Project Pages

Irrevocable Charitable Trusts

Project Description: The objective of this project is determine what accounting and financial reporting guidance, if any, should be established for irrevocable charitable trusts held for the benefit of governmental entities.

Status:
Currently being deliberated
Added to Research Agenda: December 2013
Added to Current Agenda: May 2014

IRREVOCABLE CHARITABLE TRUSTS—PROJECT PLAN

Background: Questions about the appropriate reporting in irrevocable trust situations occasionally come to the GASB. Discussions with practitioners and auditors suggest that practice varies. Some constituents believe that the recognition criteria in Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, are not met and recognition is not appropriate. Paragraph 22 from Statement 33 states:

In some kinds of government-mandated and voluntary nonexchange transactions, a provider transmits cash or other assets with the stipulation (time requirement) that the resources cannot be sold, disbursed, or consumed until after a specified number of years have passed or a specific event has occurred, if ever. In the interim, the provider requires or permits the recipient to benefit from the resources—for example, by investing or exhibiting them. Examples of these transactions include permanently nonexpendable additions to endowments and other trusts; term endowments; and contributions of works of art, historical treasures, and similar assets to capitalized collections. For these kinds of transactions, the recipient should recognize revenues when the resources are received, provided that all eligibility requirements have been met. Resulting net assets (or equity or fund balance, as appropriate) should be reported as restricted for as long as the provider's purpose restrictions or time requirements remain in effect.

Other constituents do not see a substantive difference between permanent endowments received by an institution (and subsequently transferred to independent investment managers) and resources deposited directly into an irrevocable trust.

Private institutions, under the guidance of Financial Accounting Standards Board Statement No. 136, Transfers of Assets to a Not-for Profit Organization or Charitable Trust That Raises or Holds Contributions for Others, recognize the resources held in an irrevocable trust as assets and the contributions into the trust as revenues. Paragraph 15 of Statement 136 states:

A specified beneficiary shall recognize its rights to the assets (financial or nonfinancial) held by a recipient organization as an asset unless the recipient organization is explicitly granted variance power. Those rights are either an interest in the net assets of the recipient organization, a beneficial interest, or a receivable. … If the beneficiary has an unconditional right to receive all or a portion of the specified cash flows from a charitable trust or other identifiable pool of assets, the beneficiary shall recognize that beneficial interest, measuring and subsequently remeasuring it at fair value. In all other cases, a beneficiary shall recognize its rights to the assets held by a recipient organization as a receivable and contribution revenue in accordance with the provisions of Statement 116 for unconditional promises to give.

The results of the research conducted by project staff provide information about users’ needs for information on irrevocable charitable trusts and the prevalence of the issue. Users of financial statements expressed interest in information on irrevocable charitable trusts to the extent that trusts held by the government or beneficial interests in trusts held by a third party can be used to fund operations of the government or fund debt payments. Results of the preparer survey and archival research did not provide information that clearly supports that beneficial interests in irrevocable charitable trusts are significant, but they did suggest that many types of agreements exist in the government environment.

The archival research showed that a significant number of colleges and universities engage in one or more types of split-interest agreements. However, because trusts are held by third parties or by foundations that are often component units of the primary government, information about beneficial interests in assets held by others generally does not appear in the financial statements of the entities. In the case of foundations that are discretely presented component units, there are inconsistencies in what information, if any, related to beneficial interests in irrevocable charitable trusts is presented or disclosed.

While irrevocable charitable trusts may not represent a clearly significant balance for all governments currently, it has the potential to be significant to them in the future and is significant at present to certain types of governments. Users have expressed an interest in information on these amounts to provide more information on the resources a government may have the ability to call upon in the future. Furthermore, confusion is added by the fact that the FASB has addressed these transactions.

Accounting and Financial Reporting Issues: The project will consider the following issues:
  1. What are the types of irrevocable charitable trusts encountered in the government environment?
  2. What information regarding irrevocable charitable trusts held by the government and by third parties do governments currently have available?
  3. What specific information regarding irrevocable charitable trusts for benefit of the government is necessary for users to make decisions and assess accountability?
  4. Do irrevocable charitable trusts meet the definition of an asset?
  5. What are the measurement and recognition issues associated with irrevocable charitable trusts?
History:
  • Pre-agenda research approved: December 2013
  • Added to current technical agenda: May 2014
  • Deliberations began: July 2014
     
Work Plan:

Board Meetings Topics to be Considered

December 2014:

Intra-entity beneficial interests in irrevocable charitable trusts.

January 2015:

Disclosures about beneficial interests in irrevocable charitable trusts and the beneficial interests of others in irrevocable charitable trusts that the entity is holding.

March 2015:

Review of draft standards section of an Exposure Draft.

March 2015 (T/C):

Review the preballot draft of an Exposure Draft.

May 2015 (T/C):

Review the ballot draft and issue Exposure Draft.

June-August 2015:

Comment period.

September 2015 (T/C–December 2015 (T/C):

Redeliberate issues based on respondent feedback.

January 2016:

Review the preballot draft of the final Statement.

January 2016 (T/C):

Review the ballot draft and issue final Statement.



IRREVOCABLE CHARITABLE TRUSTS—Recent Minutes


Minutes of Meetings November 11-13, 2014

The Board continued deliberations of the Irrevocable Charitable Trusts project by discussing the issues regarding certain liabilities accepted under split-interest agreements that have been analogized as hybrid instruments under FASB literature.

The Board initially discussed whether to consider certain liabilities (those with period-certain and variable payment terms) accepted pursuant to split-interest agreements as a hybrid instrument. The Board tentatively agreed that it would not be operational in the governmental environment to consider accounting for such liabilities as financial hybrid instruments.

Next, the Board discussed whether these liabilities should be considered derivatives within the scope of Statement No. 53, Accounting and Financial Reporting for Derivative Instruments. The Board tentatively agreed to propose that liabilities (those with period-certain and variable payment terms) assumed by the government pursuant to split-interest agreements be considered outside the scope of Statement 53. This tentative decision is based on the perspective that Statement 53 was developed for exchange transactions and therefore is not applicable to a donation.

Therefore, the Board tentatively agreed to propose to measure all liabilities assumed under split-interest agreements in the manner as discussed at the September meeting. The Board tentatively reaffirmed its previous tentative decision to measure the income benefit of a split-interest agreement directly at settlement amount and to measure the remainder benefit as a residual amount (fair value of financial assets minus the settlement amount of the income benefit).

Minutes of Meetings, September 30-October 1, 2014

The Board continued deliberations on the Irrevocable Charitable Trusts project, discussing the issues regarding initial measurement of elements that are recognized in split-interest agreements.

The first issue the Board discussed was the initial measurement of assets. The Board tentatively agreed to propose that financial assets be recognized at fair value at initial measurement. The Board agreed that both kinds of assets (the resources held and administered by a government and the beneficial interest in resources held and administered by a third party outside the reporting entity) are financial in nature. Thus, these assets should be measured at fair value at initial measurement. The Board directed project staff to conduct additional research regarding split-interest agreements with nonfinancial assets.

Next, the Board discussed the initial measurement of liabilities and deferred inflow of resources that arise when a government is holding and administering the resources in a split-interest agreement. The Board discussed the nature of the liabilities that are applicable to this project.

The Board tentatively agreed to propose that liabilities to nongovernmental beneficiaries that represent the income benefit in split-interest agreements that generally meet the definition of a financial liability be initially measured at a settlement amount. The Board also tentatively agreed to propose that the remainder benefit due to the government (deferred inflow of resources) be measured as a residual amount of the value of the assets less the value of the liability.

Similarly, the Board tentatively agreed to propose that liabilities to nongovernmental beneficiaries that represent the remainder benefit in split-interest agreements that generally meet the definition of a financial liability be measured as the residual amount of the value of the assets less the value of the income benefit due to the government (deferred inflow of resources).

Finally, the Board discussed certain scenarios in which liabilities could meet the definition of a hybrid financial instrument. The Board directed the project staff to conduct further research regarding whether certain liabilities could potentially meet the definition of an embedded derivative under GASB standards. No tentative decision was reached regarding this issue.

Minutes of Meetings, August 20-22, 2014

The Board continued deliberations, focusing on recognition issues of three scenarios: (1) direct donations to the government, (2) donations to a component unit of the government, and (3) donations to a third party that is outside the reporting entity for the benefit of the government.

The Board discussed split-interest agreements in which a government or a component unit of the government holds and administers the resources. The Board tentatively decided that these resources meet the definition of an asset provided in Concepts Statement No. 4, Elements of Financial Statements.

Next, the Board discussed split-interest agreements in which a third party outside the reporting entity holds and administers the resources and whether a government’s beneficial interests in these split-interest agreements meet the asset definition. The Board discussed the elements of control and present service capacity. The Board tentatively decided to propose that donated resources held and administered by a third party outside the reporting entity are placed beyond the control of the donor, granting the government control over beneficial interests, when all the following criteria are met:
  • The government (or a component unit of the government) is specified by name as beneficiary in the legal document underlying the donation.
  • The government has a vested beneficial interest.
  • The donation agreement is irrevocable.
  • The donor has not granted variance power to the intermediary.
  • The intermediary is not under the control of the donor (in the case of agency relationships).
The Board discussed a government’s ability to monetize beneficial interests via assignment as a means to establish the present service capacity of such beneficial interests. The Board tentatively decided to propose that a government controls the present service capacity of beneficial interests if:
  • The ability to assign beneficial interests is not subject to approval of the trustee or prohibited by law, and
  • An actual attempt to assign beneficial interests does not invalidate the government’s beneficial interests and therefore terminate the trust.
Next, the Board discussed whether to recognize revenue for beneficial interests contemplated in the scope of the project. The Board tentatively decided to propose that the beneficial interests be recognized as a deferred inflow of resources.

Finally, the Board discussed recognition issues related to component units. The Board tentatively decided to propose that in the case in which the component unit is the specified beneficiary of a split-interest agreement, the component unit recognize an asset and a deferred inflow of resources, consistent with scenarios in which a government is the specified beneficiary. In the case in which a component unit holds and administers the resources of a split-interest agreement for the primary government, the component unit would recognize the donated resources and liabilities to both the nongovernmental beneficiary and the primary government. Consistent with prior tentative Board decisions, the Board tentatively decided to propose that the primary government recognize an asset and a deferred inflow for its beneficial interests in the split-interest agreement in which the component unit holds and administers the resources.

Minutes of Meetings, July 9-10, 2014

The Board began deliberations on the Irrevocable Charitable Trusts project, focusing on defining the scope of items that will be covered by the project. The Board discussed whether to include the following issues in the scope of the project: (a) beneficial interests in resources held by unrelated third parties for the benefit of the government (whether the assets are for the full benefit of the government or there is a split-interest agreement in place); (b) methodology for the measurement and remeasurement of liabilities for split-interest agreements in which the government, or a component unit of the government (that reports under GASB guidance), is holding the assets; (c) guidance for the treatment of liabilities recognized by the component unit for the benefit of the primary government; (d) disclosures related to beneficial interests held by third parties; and (e) disclosures related to split-interest agreements that the government (or its component unit) holds.

The Board tentatively decided to not factor legal structures in the consideration of the scope of the project and tentatively agreed to define the scope of the project as follows:

To consider (a) recognition, measurement, and disclosure of beneficial interests in resources held by third parties that are outside the reporting entity and (b) expanded guidance on recognition, measurement, and disclosure for split-interest agreements for which the government or its component units administer the assets.

IRREVOCABLE CHARITABLE TRUSTS—TENTATIVE BOARD DECISIONS TO DATE


These tentative decisions have been made since the inclusion of the project as a part of the current technical agenda. The Board tentatively agreed to propose that:
  • The scope of the project consider (a) recognition, measurement, and disclosure of beneficial interests in resources held by third parties that are outside the reporting entity and (b) expanded guidance on recognition, measurements, and disclosure for split-interest agreements for which the government or its component units administer the assets.
  • Financial assets be recognized by a government (or component unit), initially measured at fair value, for the resources of a split-interest agreement in which resources are held and administered by the government (or component unit) and a deferred inflow of resources be recognized for the government’s beneficial interest in such a split-interest agreement.
    • Liabilities to nongovernmental beneficiaries that represent the income benefit in split-interest agreements should be initially measured directly at settlement amount.
    • The remainder benefit due to the government (or component unit) should be initially measured as a residual amount of the fair value of the resources received less the value of the liability representing the income benefit due to nongovernmental beneficiaries.
    • The income benefit due to the government (or component unit) should be initially measured directly at settlement amount.
    • Liabilities to the nongovernmental beneficiary that represent the remainder benefit in split-interest agreements should be initially measured as a residual amount of the fair value of the resources received less the value of the deferred inflow representing the income benefit due to the government (or component unit).
  • Financial assets and deferred inflow of resources be recognized by a government (or component unit), initially measured at fair value, for its beneficial interest in a split-interest agreement in which resources are held and administered by third parties outside the reporting entity when all of the following criteria are met:
    • The government (or a component unit of the government) is specified by name as beneficiary in the legal document underlying the donation.
    • The government has a vested beneficial interest.
    • The donation agreement is irrevocable.
    • The donor has not granted variance power to the intermediary.
    • The intermediary is not under the control of the donor (as in the case of agency relationships).
    • The ability to assign beneficial interests is not subject to approval of the trustee or prohibited by law.
    • An actual attempt to assign beneficial interests does not invalidate the government’s beneficial interest and, thereby, terminate the trust.
  • A liability to the primary government and nongovernmental beneficiaries be recognized by a component unit that holds and administers the resources of a split-interest agreement for the benefit of its primary government.
  • An asset and a deferred inflow of resources be recognized by a government for its beneficial interest in a split-interest agreement in which resources are held and administered by a component unit.