Guidance Available for Fair Value Transactions Beyond Investments
Nonprofit organizations are required to regularly disclose certain assets as part of their financial reporting. Fair value standards were established to help calculate the present value of these assets. Over the last couple years, much of the guidance released by the American Institute of Certified Public Accountants (AICPA) and the Financial Accounting Standards Board (FASB) has focused on investments. This has left organizations scrambling to determine the fair value other transactions, such as pledges and trusts.
Nearly all nonprofits receive some type of gift or donation like this, so these challenges have been widespread. In response, the AICPA has issued a white paper, Measurement of Fair Value for Certain Transactions of Not-for-Profit Entities. The paper is free to members and available to non-members at a charge.
Transactions
The white paper addresses three transaction types:
- Unconditional promises to give cash or other financial assets
Example: A donor commits to give a nonprofit organization $100,000 each year for the next 10 years. The organization must work to determine what the present value is by choosing the appropriate discount rate and valuation technique (market approach, income approach, cost approach, or a combination).
- Beneficial interest in trusts
Example: An organization is a named beneficiary of a trust in which they receive distribution payments each year. If a perpetual trust, the organization can estimate the value of its interest in the trust by measuring the fair value of the assets contributed. If a non-perpetual trust, they can determine the present value of future distributions projected to be received over the life of the trust.
- Split interest agreements
Example: A person gives a gift annuity to her religious organization with a payout of $1 million. The church receives money, invests it, and makes payments to the annuitant for a specified number of years. The organization must then determine the fair value of this liability based on various factors, such as the beneficiary’s age, number of beneficiaries, dollar amount of distributions (either a specific dollar amount or a specific percentage of the assets), etc.
Determining the valuation approach
Unlike investments, which have existing markets (e.g., stocks) to help determine fair value, these transaction types do not have easy reference points. But there are valuation approaches that can be used that take into consideration the unknown variables.
“The techniques and considerations that go into determining fair value for these types of transactions are not new; rather they are now getting the attention needed to appropriately apply the standards,” Reichling says.
In addition to examples of the three transaction types above, the white paper addresses some of the most frequently asked questions for each, such as:
- What is the unit of account you are measuring at fair value (e.g., each individual unconditional promise to give, each beneficial interest within a trust, each separate split interest agreement)?
- What valuation technique should be used and how do you determine that?
- What are the key inputs to determine? What discount rate should be used?
- What are the disclosure requirements? Do they differ from the standard fair value disclosures?
Next steps and how we can help
“Reviewing this information now can help your organization prepare for upcoming audits,” Reichling advises. “It will also provide the base of knowledge necessary to keep up with the changing requirements on fair value disclosure.”
The valuation techniques and the disclosure requirements can be confusing, especially given the quantity and complexity of transactions that fall under these rules. We can help you make sense of these approaches and apply them to your organization’s transactions. Fair value disclosures continue to be scrutinized and reviewed, and we want to help you stay current with the standards.
Sarah Reichling, Nonprofit and Government Senior
sreichling@larsonallen.com or 612-397-3066
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