Project Pages

Irrevocable Split-Interest Agreements

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

Status:
Statement No. 81, Split-Interest Agreements, was approved in March 2016.

Irrevocable Split-Interest Agreements—PROJECT PLAN

Background: Questions about the appropriate reporting in irrevocable split-interest agreement situations occasionally come to the GASB. Discussions with preparers and auditors of financial statements 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 split-interest agreements and the prevalence of the issue. Users of financial statements expressed interest in information on irrevocable split-interest agreements to the extent that trusts held by the government or beneficial interests in agreements held by a third party can be used to fund operations of the government or debt payments. Results of the preparer survey and archival research did not provide information that clearly supports that beneficial interests in irrevocable split-interest agreements 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 assets in certain split-interest agreements are held by third parties or by foundations that are often component units of the primary government, information about beneficial interests 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 split-interest agreements is presented or disclosed.

While irrevocable split-interest agreements 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 split-interest agreements encountered in the government environment?
  2. What information regarding irrevocable split-interest agreements held by the government and by third parties do governments currently have available?
  3. What specific information regarding irrevocable split-interest agreements for the benefit of the government is necessary for users to make decisions and assess accountability?
  4. Do beneficial interests in irrevocable split-interest agreements held by others meet the definition of an asset?
  5. What are the measurement and recognition issues associated with irrevocable split-interest agreements?
Project History:
  • Pre-agenda research approved: December 2013
  • Added to current technical agenda: May 2014
  • Task force appointed: No
  • Deliberations began: July 2014
  • Exposure Draft issued: June 2015
  • Comment period: July–September 2015
  • Redeliberations began: October 2015
  • Final Statement issued: March 2016

Irrevocable Split-Interest Agreements—Recent Minutes


Minutes of Teleconference, March 7, 2016

The Board reviewed a ballot draft of a final statement, Irrevocable Split-Interest Agreements, and provided clarifying edits on the draft document. The Board then voted unanimously to approve the issuance of the final Statement.

Minutes of Meetings, February 16-18, 2016

The Board reviewed a preballot draft of the final statement, Irrevocable Split-Interest Agreements, and provided clarifying edits on the document. The Board voted unanimously to move forward with a ballot draft of the proposed Statement.

Minutes of Meetings, January 5-6, 2016

The Board continued redeliberations and reviewed a draft text of the Standards section of a final Statement. The Board provided clarifying edits on the draft Standards section.

The Board also discussed respondent feedback requesting that the Board delay this project until the reexamination of Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, and tentatively decided to proceed towards issuance of a final Statement.

Minutes of Teleconference, December 8, 2015

The Board began redeliberations with discussion of respondent comments related to life-interests in real estate. The Board tentatively decided to carry forward the guidance proposed in the Exposure Draft for asset recognition at the time of donation. The Board also tentatively decided to carry forward the proposed guidance requiring governments to recognize a liability for care and maintenance costs when a government assumes a legally enforceable obligation to pay for those costs as a condition of entering into a life-interest in real estate donation agreement. The Board also discussed guidance proposed in the Exposure Draft that would require recognition of two separate deferred inflows of resources and tentatively decided to require an alternative approach in the final Statement. That alternative approach would require governments to recognize a single deferred inflow of resources. A reduction in the value of a capital asset during the agreement also would result in the reduction of the related deferred inflow of resources. The alternative approach would require the recognition of revenue only at the termination of the agreement.

Next, the Board discussed respondent comments on the transition provisions included in the Exposure Draft and tentatively decided to carry forward the requirements of the Exposure Draft requiring retroactive application of the guidance.

The Board then discussed respondent requests to allow reporting of irrevocable split-interest agreements in fiduciary funds and tentatively decided not to include any guidance in the final Statement related to fiduciary fund reporting.

The Board also discussed respondent comments requesting that the Board include guidance for charitable gift annuities and pooled income funds, and tentatively decided not to include additional guidance for these transactions in the final Statement.

Finally, the Board discussed respondents’ requests to consider incremental disclosure requirements in the final Statement, and tentatively decided not to require any incremental disclosure requirements.

Minutes of Meetings, November 18-20, 2015

The Board began redeliberations by considering respondent comments for situations in which a government is the intermediary in an irrevocable split-interest agreement. The Board tentatively decided to carry forward the requirement that governments recognize resources received pursuant to irrevocable split-interest agreements as assets. The Board also tentatively decided to require that changes associated with investments, including changes in fair value, should be recognized as an increase or a decrease in the remainder interest benefit (most often a deferred inflow of resources).

The Board also considered respondents’ comments related to the guidance for lead interest benefits proposed in the Exposure Draft. The Board tentatively decided to carry forward the guidance in the Exposure Draft that the lead interest benefit will be measured directly using the settlement amount measurement attribute and will utilize an established valuation technique to produce either a discounted or an undiscounted amount.

The Board tentatively decided to require remeasurement of the lead interest benefit each reporting period. Based on this decision, the Board also tentatively decided not to carry forward the guidance proposed in the Exposure Draft for situations in which a government makes disbursements in excess of the amount recognized for the lead interest benefit.

Next, the Board tentatively decided to carry forward the guidance requiring measurement of the remainder interest as the difference between the asset and the lead interest benefit. Again, based on the remeasurement decision, the Board tentatively decided not to carry forward the remeasurement requirement for the remainder interest.

The Board also considered respondents’ comments related to the asset recognition criteria for situations in which a third party is the intermediary in a split-interest agreement. The Board tentatively decided to carry forward to the final Statement the provisions of paragraphs 34a–34e. The Board tentatively decided to modify the criteria in paragraphs 34f and 34g to focus on the legal right conferred by the donor to the government. The Board also tentatively decided that changes in fair value of beneficial interests should be recognized as an increase or a decrease in the deferred inflow of resources.

Minutes of Teleconference, October 26, 2015

The Board began redeliberations of the Exposure Draft, Accounting and Financial Reporting for Irrevocable Split-Interest Agreements, by considering responses requesting clarification on various scope and terminology matters. The Board tentatively decided to reaffirm the definition of the scope of the proposed guidance. The Board also tentatively decided to replace the term “equivalent arrangement,” with “other legally enforceable agreements with characteristics that are similar to irrevocable split-interest agreements.”

The Board also considered respondents’ requests to provide guidance for recognizing irrevocable split-interest agreements when those agreements are reported in governmental funds. The Board tentatively decided that the Exposure Draft provisions should be applicable to both the current financial resources measurement focus and the economic resources measurement focus.

The Board concluded the redeliberations by considering requests from respondents to require the recognition of revenue for the government’s beneficial interests in irrevocable split-interest agreements at inception, as opposed to a deferred inflow of resources proposed in the Exposure Draft. The Board tentatively decided to carry forward the recognition guidance of the Exposure Draft.

Minutes of Meetings, June 2-4, 2015

The Board reviewed the ballot draft of the Exposure Draft, Accounting and Financial Reporting for Irrevocable Split-Interest Agreements. The Board provided clarifying edits and additional clarifying language to the proposed guidance. The Board unanimously voted to approve the issuance of the Exposure Draft.

The Exposure Draft will be issued for public comment on June 12, 2015. Comments from stakeholders will be due on September 18, 2015.

Minutes of Teleconference, May 11, 2015

The Board reviewed the preballot draft of the Exposure Draft, Accounting and Financial Reporting for Irrevocable Split-Interest Agreements. The Board provided edits and added clarifying language to the proposed guidance.

The Board also tentatively decided to remove perpetual trusts from the scope of the project. The Board also decided that the exclusion of perpetual trusts from the scope of the project will be explained in the Basis for Conclusions of the proposed Statement.

Minutes Archive

Irrevocable Split-Interest Agreements—TENTATIVE BOARD DECISIONS TO DATE


Statement No. 81, Split-Interest Agreements, was approved in March 2016.