Not-for-Profit Split-Interest Agreements: Accounting Under ASC 958 for the CPA Exam
Master split-interest agreement accounting for not-for-profit entities under ASC 958 for the CPA FAR exam. Covers charitable remainder trusts, lead trusts, gift annuities, and pooled income funds.
Split-Interest Agreements Under ASC 958
Split-interest agreements are arrangements in which a donor makes an initial gift to a not-for-profit (NFP) entity, and the economic benefits of that gift are shared between the NFP and at least one other beneficiary. These agreements are typically irrevocable and involve the NFP serving as either a trustee or a beneficiary. ASC 958-30 provides the accounting guidance for these arrangements, and they are a recurring topic on the CPA FAR exam's NFP sections.
Common Types of Split-Interest Agreements
Charitable Remainder Trust
In a charitable remainder trust, the donor transfers assets to a trust that provides income to a noncharitable beneficiary (often the donor or donor's family) for a specified period or for life. When the trust terminates, the remaining assets pass to the NFP. The NFP has a remainder interest. If the NFP serves as trustee, it recognizes the assets received at fair value, a liability for the present value of the estimated payments to the income beneficiary, and contribution revenue for the difference (the remainder interest). If the NFP is only a beneficiary and not the trustee, it recognizes only its beneficial interest in the trust at fair value.
Charitable Lead Trust
A charitable lead trust is the reverse: the trust provides income to the NFP for a specified period, and when the trust terminates, the remaining assets pass to a noncharitable beneficiary (typically the donor's heirs). The NFP has a lead interest. If the NFP is the trustee, it recognizes the trust assets, a liability for the present value of the amounts to be distributed to the noncharitable beneficiary at termination, and contribution revenue for the difference. If not the trustee, the NFP recognizes a receivable (or beneficial interest) at the present value of the expected distributions.
Charitable Gift Annuity
In a charitable gift annuity, the donor transfers assets directly to the NFP in exchange for the NFP's promise to pay a fixed annuity to one or more beneficiaries for life or a specified period. The NFP recognizes the assets at fair value, a liability for the present value of the annuity obligation, and contribution revenue for the difference. The key distinction from a charitable remainder trust is that the annuity is a general obligation of the NFP, not limited to the specific assets received.
Pooled Income Fund
A pooled income fund commingles gifts from multiple donors. Each donor (or the donor's designated beneficiary) receives a proportionate share of the fund's income for life. Upon the death of each donor's last income beneficiary, the donor's proportionate share of the fund's assets is distributed to the NFP. The NFP recognizes its beneficial interest (remainder interest) at the present value of the expected future distributions from the fund.
Measurement and Recognition
When the NFP serves as trustee, it recognizes the trust assets at fair value and measures the liability to other beneficiaries at the present value of expected future payments, using an appropriate discount rate (often the risk-free rate). The difference between asset fair value and liability is recognized as contribution revenue. This revenue is classified based on the donor's restrictions: with donor restrictions if the agreement specifies a purpose or time restriction, or without donor restrictions if no such restriction exists.
When the NFP is only a beneficiary and not the trustee, it recognizes its beneficial interest at fair value and records contribution revenue. Subsequent changes in the fair value of the beneficial interest are recognized as gains or losses, or as changes in the value of split-interest agreements, depending on the entity's accounting policy.
Subsequent Measurement
Trust assets held by the NFP are remeasured at fair value each period. The liability is recalculated using updated actuarial and discount rate assumptions. Changes in the liability due to the passage of time (accretion) are recognized as an expense or change in value. Changes due to revisions in actuarial assumptions are recognized as adjustments to contribution revenue or as changes in the value of split-interest agreements. Payments to beneficiaries reduce the liability.
Revocable Agreements
If a split-interest agreement is revocable, the NFP does not recognize contribution revenue because the donor retains the ability to redirect the assets. Instead, if the NFP holds assets under a revocable agreement, it recognizes the assets and a refundable advance (liability) for the same amount. Revenue is recognized only when the agreement becomes irrevocable (typically upon the donor's death for a revocable trust).
Exam Preparation Tips
- Know the four main types of split-interest agreements and the cash flow pattern of each (who gets income, who gets the remainder).
- Distinguish between the NFP as trustee (recognize trust assets and liability) and the NFP as beneficiary only (recognize beneficial interest).
- Understand that contribution revenue is the difference between asset fair value and the liability to other beneficiaries.
- Remember that revocable agreements do not generate contribution revenue until they become irrevocable.
- Practice present value calculations for the liability to income beneficiaries, using life expectancy tables and discount rates.
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