Accounting and Reporting for Not-for-Profit Organizations

Case Study 12

Split-Interest Agreements and Beneficial Trusts

Learning objectives

• Identify the accounting treatment of revocable split-interest agreements.
• Differentiate between various types of split-interest agreements.

Background

The FASB Accounting Standards Codification^® defines a split-interest agreement as an agreement in which a donor enters into a trust or other arrangement under which a not-for-profit (NFP) entity receives benefits that are shared with other beneficiaries. A typical split-interest agreement has the following two components: (a) a lead interest and (b) a remainder interest.

Revocable split-interest agreements

Revocable split-interest agreements should be accounted for as intentions to give, as they can be changed at any time. If assets are received, they should be recognized at fair value and a related refundable advance should be recognized. Any changes in fair value should be booked to the asset and refundable advance. No income should be recognized. When the revocable agreement becomes irrevocable, contribution revenue should be recognized.

Irrevocable split-interest agreements

NFP is the trustee.

A charitable lead trust provides payment to the NFP until termination when the remainder would be distributed to the other party. Termination can occur upon death or a predetermined date. The distributions may be for a fixed dollar amount (charitable lead annuity trust), or for a fixed percentage of the trust’s fair value as determined annually ...