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?
Project History:
  • Pre-agenda research approved: December 2013
  • Added to current technical agenda: May 2014
  • Task force appointed: No
  • Deliberations began: July 2014
Current Developments: At its September, November, and December meetings, the Board deliberated issues associated with the Irrevocable Charitable Trusts project.

Work Plan:

Board Meetings Topics to be Considered

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, March 10-12, 2015

The Board continued deliberations on the Irrevocable Charitable Trusts project by discussing topics including fund reporting, community foundations, and a few issues related to the scope and definitions that were pending from the January 2015 meeting.

The Board first considered whether assets donated pursuant to split-interest agreements should be reported, partially or in their entirety, in fiduciary funds. The Board tentatively agreed to propose that resources received pursuant to split-interest agreements be reported with the government’s own resources in either governmental or enterprise funds. Also, the Board tentatively agreed that specific guidance for split-interest agreements to be accounted for and reported in governmental funds is not necessary to include in the proposed standard as existing literature would provide sufficient guidance.

The Board then discussed whether specific guidance should be included in this project for resources held in community foundations. The Board tentatively agreed to make a clarifying edit to the asset recognition criteria previously developed for beneficial interests. Specifically, the language in the proposed variance power criteria would be expanded to clarify that this criteria is specific to the donated resources and not to the entity administering the resources. Furthermore, the Board tentatively agreed that specific guidance should not be proposed for community foundations in this project.

Finally, the Board considered a few scope issues that were pending from the January 2015 meeting. The Board tentatively agreed that revocable split-interest agreements would not be included as part of this project. In addition, the Board tentatively agreed with the proposed definition of a split-interest agreement. Finally, the Board concluded deliberations by tentatively agreeing that the text of the proposed standards should clarify that the accounting and reporting of split-interest agreements is applicable to unconditional rights.

Minutes of Meetings, January 27-29, 2015

The Board continued deliberations on the Irrevocable Charitable Trusts (ICT) project. The topics discussed include definitions, disclosures, pooled income funds, net income unitrusts, perpetual trusts held by a third party, and life interests in real estate.

The Board initially considered a scope clarification to determine whether revocable agreements or conditional interests should be included in the project’s scope. The Board did not reach conclusions with regard to this issue and requested further research regarding revocable agreements and contingent rights. The Board tentatively agreed to include the definitions proposed for lead interest, remainder interest, beneficial interest, beneficiary, and term. However, the Board noted that the terms beneficiary and term will be included in the text of the standard as clarifying provisions rather than key terms.

The Board then discussed possible disclosure requirements for split-interest agreements and beneficial interests. The Board considered incremental disclosures for assets, liabilities, and deferred inflows of resources as well as a narrative disclosure. The Board tentatively agreed that disclosure requirements of existing standards would be applicable and would adequately provide information to the readers of financial statements regarding assets, liabilities, and deferred inflows of resources. The Board then discussed pooled income funds, net income unitrusts, and perpetual trusts held by a third party. The Board tentatively agreed that only assets and deferred inflows of resources should be recognized at inception. In addition, the Board tentatively agreed that a liability to the nongovernmental beneficiary should be recognized as an amount equal to undistributed income. Furthermore, the Board tentatively agreed to further consider the need for a Technical Bulletin to address pooled income funds and net income unitrusts.

Finally, the Board continued deliberations regarding life interests in real estate, a topic previously considered. The Board tentatively agreed that real estate assets donated pursuant to life interests in real estate should be recognized as capital assets or investments, depending on donor-imposed restrictions and management’s intent at the time of the donation. This approach is consistent with the recognition guidance provided in the forthcoming fair value Statement.

The Board reconsidered the recognition of the right to use retained by the donor and concluded that it should be recognized as a deferred inflow of resources, consistent with previously issued standards. The Board also tentatively agreed that this deferred inflow of resources would be recognized as revenue in a systematic and rational manner throughout the actuarial life of the donor. The Board concluded that a liability should be recognized for any contractual obligations assumed by the government (such as improvements, maintenance, or insurance) and that a second deferred inflow of resources should be recognized for the residual interest in the real estate.

Minutes of Meetings, December 15-17, 2014

The Board continued deliberations on the Irrevocable Charitable Trusts project, discussing issues pertaining split-interest agreements and other donation agreements that involve real estate property and gifts of life insurance. The Board also discussed the initial measurement of the income benefit (generally representing the liability) and the remeasurement of assets, income benefit, and remainder benefit.

The Board initially discussed gifts of real estate when the donor retains life interest. The Board tentatively agreed that a government should recognize a capital asset for the real estate property, initially measured at acquisition value. This tentative decision was based on the perspective that because title has been transferred to the government, it is entitled to the risks and rewards associated with the real estate property. The Board tentatively agreed that the government should recognize a liability for mortgages and claims a third party may have over the property. The Board also tentatively decided that a second liability should be recognized for the right of residency or use that the donor retained at the time of the donation. The Board justified recognition of the liability because of the nonexchange nature of the transaction. The Board tentatively agreed to recognize a deferred inflow of resources for the difference between the capital assets and the liabilities recognized. The Board directed project staff to conduct analysis on the remeasurement of the elements associated with this transaction.

Next, the Board discussed gifts of life insurance. The Board tentatively agreed that gifts of life insurance are outside of the scope of the Irrevocable Charitable Trusts project. The Board tentatively agreed that if life insurance policies are used to fund a trust pursuant to a split-interest agreement, the guidance under the proposed Statement, Fair Value Measurement and Application, would be applicable to measuring the policy.

Next, the Board discussed the remeasurement of assets initially recognized when a government enters into split-interest agreements. For split-interest agreements under which resources are being held and administered by the government, the Board tentatively agreed that donated assets that meet the definition of an investment should be remeasured at fair value. The Board also tentatively agreed that changes in the fair value of these assets should be accounted for according to the guidance provided in Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools. For split-interest agreements under which resources are being held and administered by a third party outside the reporting entity, the Board tentatively agreed that beneficial interests should be remeasured at fair value at the end of each reporting period. Next, the Board discussed the final details related to initial measurement of the income benefit pursuant to a split-interest agreement. The Board tentatively agreed to not provide specific guidance to use any specific measurement technique for the income benefit. Based on the nature of the income benefit (stream of cash flows over a period of time) the Board tentatively agreed to introduce examples of measurement techniques the government could use including a present value technique. The Board also tentatively decided to only highlight risk assumptions the government should consider in measuring the income benefit rather than prescribe a specific set of risk assumptions to be incorporated in the measurement. The Board tentatively agreed that the risk assumptions a government should consider include (1) discount rate, (2) estimated return on assets, (3) terms of the agreement for the income benefit, and (4) mortality risks, if the agreement is life-contingent.

Next, the Board discussed the remeasurement of the income benefit. The Board tentatively agreed the income benefit should periodically be adjusted by reducing its carrying value by the discounted amount of payments distributed to the income beneficiary with the asymmetry between amounts being accounted for in the statement of resource flows. The Board also tentatively decided to not require periodic remeasurement of the income benefit unless there is a substantial change in economic conditions or in the trust assets. The Board tentatively agreed to require the remeasurement of the remainder benefit at each reporting period.

Next, the Board discussed the issues that arise upon termination of the agreement. In situations in which the government is entitled to the remainder benefit, the Board tentatively agreed that the government should recognize a gain for any liability that remains outstanding or a loss for payments made in excess of the estimated liability. The Board also tentatively agreed that governments also should derecognize the deferred inflow of resources and recognize the remainder interest as revenue. In situations in which the government is entitled to the income benefit, the government would have recognized income throughout the life of the trust and would use the remaining trust assets to fulfill the liability to the nongovernmental beneficiary. At termination of said agreement, the government would recognize as revenue any outstanding deferred inflow of resources.

Finally, the Board discussed an alternative approach to recognizing changes in the value of elements pursuant to split-interest agreements. This approach would recognize all changes in the assets and the income benefit directly to the remainder benefit (usually the deferred inflow of resources) instead of accounting for those changes through the statement of resource flows. The Board tentatively agreed to not consider the alternative approach.

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.
      • The Board tentatively agreed to include the following definitions:
        • Lead Interest—the right to all or a portion of the benefits of resources during the term of a split-interest agreement
        • Remainder Interest—the right to receive all or a portion of the resources remaining at the end of the split-interest agreement’s term
        • Beneficial Interest—the right to a portion of the benefits of the resources pursuant to agreements in which the donor enters into a trust or other arrangement under which a third party outside the reporting entity receives and administers resources
        • Beneficiary—the person, government, or entity entitled to the lead or remainder interest
        • Term—the duration of a split-interest agreement that generally starts upon the signing of the agreement and, except for perpetual trusts, either terminates after a specified number of years, or upon the occurrence of a certain event (commonly either the death of the donor or the death of the lead interest beneficiary).
  • Assets be recognized by a government (or component unit), for the resources received pursuant to a split-interest agreement under which resources are held and administered by the government (or component unit), a liability be recognized for the benefit to be distributed to nongovernmental beneficiaries, and a deferred inflow of resources be recognized for the government’s beneficial interest.
    • If financial assets are received, the government (or component unit) should initially measure those assets at fair value. Assets that meet the definition of an investment should be subsequently measured at fair value with any changes accounted for according to the requirements of Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools.
    • If real estate assets are received, the government (or component unit) should apply the provisions of Statement No. 72, Fair Value Measurement and Application, to determine how to measure the real estate asset.
    • An income benefit should be initially measured directly, at settlement amount taking into consideration the pertinent risk assumptions including (1) discount rate, (2) estimated return on assets, (3) terms of the agreement, and (4) mortality risk (if the agreement if life-contingent). The government should periodically adjust the income benefit by reducing its carrying value by the discounted amount of payments distributed to the income beneficiary with the difference between amounts accounted for in the statement of flows. The government need not remeasure the income benefit unless there is substantial change in economic conditions or in the trust assets. Liabilities to nongovernmental beneficiaries that represent the income benefit in split-interest agreements should be initially measured directly at settlement amount. The government also would also make annual adjustments for any mortality risk changes.
    • The remainder benefit should be measured as the residual amount of the value of the assets received less the value of the income benefit. The government should remeasure the remainder benefit at each reporting period.
    • Interperiod transactions should be accounted for in the statement of resource flows.
  • 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 when resources are held and administered by third parties outside the reporting entity.
    • Recognition Criteria:
      • 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 an unconditional vested beneficial interest.
      • The donation agreement is irrevocable.
      • The donor has not granted variance power to the intermediary with regard to the donated resources.
      • 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.
    • Financial assets (beneficial interest in a split-interest agreement) should be remeasured at fair value at each reporting period with any changes accounted for according to the requirements of Statement 31.
  • Real Estate assets donated when the donor retains a life interest be recognized as capital assets or as an investment. The government should recognize a liability for any contractual obligations assumed (such as improvements, insurance, or maintenance). The right of use retained by the donor should be recognized as a deferred inflow of resources and further recognized as revenue in a systematic and rational manner through the actuarial life of the donor. The difference between the asset, liability and deferred inflow (for the right to use) should be recognized as a second deferred inflow of resources (for the remainder interest).
  • 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.
    • Pooled Income Funds and Net Income Unitrusts: a technical bulletin will be developed if needed.
      • Only assets and deferred inflows will be recognized at inception.
      • A liability will be recognized up to undistributed income.
    • Disclosures: disclosure requirements of existing standards would adequately provide information to the readers regarding assets, liabilities, and deferred inflows of resources.
    • Resources received pursuant to split-interest agreements should be reported with the government’s own resources in governmental or enterprise funds.