Irrevocable Split-Interest Agreements
Project Description: The objective of this project is determine what accounting and financial reporting guidance, if any, should be established for irrevocable split-interest agreements held for the benefit of governmental entities.
Exposure Draft approved in June 2015
Added to Research Agenda: December 2013
Added to Current Agenda: May 2014
- Project Plan
- Recent Minutes
- Tentative Board Decisions to Date
- Project staff:
Irrevocable Split-Interest Agreements—PROJECT PLAN
Background: Questions about the appropriate reporting in irrevocable split-interest agreement situations occasionally come to the GASB. Discussions with preparers and auditors of financial statements suggest that practice varies. Some constituents believe that the recognition criteria in Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, are not met and recognition is not appropriate. Paragraph 22 from Statement 33 states:
Other constituents do not see a substantive difference between permanent endowments received by an institution (and subsequently transferred to independent investment managers) and resources deposited directly into an irrevocable trust.
Private institutions, under the guidance of Financial Accounting Standards Board Statement No. 136, Transfers of Assets to a Not-for Profit Organization or Charitable Trust That Raises or Holds Contributions for Others, recognize the resources held in an irrevocable trust as assets and the contributions into the trust as revenues. Paragraph 15 of Statement 136 states:
The results of the research conducted by project staff provide information about users’ needs for information on irrevocable split-interest agreements and the prevalence of the issue. Users of financial statements expressed interest in information on irrevocable split-interest agreements to the extent that trusts held by the government or beneficial interests in agreements held by a third party can be used to fund operations of the government or debt payments. Results of the preparer survey and archival research did not provide information that clearly supports that beneficial interests in irrevocable split-interest agreements are significant, but they did suggest that many types of agreements exist in the government environment.
The archival research showed that a significant number of colleges and universities engage in one or more types of split-interest agreements. However, because assets in certain split-interest agreements are held by third parties or by foundations that are often component units of the primary government, information about beneficial interests held by others generally does not appear in the financial statements of the entities. In the case of foundations that are discretely presented component units, there are inconsistencies in what information, if any, related to beneficial interests in irrevocable split-interest agreements is presented or disclosed.
While irrevocable split-interest agreements may not represent a clearly significant balance for all governments currently, it has the potential to be significant to them in the future and is significant at present to certain types of governments. Users have expressed an interest in information on these amounts to provide more information on the resources a government may have the ability to call upon in the future. Furthermore, confusion is added by the fact that the FASB has addressed these transactions.
Accounting and Financial Reporting Issues: The project will consider the following issues:
- What are the types of irrevocable split-interest agreements encountered in the government environment?
- What information regarding irrevocable split-interest agreements held by the government and by third parties do governments currently have available?
- What specific information regarding irrevocable split-interest agreements for the benefit of the government is necessary for users to make decisions and assess accountability?
- Do beneficial interests in irrevocable split-interest agreements held by others meet the definition of an asset?
- What are the measurement and recognition issues associated with irrevocable split-interest agreements?
- Pre-agenda research approved: December 2013
- Added to current technical agenda: May 2014
- Task force appointed: No
- Deliberations began: July 2014
- Exposure Draft issued: June 2015
|Board Meetings||Topics to be Considered
October 2015 (T/C)–
Redeliberate issues based on respondent feedback.
Review the preballot draft of the final Statement.
March 2016 (T/C):
Review the ballot draft and issue final Statement.
Irrevocable Split-Interest Agreements—Recent Minutes
Minutes of Teleconference, Ocotber 26, 2015
The Board began redeliberations of the Exposure Draft, Accounting and Financial Reporting for Irrevocable Split-Interest Agreements, by considering responses requesting clarification on various scope and terminology matters. The Board tentatively decided to reaffirm the definition of the scope of the proposed guidance. The Board also tentatively decided to replace the term “equivalent arrangement,” with “other legally enforceable agreements with characteristics that are similar to irrevocable split-interest agreements.”
The Board also considered respondents’ requests to provide guidance for recognizing irrevocable split-interest agreements when those agreements are reported in governmental funds. The Board tentatively decided that the Exposure Draft provisions should be applicable to both the current financial resources measurement focus and the economic resources measurement focus.
The Board concluded the redeliberations by considering requests from respondents to require the recognition of revenue for the government’s beneficial interests in irrevocable split-interest agreements at inception, as opposed to a deferred inflow of resources proposed in the Exposure Draft. The Board tentatively decided to carry forward the recognition guidance of the Exposure Draft.
Minutes of Meetings, June 2-4, 2015
The Board reviewed the ballot draft of the Exposure Draft, Accounting and Financial Reporting for Irrevocable Split-Interest Agreements. The Board provided clarifying edits and additional clarifying language to the proposed guidance. The Board unanimously voted to approve the issuance of the Exposure Draft.
The Exposure Draft will be issued for public comment on June 12, 2015. Comments from stakeholders will be due on September 18, 2015.
Minutes of Teleconference, May 11, 2015
The Board reviewed the preballot draft of the Exposure Draft, Accounting and Financial Reporting for Irrevocable Split-Interest Agreements. The Board provided edits and added clarifying language to the proposed guidance.
The Board also tentatively decided to remove perpetual trusts from the scope of the project. The Board also decided that the exclusion of perpetual trusts from the scope of the project will be explained in the Basis for Conclusions of the proposed Statement.
Minutes of Teleconference, March 30, 2015
The Board began deliberations with discussion of due process issues related to the irrevocable charitable trusts project. The Board tentatively agreed to propose that the transition provisions for the Exposure Draft be applied retroactively. That is, in the first period that the proposed Statement is applied, changes made to comply with the proposed Statement should be treated as an adjustment to prior periods, and financial statements presented for the periods affected should be restated. The Board also tentatively agreed to propose a practicality exception for transition requirements.
The Board then tentatively agreed that a 90-day comment period should be used for the Exposure Draft. The Board tentatively decided that the Exposure Draft should propose an effective date for periods beginning after December 15, 2016. The Board also tentatively decided to propose that the effective date provisions encourage early implementation. The Board then tentatively agreed that the expected benefits of the Exposure Draft would outweigh the perceived costs of implementation.
The Board then discussed whether the expected benefits of information to users and other stakeholders from the irrevocable charitable trust proposals exceed the anticipated costs to preparers and other stakeholders. The Board tentatively agreed that the expected benefits associated with the proposed requirements outweigh the anticipated implementation and ongoing costs.
The Board concluded deliberations by reviewing and providing clarifying comments on the proposed text of the Standards section of the Exposure Draft.
Minutes of Meetings, March 10-12, 2015
The Board continued deliberations on the Irrevocable Charitable Trusts project by discussing topics including fund reporting, community foundations, and a few issues related to the scope and definitions that were pending from the January 2015 meeting.
The Board first considered whether assets donated pursuant to split-interest agreements should be reported, partially or in their entirety, in fiduciary funds. The Board tentatively agreed to propose that resources received pursuant to split-interest agreements be reported with the government’s own resources in either governmental or enterprise funds. Also, the Board tentatively agreed that specific guidance for split-interest agreements to be accounted for and reported in governmental funds is not necessary to include in the proposed standard as existing literature would provide sufficient guidance.
The Board then discussed whether specific guidance should be included in this project for resources held in community foundations. The Board tentatively agreed to make a clarifying edit to the asset recognition criteria previously developed for beneficial interests. Specifically, the language in the proposed variance power criteria would be expanded to clarify that this criteria is specific to the donated resources and not to the entity administering the resources. Furthermore, the Board tentatively agreed that specific guidance should not be proposed for community foundations in this project.
Finally, the Board considered a few scope issues that were pending from the January 2015 meeting. The Board tentatively agreed that revocable split-interest agreements would not be included as part of this project. In addition, the Board tentatively agreed with the proposed definition of a split-interest agreement. Finally, the Board concluded deliberations by tentatively agreeing that the text of the proposed standards should clarify that the accounting and reporting of split-interest agreements is applicable to unconditional rights.
Minutes of Meetings, January 27-29, 2015
The Board continued deliberations on the Irrevocable Charitable Trusts (ICT) project. The topics discussed include definitions, disclosures, pooled income funds, net income unitrusts, perpetual trusts held by a third party, and life interests in real estate.
The Board initially considered a scope clarification to determine whether revocable agreements or conditional interests should be included in the project’s scope. The Board did not reach conclusions with regard to this issue and requested further research regarding revocable agreements and contingent rights. The Board tentatively agreed to include the definitions proposed for lead interest, remainder interest, beneficial interest, beneficiary, and term. However, the Board noted that the terms beneficiary and term will be included in the text of the standard as clarifying provisions rather than key terms.
The Board then discussed possible disclosure requirements for split-interest agreements and beneficial interests. The Board considered incremental disclosures for assets, liabilities, and deferred inflows of resources as well as a narrative disclosure. The Board tentatively agreed that disclosure requirements of existing standards would be applicable and would adequately provide information to the readers of financial statements regarding assets, liabilities, and deferred inflows of resources. The Board then discussed pooled income funds, net income unitrusts, and perpetual trusts held by a third party. The Board tentatively agreed that only assets and deferred inflows of resources should be recognized at inception. In addition, the Board tentatively agreed that a liability to the nongovernmental beneficiary should be recognized as an amount equal to undistributed income. Furthermore, the Board tentatively agreed to further consider the need for a Technical Bulletin to address pooled income funds and net income unitrusts.
Finally, the Board continued deliberations regarding life interests in real estate, a topic previously considered. The Board tentatively agreed that real estate assets donated pursuant to life interests in real estate should be recognized as capital assets or investments, depending on donor-imposed restrictions and management’s intent at the time of the donation. This approach is consistent with the recognition guidance provided in the forthcoming fair value Statement.
The Board reconsidered the recognition of the right to use retained by the donor and concluded that it should be recognized as a deferred inflow of resources, consistent with previously issued standards. The Board also tentatively agreed that this deferred inflow of resources would be recognized as revenue in a systematic and rational manner throughout the actuarial life of the donor. The Board concluded that a liability should be recognized for any contractual obligations assumed by the government (such as improvements, maintenance, or insurance) and that a second deferred inflow of resources should be recognized for the residual interest in the real estate.
Minutes of Meetings, December 15-17, 2014
The Board continued deliberations on the Irrevocable Charitable Trusts project, discussing issues pertaining split-interest agreements and other donation agreements that involve real estate property and gifts of life insurance. The Board also discussed the initial measurement of the income benefit (generally representing the liability) and the remeasurement of assets, income benefit, and remainder benefit.
The Board initially discussed gifts of real estate when the donor retains life interest. The Board tentatively agreed that a government should recognize a capital asset for the real estate property, initially measured at acquisition value. This tentative decision was based on the perspective that because title has been transferred to the government, it is entitled to the risks and rewards associated with the real estate property. The Board tentatively agreed that the government should recognize a liability for mortgages and claims a third party may have over the property. The Board also tentatively decided that a second liability should be recognized for the right of residency or use that the donor retained at the time of the donation. The Board justified recognition of the liability because of the nonexchange nature of the transaction. The Board tentatively agreed to recognize a deferred inflow of resources for the difference between the capital assets and the liabilities recognized. The Board directed project staff to conduct analysis on the remeasurement of the elements associated with this transaction.
Next, the Board discussed gifts of life insurance. The Board tentatively agreed that gifts of life insurance are outside of the scope of the Irrevocable Charitable Trusts project. The Board tentatively agreed that if life insurance policies are used to fund a trust pursuant to a split-interest agreement, the guidance under the proposed Statement, Fair Value Measurement and Application, would be applicable to measuring the policy.
Next, the Board discussed the remeasurement of assets initially recognized when a government enters into split-interest agreements. For split-interest agreements under which resources are being held and administered by the government, the Board tentatively agreed that donated assets that meet the definition of an investment should be remeasured at fair value. The Board also tentatively agreed that changes in the fair value of these assets should be accounted for according to the guidance provided in Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools. For split-interest agreements under which resources are being held and administered by a third party outside the reporting entity, the Board tentatively agreed that beneficial interests should be remeasured at fair value at the end of each reporting period. Next, the Board discussed the final details related to initial measurement of the income benefit pursuant to a split-interest agreement. The Board tentatively agreed to not provide specific guidance to use any specific measurement technique for the income benefit. Based on the nature of the income benefit (stream of cash flows over a period of time) the Board tentatively agreed to introduce examples of measurement techniques the government could use including a present value technique. The Board also tentatively decided to only highlight risk assumptions the government should consider in measuring the income benefit rather than prescribe a specific set of risk assumptions to be incorporated in the measurement. The Board tentatively agreed that the risk assumptions a government should consider include (1) discount rate, (2) estimated return on assets, (3) terms of the agreement for the income benefit, and (4) mortality risks, if the agreement is life-contingent.
Next, the Board discussed the remeasurement of the income benefit. The Board tentatively agreed the income benefit should periodically be adjusted by reducing its carrying value by the discounted amount of payments distributed to the income beneficiary with the asymmetry between amounts being accounted for in the statement of resource flows. The Board also tentatively decided to not require periodic remeasurement of the income benefit unless there is a substantial change in economic conditions or in the trust assets. The Board tentatively agreed to require the remeasurement of the remainder benefit at each reporting period.
Next, the Board discussed the issues that arise upon termination of the agreement. In situations in which the government is entitled to the remainder benefit, the Board tentatively agreed that the government should recognize a gain for any liability that remains outstanding or a loss for payments made in excess of the estimated liability. The Board also tentatively agreed that governments also should derecognize the deferred inflow of resources and recognize the remainder interest as revenue. In situations in which the government is entitled to the income benefit, the government would have recognized income throughout the life of the trust and would use the remaining trust assets to fulfill the liability to the nongovernmental beneficiary. At termination of said agreement, the government would recognize as revenue any outstanding deferred inflow of resources.
Finally, the Board discussed an alternative approach to recognizing changes in the value of elements pursuant to split-interest agreements. This approach would recognize all changes in the assets and the income benefit directly to the remainder benefit (usually the deferred inflow of resources) instead of accounting for those changes through the statement of resource flows. The Board tentatively agreed to not consider the alternative approach.
Minutes of Meetings November 11-13, 2014
The Board continued deliberations of the Irrevocable Charitable Trusts project by discussing the issues regarding certain liabilities accepted under split-interest agreements that have been analogized as hybrid instruments under FASB literature.
The Board initially discussed whether to consider certain liabilities (those with period-certain and variable payment terms) accepted pursuant to split-interest agreements as a hybrid instrument. The Board tentatively agreed that it would not be operational in the governmental environment to consider accounting for such liabilities as financial hybrid instruments.
Next, the Board discussed whether these liabilities should be considered derivatives within the scope of Statement No. 53, Accounting and Financial Reporting for Derivative Instruments. The Board tentatively agreed to propose that liabilities (those with period-certain and variable payment terms) assumed by the government pursuant to split-interest agreements be considered outside the scope of Statement 53. This tentative decision is based on the perspective that Statement 53 was developed for exchange transactions and therefore is not applicable to a donation.
Therefore, the Board tentatively agreed to propose to measure all liabilities assumed under split-interest agreements in the manner as discussed at the September meeting. The Board tentatively reaffirmed its previous tentative decision to measure the income benefit of a split-interest agreement directly at settlement amount and to measure the remainder benefit as a residual amount (fair value of financial assets minus the settlement amount of the income benefit).
Irrevocable Split-Interest Agreements—TENTATIVE BOARD DECISIONS TO DATE
These tentative decisions have been made since the issuance of the Exposure Draft and in anticipation of the final Statement. The Board tentatively agreed that:
- The final Statement should carry forward the scope definitions from the Exposure Draft.
- Guidance proposed in the Exposure Draft should be applicable to the economic resource measurement focus as well as the current financial resource measurement focus.
- The final Statement should carry forward the guidance from the Exposure Draft requiring recognition of the government’s portion of an irrevocable split-interest agreement as a deferred inflow of resources at inception of the agreement, and revenue should be recognized when resources become applicable to the reporting period.