Donors have been using many kinds of gifting structures to provide funding to governmental entities. GASB 33, Accounting and Financial Reporting for Nonexchange Transactions, provided a base guideline to follow, but as gifting structures have become more complex and frequently involve more than one beneficiary, additional guidance has been issued. GASB 81, Irrevocable Split-Interest Agreements, is now effective for entities following GASB standards.
In general, this new standard provides recognition and measurement guidance for situations in which a government is a beneficiary of an irrevocable split-interest agreement. In these situations, a donor irrevocably transfers resources to an intermediary, and the intermediary administers these resources for the unconditional benefit of the government and at least one other beneficiary. In certain situations, the government can be both the intermediary and the beneficiary, and the GASB addresses each of these situations in the new standard.
First, it’s important to understand certain key terms when applying the guidance:
- Split-interest – When more than one beneficiary is involved, it’s a split-interest agreement. This means, a donor is providing a gift that benefits a government and someone else (typically the donor, their spouse, or their children), so the benefit of the gift is shared. Examples include charitable lead trusts, charitable remainder trusts, and life-interests in real estate.
- Irrevocable – The split-interest agreement must be irrevocable to be recorded, which means the gift cannot be altered, and the donor cannot change their mind once the gift is made.
- Intermediary – The intermediary holds the cash from the donor and administers the payments to the lead, and ultimately remainder, beneficiaries. The intermediary can be the government itself or a third party (typically a bank).
- Lead interest – The government receives the cash upfront or during the term of the agreement (i.e. annual payments for 10 years).
- Remainder interest – The government receives the cash at the end of the agreement.
You may be asking yourself if there will be new disclosures required under GASB 81, and the good news is there are none!
Following the guidance in Statement 81, the accounting for four typical split-interest situations would be as follows:
*Criteria exist for when beneficial interests in trusts should be recognized by the government. In most cases, all of these criteria are commonly found in these types of transactions when a third party is the intermediary. All of the following criteria must be met to record a beneficial interest asset:
- The government is specified by name as beneficiary in the legal document underlying the donation.
- The donation agreement is irrevocable.
- The donor has not granted variance power to the intermediary with respect to the donated resources.
- The donor does not control the intermediary, such that the actions of the intermediary are not influenced by the donor beyond the specified stipulations of the agreement.
- The irrevocable split-interest agreement establishes a legally enforceable right for the government's benefit (an unconditional beneficial interest).
The standard also covers situations in which a donor donates real estate but retains the right to use the asset (typically a house) for their lifetime. The asset will be recognized either as an investment (if it meets the criteria, i.e. the asset will be held primarily for income or profit and be sold to generate cash) or a capital asset (an asset that provides direct services to the government or its constituents). A liability will be recognized for the estimated payments to be made on behalf of the asset over the donor’s lifetime based on the agreement. Such payments might include insurance, maintenance, or repairs of the asset. A deferred inflow should be recognized for the difference between the asset and liability and adjusted accordingly over the lifetime of the donor.If you have any split-interest agreements, you might find yourself having to dig through some old agreements to appropriately adopt the standard on a retroactive basis.
You may be asking yourself if there will be new disclosures required under GASB 81, and the good news is there are none! GASB feels current standards cover all significant aspects of split-interest agreements, including GASB 72, Fair Value Measurement and Application for Investments, GASB 34, Basic Financial Statements—and Management's Discussion and Analysis—for State and Local Governments, for liabilities (only if significant/material), and GASB 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, for deferred inflows of resources.
The new GASB 81 standard is required to be implemented retroactively by restating financial statements for all prior periods presented. If you have any split-interest agreements, you might find yourself having to dig through some old agreements to appropriately adopt the standard on a retroactive basis. The main key to successful adoption and application is to review each agreement separately to ensure the appropriate accounting.