Focus Area: Irrevocable Split-Interest Agreements
GASB 81 Effective for FY 2018
August 10, 2017
In March 2016, the Governmental Accounting Standards Board (GASB) issued Statement No. 81, Irrevocable Split-Interest Agreements (GASB 81). This Statement impacts governmental entities that participate in irrevocable split-interest agreements such as charitable lead trusts, charitable remainder trusts, and life-interests in real estate. Although public colleges, universities, and healthcare institutions are the most common type of governmental participant, other types of entities (e.g., museums, libraries, and zoos) may also participate in these agreements and, therefore, be impacted by this standard.
Irrevocable split-interest agreements are a type of planned giving arrangement in which a donor irrevocably places resources in a trust (or similar legally-enforceable agreement with characteristics that are equivalent to an irrevocable split-interest agreement) for the unconditional benefit of the government and at least one additional beneficiary. The resources are administered by an intermediary, which may be the government itself or a third party. Because these agreements offer immediate charitable tax deductions as well as other tax advantages, they are a popular component of estate planning for high net worth donors.
In common practice, a government typically has a remainder interest in an irrevocable split-interest agreement. A remainder interest confers the right to receive benefits at the end of the agreement whereas a lead interest confers the right to receive benefits during the term of the agreement. The term of the agreement may be life-contingent (contingent upon the occurrence of a specified event, such as the death of the donor) or period-certain (a defined length of time). Throughout the term of the agreement, the lead interest beneficiary may receive a fixed amount (an annuity) or a variable amount, for example, a percentage of the income earned on trust assets during the period (a unitrust). See Appendix A for an overview of how to account for several common arrangements.
Prior to the implementation of GASB 81, public institutions accounted for irrevocable split-interest agreements as voluntary nonexchange transactions using the guidance in GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions (GASB 33). Among other issues, the inconsistent interpretation of the time-related eligibility requirements of GASB 33 led to inconsistent financial reporting. Furthermore, there was no guidance for situations when a government was a beneficiary but a third party was a trustee. GASB 81 clarifies the accounting treatment for irrevocable split-interest agreements by providing specific recognition and measurement guidance. In general, governments will recognize revenue related to these agreements later under GASB 81 than they would have under GASB 33.
Although beneficial interests in perpetual trusts, pledges, and permanent endowments have characteristics similar to irrevocable split-interest agreements, they are outside the scope of this standard. Governments should continue to follow the guidance in GASB 33 for revocable agreements and conditional beneficial interests. GASB 81 does not apply to foundations that follow the FASB reporting model. No additional note disclosures are required by this Statement.
GASB 81 is effective for the fiscal year ending June 30, 2018, and should be applied retroactively. The provisions of GASB 81 need not be applied to immaterial items.
To gain additional understanding of GASB 81, please refer to the following resources:
- The GASB webpage from which you can access a PDF file of GASB 81 as well as other GASB pronouncements – GASB Pronouncements
- NACUBO Website Article - GASB Issues Guidance on Split-Interest Gifts
GASB 81 Implementation
The financial reporting staff at entities that participate in irrevocable split-interest agreements should begin reviewing existing agreements as well as meeting with staff responsible for managing those agreements (e.g., Office of University Development staff) (a) to ensure that agreements in existence at June 30, 2017 are properly restated in the FY 2018 financial statements and (b) to ensure that agreements are properly classified according to the provisions of GASB 81 (e.g., government is lead interest beneficiary, government is remainder interest beneficiary, government is intermediary, third party is intermediary, etc.) The specific restatement will depend on how the entity previously recorded the agreement. In some situations, such as when a third party serves as an intermediary, the entity may not have previously recorded the agreement at all. The objective of the restatement is to record the appropriate beginning balances of any associated assets (including beneficial interest assets), liabilities, and deferred inflows of resources with a corresponding net adjustment to beginning net position.
GASB 81 does not specify the valuation technique that a government should use to measure the settlement amount of the lead interest benefit in an irrevocable split-interest agreement. Although the Statement identifies some of the possible assumptions that a government should consider (e.g., the mortality rate in a life-contingent agreement), it does not provide specific guidance on an approach to incorporate those assumptions (e.g., a present value approach).
In the Statement’s Basis for Conclusions, the Board clarifies that the liability associated with an irrevocable split-interest agreement in which the government serves as an intermediary should be recognized in governmental funds. These liabilities differ from those arising from operating expenditures or long-term borrowings and are outside the scope of GASB Interpretation No. 6, Recognition and Measurement of Certain Liabilities and Expenditures in Governmental Fund Financial Statements.
For additional information regarding the GASB 81 implementation, please refer to the following resources:
- Appendix A: Accounting for Common Scenarios - See attachment below
- Appendix B: Update to NCAS Chart of Accounts – See attachment below
Thank you for your time and attention to this important change. OSC will continue to provide updates as the standard is implemented. Questions regarding this specific update should be directed to Megan Wallace at (919) 707-0590 or megan.wallace@ncosc.gov.