FASB 136 and Accounting for Not-for-Profit Transfers
Learn how not-for-profits determine the proper accounting for assets received on behalf of other entities, based on the level of control granted.
The Financial Accounting Standards Board (FASB) established guidance for not-for-profit organizations that accept assets with the obligation to pass them to another entity. These principles, originally in FASB Statement 136, are now incorporated into the FASB Accounting Standards Codification (ASC) under Topic 958, Not-for-Profit Entities. This guidance helps distinguish between acting as an agent versus receiving a contribution.
The accounting treatment for these transfers hinges on which entity has ultimate control over the funds. This distinction determines whether the transaction is recorded as a liability or as contribution revenue. The rules within ASC 958 ensure a nonprofit’s financial statements accurately reflect its control over the assets it receives.
The Concept of Variance Power
Variance power is the unilateral authority a donor grants to a recipient organization to redirect assets to a beneficiary different from the one the donor initially specified. This power must be explicitly granted in the legal agreement governing the donation. For an organization to possess variance power, the documentation must clearly state its ability to override the donor’s initial designation.
The presence of variance power is determined by the specific language in the donation instrument. For example, a gift agreement might include a clause such as, “the recipient organization’s board of directors retains the right to redirect the distribution of these funds to another organization with a similar charitable mission if it determines circumstances have changed.” Without such a clause, the recipient organization is presumed to be acting only as an agent.
Conversely, language that restricts the organization’s discretion indicates the absence of variance power. A phrase like, “these funds are to be granted to the Community Food Bank” with no additional permissions does not grant variance power. It is important to distinguish this from routine administrative discretion, such as the timing of a payment, which does not constitute variance power.
This concept determines whether the nonprofit has control over the economic benefits of the transferred assets. If the organization can decide who ultimately receives the funds, it has a degree of control that warrants recognizing the inflow as its own revenue. If it lacks this power, it is simply facilitating a transfer from the donor to the specified beneficiary.
Accounting for Transactions Without Variance Power
When a not-for-profit organization receives assets from a donor but does not have variance power, it is considered an agent or intermediary. In this situation, the organization does not recognize contribution revenue. The transaction is treated as an agency transaction, reflecting the organization’s obligation to another party.
The proper accounting entry involves recognizing the asset received and a corresponding liability. For instance, if a nonprofit receives $10,000 in cash that is legally designated for a specific, unaffiliated charity, the journal entry would be a debit to Cash for $10,000 and a credit to a liability account for $10,000. This entry increases the organization’s assets and liabilities equally, with no impact on its revenue.
This approach is based on the principle that the recipient organization does not have control over the assets. It has a fiduciary duty to transfer the funds to the beneficiary specified by the donor. The liability remains on the organization’s books until the assets are transferred to the designated beneficiary.
Accounting for Transactions With Variance Power
When a not-for-profit organization receives assets and the donor explicitly grants it variance power, the accounting treatment is different. The presence of variance power signifies that the recipient organization has control over the disposition of the assets. Consequently, the organization must recognize the fair value of the assets received as contribution revenue.
The journal entry involves recognizing the asset and the corresponding revenue. For example, if a nonprofit receives $25,000 in cash with a donor’s letter stating the board can redirect the funds, the entry would be a debit to Cash for $25,000 and a credit to Contribution Revenue for $25,000. This transaction increases the organization’s assets and its net assets.
No liability is recorded to the beneficiary initially suggested by the donor because the recipient organization has the legal authority to choose a different one. The variance power effectively severs the obligation to the specified beneficiary, giving the recipient control.
Financial Statement Disclosures
Disclosures in the financial statements are necessary to provide clarity regarding transfers intended for other beneficiaries. The specific information required depends on whether the recipient organization has variance power. These disclosures, found in the notes to the financial statements, help stakeholders understand the nature of these activities.
For agency transactions where the organization lacks variance power, specific disclosures are required. The nonprofit must describe its activities as an agent and disclose the dollar amount of the assets held on behalf of others. This amount is presented as a liability on the statement of financial position, ensuring users understand these assets are not available for general use.
When an organization receives contributions with variance power, the disclosures are governed by the general requirements for contribution revenue. The organization should describe its policy for recognizing contributions and any significant donor-imposed restrictions. It may also need to disclose how it exercises its variance power if it has a material effect on its operations or financial position.