Accounting Update: New Guidance on Irrevocable Split-Interest Agreements

Introduction

On March 29th, the Governmental Accounting Standards Board (GASB) issued a new standard designed to provide guidance for irrevocable split-interest agreements, in which governments receive assets or pledges of assets and share the benefits the assets generate with the donors’ beneficiaries. GASB Statement 81, Irrevocable Split-Interest Agreements, addresses when these types of arrangements constitute an asset for accounting and financial reporting purposes when the resources are administered by a third party and also provides expanded guidance for circumstances in which the government holds the assets.

Main Provisions

Split-interest agreements are a type of giving agreement used by donors to provide resources to two or more beneficiaries, including governments. Split-interest agreements can be created through trusts or other legally enforceable agreements with characteristics that are equivalent to split-interest agreements. Examples of these types of agreements include charitable lead trusts, charitable remainder trusts, and life-interests in real estate.

Under a typical irrevocable split-interest agreement, a donor transfers assets for the shared benefit of at least two beneficiaries: a government (e.g., a college, university, hospital, museum, or library) and another donor-designated beneficiary, such as the donor or the donor’s heirs. The donor transfers the related assets to either the government or to a separate third party, such as a bank. Donors often set up the agreements for estate planning or to lower their tax bills.

Statement 81 requires that, if the assets are being managed by a third party (such as a bank), the government must recognize the gift as an asset and a deferred stream of income generated by the assets; the government recognizes revenue when the resources become applicable to the reporting period. If the government is holding the assets, it has to recognize the assets, the deferred income stream, and a liability for any interest in the gift that will go to other beneficiaries.

OBSERVATION: The GASB considered whether irrevocable split-interest agreements should be reported, partially or entirely, in fiduciary funds, but decided to not include any reporting requirements pertaining to the use of fiduciary funds in Statement 81. The GASB also considered whether a government should be required to separate the assets received pursuant to irrevocable split-interest agreements and to report the other beneficiaries’ portions in a fiduciary fund, but concluded that the operational or practical difficulties of separating the assets would outweigh the benefits that may be achieved by separate reporting.

Effective Date and Transition

The requirements of Statement 81 are effective for financial statements for periods beginning after December 15, 2016, and should be applied retroactively. Earlier application is encouraged.

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