AICPA Guide Chapter-by-Chapter: 5 — Contributions Received and Agency Transactions

AICPA guideAs a member of the task force that drove the overhaul of the recently-released AICPA Not-for-Profit Entities Audit and Accounting Guide, I am providing weekly, chapter-by-chapter summaries to help users preview the guide

Chapter 5 includes new sections on measuring and reporting noncash gifts, including gifts in kind; contributions of fundraising materials, informational materials, advertising, and media time or space; below market interest rate loans and bargain purchases; and naming opportunities. Additional emphasis is given to distinguishing among contributions, exchange transactions, and agency transactions.

What’s in a Name?

Naming opportunities, an incentive benefit sometimes offered to significant contributors, may be contributions, exchange transactions, or some combination of both, depending on the value of the public recognition and other rights conveyed to the donor. Factors to consider include:

• The value to the donor
• The length of time the naming benefit is provided
• Control over the name and logo use
• Other exclusive rights and privileges. (For example, exclusive naming rights for a university football stadium for a 10-year term is likely worth more than the having one’s name on a plaque in the university library.)

Agency Transactions — Not Revenue, Not Expenses

In the aftermath of investigations by the IRS and various watchdog organizations into the distribution of certain medicines to needy populations outside the U.S., the determination of whether an apparent contribution is, in fact, an agency transaction has never been more important. In these investigations, certain international nongovernmental organizations (NGOs) were accused of misreporting agency transactions as contributions received, offset by contributions made, in situations where the NGOs arranged for the delivery of medicines directly to needy populations without clearly taking title, possession, or exercising control or discretion in using or distributing the medicines along the way. These transactions, said the IRS, were nothing more than agency transactions which, while laudable, did not constitute contributions received or made by the NGOs. The IRS further alleged that even if the transactions would have qualified as activities of the NGOs involved, the valuation methods used to determine the amounts of the contributions reported were flawed, resulting in the overvaluation of both the contributions received and made.

GIK Challenges

Gifts in kind (GIK) should be recognized if the recipient entity has discretion on using or distributing the gifts, AND also has the risks and rewards of ownership. Physical possession is not a requirement of revenue recognition. GIK that can be used or sold should be measured at fair value. GIK that can’t be used or sold are not recordable.

As was evident in the IRS investigation mentioned above, valuing GIK presents several unique challenges to the recipient entity, including the following:

• There may be a lack of an active market for the items received
• Some items received are rarely bought and sold
• Some items would not otherwise be purchased or sold by the entity
• Some items are not used at the highest and best use by the entity
• Some items may have expired
• There may be geographic or market-based diversity in pricing

While fair value estimates are just that — estimates — NFPs must carefully consider and document valuations of these gifts.

Part of an NFP’s fundraising activities may include an annual gala and/or auction. Contributions of tickets, gift certificates, works of art, and merchandise to be sold at fundraising events should be recorded as contributions at fair value. Later, when sold, the original contribution amount should be adjusted for the difference between the recorded amount and the selling price. Note: the contribution amount is adjusted, thus there is no “gain” or “loss” on the eventual sale of the contributed items.

Contributed Material or Advertising

Questions as to whether contributed fundraising and informational material, as well as advertising (including media timea and space) constitute GIK or donated professional services have long abounded. The questions are important in that the recognition criteria differ depending on the answer. The Guide clarifies that these are contributed assets, not services, and should be recognized as contributions if the NFP has active involvement in determining and managing the message and use of the materials. The involvement does not need to be absolute. Advertisements or the distribution of promotional materials produced by others without any input or participation by the NFP need not be recognized.

Unlike donated professional services, recognition of contributed fundraising materials, informational material, or advertising is unaffected by whether the NFP could afford to purchase the assets, or would typically need to purchase the assets if they had not been provided by contribution. NFPs should consider the appropriate function allocation of the expense side of the contributions to the various program and supporting services categories.

Use of Campaign Proceeds to Pay Campaign Expenses

NFPs commonly earmark a portion of capital campaign proceeds to offset the costs of conducting the campaign. FinREC has clarified that such a practice is a violation of a donor’s enforceable right to have his or her contribution expended only for the purpose stipulated by the donor. In the absence of explicit donor stipulations, campaign solicitation materials may imply those purposes. Unless those materials include campaign costs as an explicit use of campaign proceeds, NFPs are precluded from using such proceeds to pay those costs. Doing so is an act of noncompliance with donor restrictions.

To avoid this prohibition, NFPs should make their intentions known by effectively communicating to all prospective donors during the solicitation process. Disclosing the policy in the notes to the financial statements is not sufficient.

AICPA Financial Reporting White Paper

In addition to an extensive auditing section geared toward the revenue recognition issues unique to NFPs, Chapter 5 includes a section on measuring unconditional promises to give cash or other financial assets excerpted from the AICPA Financial Reporting White Paper, Measurement of Fair Value of Certain Transactions of Not-for-Profit Entities. The information included is extremely helpful, and those responsible for this area will be well served by reading it.

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