Revenue recognition around contributions can be complicated for not-for-profit organizations, especially when it comes to planned gifts. This article aims to provide guidance to controllers and CFOs as your organization navigates these complexities.
Once an organization determines that a revenue stream is a contribution rather than an exchange transaction, the contribution must be analyzed for conditions. A donor-imposed condition must include both:
- One or more barriers that must be overcome before the recipient is entitled to the assets transferred or promised.
- A right of return to the contributor for assets transferred (or for a reduction, settlement, or cancellation of liabilities) or a right of release of the promisor from its obligation to transfer assets (or reduce, settle, or cancel liabilities).
In addition, unconditional contributions must be irrevocable to be recognized under generally accepted accounting principles. Irrevocable gifts are contributions which are final and unable to be reversed in the future.
Types of Planned Gifts
Beneficiary Designations
Beneficiaries under the donor’s life insurance can be changed to the not-for-profit organization. Unless the donor also transfers ownership of the life insurance policy, the donor could change their life insurance beneficiary in the future and the contribution would not be recognized. However, if the donor transfers ownership of the policy, the organization would recognize this contribution as the donor no longer has the ability to revoke the beneficiary change. See Exhibit A for example recognition.
Bequests
The donor would add the not-for-profit organization to their will. This type of contribution would not be recognized as the will can be changed at any time by the donor and therefore is revocable.
Charitable Gift Annuities
A charitable gift annuity is a contract between the not-for-profit organization and the donor. The donation is invested by the organization, which pays out a fixed amount to the donor based on the terms of the contract. The organization will recognize this contribution as there are no conditions on the contribution and the agreement is irrevocable. See Exhibit B for example recognition.
Retirement Accounts
Similar to life insurance, beneficiaries under the donor’s retirement accounts can also be changed to the not-for-profit organization. The donor could change their retirement account beneficiary in the future, therefore making it revocable so the contribution would not be recognized.
Charitable Lead or Remainder Trusts
In this type of arrangement, funds are transferred by the donor to either a third-party or directly to the not-for-profit organization. Per the donor’s request, periodic distributions will be made over the life of the arrangement (either the remaining life of the donor or a certain period of time).
In this situation, the not-for-profit organization has the right to distributions from the fund during the agreement’s term (the lead interest) or the right to the assets remaining at the end of the agreement (the remainder interest). If the arrangement is irrevocable and the donor no longer has the ability to change the charitable beneficiary, the organization will recognize the funds that they are eligible to receive. See Exhibit C for example recognition.
Exhibits
Exhibit A – Recognition of Life Insurance Policy Donation
An organization receives notice from a donor that they have transferred ownership of a life insurance policy to the not-for-profit organization and the beneficiary has also been changed to the organization. The insurance policy will be fully paid out to the organization on the donor’s date of death.
The organization will record a contribution in the present value of the policy amount using the life expectancy of the donor and a reasonable interest rate.
Total policy amount =$500,000
Donor life expectancy = 20 years
Interest rate for discount = 5%
Net present value = $197,850
On the date of donation, the organization would debit $500,000 of contribution receivable and credit $197,850 of contribution revenue and $302,150 of discount on contribution receivable (a contra-asset account).
Subsequently, the organization would adjust the receivable at each measurement date for changes in assumptions (typically, the change in the donor’s life expectancy).
Exhibit B – Recognition of Charitable Gift Annuity
An organization signs a contract with a donor which states the donor will transfer a certain amount of funds to the organization in exchange for the not-for-profit organization making fixed payments to the donor over their lifetime. Revenue would be recognized for the amount of the funds transferred, net of the liability related to funds expected to be transferred back to the donor.
This liability will be calculated using the present value of the fixed amounts using the life expectancy of the donor and a reasonable interest rate.
Total funds transferred = $800,000
Annual payment = $32,000
Donor life expectancy = 17 years
Interest rate for discount = 7.75%
Present value of expected payments = $297,000
On the date of donation, the organization would debit the asset transferred (cash or investments) of $800,000, credit the annuity payable of $297,000 and contribution revenue of $503,000.
Subsequently, the organization would adjust the liability when payments are made to the donor and at each measurement date for changes in assumptions (typically, the change in the donor’s life expectancy).
Exhibit C – Recognition of Charitable Lead and Remainder Trusts
An organization receives the assets from the donor and has an agreement with the donor for the future of the funds. A liability will be recorded for either the lead interest (if another charitable organization has the right to periodic payments throughout the life of the agreement) or the remainder interest (if another charitable organization has the right to the assets remaining at the end of the agreement).
Revenue would be recognized for the difference in the asset and liability. Similar to other items above, the liability will be calculated using the present value of the payments expected to be made using either the life expectancy of the donor or the term of the agreement if a fixed number of years, and a reasonable interest rate.
On the date the trust is set up, the organization would debit the assets in the trust (cash or investments), credit the liability related to either the lead or remainder interest, and credit the difference to contribution revenue.
Subsequently, the organization would adjust the liability when payments are made to the lead interest organization and at each measurement date for changes in assumptions (typically, the change in the donor’s life expectancy).
Note – if a third-party holds the assets rather than the organization, the organization would simply record the net amount expected to be received (the beneficial interest).
Get Further Guidance on Planned Giving Agreements
Accounting for planned giving agreements with donors can be difficult. However, if a not-for-profit organization reviews agreements closely for conditions and revocability, it will be able to clearly identify the revenue to be recognized.
If you have any questions or would like to discuss how to establish your gift acceptance policy, please reach out to Katie Galaska, Director, Audit & Accounting, or any member in our Not-for-Profit Industry Group.