – donor advised fund with explicit legal power to redirect despite an expressed donor request or preference

Refundable Advances Transfers represent a refundable advance if any of the following conditions exists: –(a)The transfer is subject to the resource provider’s unilateral right to redirect the use of the assets to another beneficiary –(b)The transfer is accompanied by the resource provider’s conditional promise to give or is otherwise revocable or repayable

Refundable Advances Transfers represent a refundable advance if any of the following conditions exists: –(c)The resource provider controls the recipient organization and specifies an unaffiliated beneficiary –(d)The resource provider specifies itself or its affiliate as the beneficiary and the transfer is not an equity transfer

Refundable Advances If determined to be a refundable advance under the above provisions, transfers are reported as assets and net assets of the resource provider and assets and liabilities of the recipient organization

Agent An entity or individual that acts for and on behalf of another Although the term has a legal definition, the term as used in FASB Statement No. 136 has a broader meaning to encompass not only legal agency but also the relationships described in FASB Statement No. 136

Agent A recipient organization acts as an agent for and on behalf of a donor if it: –Receives assets from the donor and agrees to use those assets on behalf of or transfer those assets, the return on investment of those assets, or both to a specified beneficiary –agrees to solicit assets from potential donors specifically for the beneficiary’s use and to distribute those assets to the beneficiary

Agent A recipient organization also acts as an agent if a beneficiary can compel the organization to make distributions on its behalf

Intermediary An entity or individual that acts as a facilitator for the transfer of assets between a potential donor and a potential beneficiary (donee) but is neither an agent or trustee nor a donee and donor An intermediary may or may not charge a handling fee or commission

Agent and Intermediary Reporting Cash and other financial assets held are reported at fair value as assets and liabilities, unless there is variance power or the recipient and beneficiary are financially interrelated Nonfinancial assets are permitted, but not required, to be recognized as assets and liabilities, unless there is variance power or the recipient and beneficiary are financially interrelated [then required to be reported]

Financially Interrelated Reporting A recipient and specified beneficiary are financially interrelated if both of the following conditions exist: –Ability to influence the operating and financial decisions of the other –Ongoing economic interest in net assets of the other

Financially Interrelated Reporting If financially interrelated and not a trustee, the recipient recognizes a contribution (for example, a supporting foundation) Specified beneficiaries also recognize their interest in the net assets of the recipient

Beneficiary Reporting A specified beneficiary recognizes its rights to assets held (financial or nonfinancial) by a recipient organization as an asset unless the recipient organization is explicitly granted variance power Such rights to assets are either: –an interest in the net assets of the recipient –a beneficial interest –a receivable

Beneficiary Reporting If the recipient and beneficiary are financially interrelated, beneficiary reports an interest in the net assets of the recipient, and adjusts for change If there is an irrevocable right to receive future cash flows, a beneficial interest is reported at fair value Receivable is reported in all other cases

Reporting Fund Raising Efforts Permits reporting amounts raised and distributed on behalf of others in a schedule or in the statement of activities, provided that amounts raised in an agent, trustee, or intermediary capacity are not shown in revenues

AERDO Standard #5 Accounting standards provide guidance intended to further consistency in reporting transactions based on certain criteria and the underlying attributes Accounting standards are not necessarily designed to preclude abuse or to avoid transactions that may be structured to meet the criteria but lack merit

AERDO Standard #5 Provides that recognition should be limited to those with essential/critical roles Provides that organizations generally should not accept or recognize GIK unless they: –Direct role in procurement from the original donor –Distribute GIK to final beneficiaries/end users

AERDO Standard #5 Provides that “other” recipients should only accept and recognize GIK it they will –Take physical possession –Add significant value by increasing utility (not just by providing storage or transportation)

AERDO Standard #5 Provides that when multiple organizations are involved, determinative factors for recognition include the attributes of: –Ownership/taking effective title to GIK –Possession –Discretion and variance power to determine the final recipients

Contact Information Gregg Capin CapinCrouse LLP 1255 Lakes Parkway, Suite 130 Lawrenceville, Georgia