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 (charitable lead unitrust). Charitable remainder trusts operate the same way except the NFP receives the remainder and the lead portion is paid to the donor or another beneficiary. A charitable gift annuity has the same accounting treatment. The main difference is that assets are not in a trust and are treated as general assets.
Assets are recorded at fair value when received. The liability for the other beneficiary is recognized at fair value, generally using present value techniques. Contributions revenue is recorded at the time of the agreement for the difference between the asset fair value and the liability.
NFP is not the trustee.
If a third party is the trustee, the recipient NFP records the contribution when it is notified of its existence. The NFP has a “beneficial interest” in the trust that is shown “net” of the assets and liabilities of the trust.
Subsequent changes in the measurement of the agreements may be impacted by the following:
- Changes in assets valuation
- Changes in annuity payment amounts (if they are variable)
- Changes in life expectancy or other actuarial assumptions
- Changes in the discount rate
- Upon termination, any remaining liability is reduced to zero
Case study
Amy is 79 years old and establishes a charitable gift annuity for her favorite NFP. The NFP serves as trustee of the annuity. Amy places $100,000 into the annuity. The agreement requires that the NFP distribute $7,500 annually to Amy’s church. Upon Amy’s death, the NFP will retain the remainder of the trust. The discount rate is 6%. Mortality tables indicate that a 79-year-old female has a 10-year life expectancy.
Questions
- Given the following annuity table, calculate the value of the lead interest.
n/i 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 4.0% 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% 20.0% 1 0.99010 0.98522 0.98039 0.97561 0.97087 0.96618 0.96154 0.95694 0.95238 0.94787 0.94340 0.93458 0.92593 0.91743 0.90909 0.90090 0.89286 0.83333 2 1.97040 1.95588 1.94156 1.92742 1.91347 1.89969 1.88609 1.87267 1.85941 1.84632 1.83339 1.80802 1.78326 1.75911 1.73554 1.71252 1.69005 1.52778 3 2.94099 2.91220 2.88388 2.85602 2.82861 2.80164 2.77509 2.74896 2.72325 2.69793 2.67301 2.62432 2.57710 2.53129 2.48685 2.44371 2.40183 2.10648 4 3.90197 3.85438 3.80773 3.76197 3.71710 3.67308 3.62990 3.58753 3.54595 3.50515 3.46511 3.38721 3.31213 3.23972 3.16987 3.10245 3.03735 2.58873 5 4.85343 4.78264 4.71346 4.64583 4.57971 4.51505 4.45182 4.38998 4.32943 4.27028 4.21236 4.10020 3.99271 3.88965 3.79079 3.69590 3.60478 2.99061 6 5.79548 5.69719 5.60143 5.50813 5.41719 5.32855 5.24214 5.15787 5.07569 4.99553 4.91732 4.76654 4.62288 4.48592 4.35526 4.23054 4.11141 3.32551 7 6.72819 6.59821 6.47199 6.34939 6.23028 6.11454 6.00205 5.89270 5.78637 5.63297 5.58238 5.38929 5.20637 5.03295 4.86842 4.71220 4.56376 3.60459 8 7.65168 7.48593 7.32548 7.17014 7.01969 6.87396 6.73274 6.59589 6.46321 6.33457 6.20979 5.97130 5.74664 5.53482 5.33493 5.14612 4.96764 3.83716 9 8.56602 8.36052 8.16224 7.97087 7.78611 7.60769 7.43533 7.26879 7.10782 6.95220 6.80169 6.51523 6.24689 5.99525 5.75902 5.53705 5.32825 4.03097 10 9.47130 9.22218 8.98259 3.75206 8.53020 8.31661 3.11090 7.91272 7.72173 7.53763 7.360O9 7.02353 6.71008 6.41766 6.14457 5.88923 5.65022 4.19247 - Given the calculation previously mentioned, prepare the journal entry on the date of creation of the annuity.
- Year 2—The annuity is now worth $104,000. Annuity payment to the church has been made. Amy’s life expectancy is now nine years. Book the adjusting journal entries for the change in fair value, the annuity payment, and the change in the liability.
Knowledge check
- Revocable split-interest agreements
- Should be treated as intentions rather than promises to give.
- Should be recognized at fair value with a corresponding credit to revenue if assets are received.
- Should be treated as unconditional promises to give.
- Should be recognized at historical cost with a corresponding credit to revenue if assets are received.
- If an NFP is the trustee for an unconditional, irrevocable charitable remainder trust, initial recognition, and measurement require that
- It recognizes only contribution revenue and their beneficial interest (assets).
- It recognizes assets held in trust and the liability for future cash payments for amounts held for others. The difference is contribution revenue.
- It recognizes only assets held in trust and their beneficial obligation (liabilities).
- It does not recognize contribution revenue and their beneficial interest (assets).
- What happens if an NFP is not a trustee of a split-interest agreement?
- It recognizes only its contribution revenue and its beneficial interest.
- It recognizes a liability only.
- It recognizes only a conditional promise to give.
- It does not have to recognize anything.