how not-for-profits should classify sale of donated securities
DESCRIPTION
The Emerging Issues Task Force (EITF) Releases Final Guidance on Issue 12-A To accommodate specific tax goals, some donors give not-for-profit entities (NFPs) appreciated securities. As a matter of policy, most NFPs quickly sell those securities to convert them into cash available for immediate use. The issue, which applies only to the sale of donated securities that are not restricted for long-term purposes or permanently restricted, revolves around how those proceeds are classified. Some NFPs classify them as an investing activity, while others classify such proceeds as an operating activity. Topic 230, Statement of Cash Flows, has been interpreted to allow as either investing or operating activities the practice of presenting the sale of donated securities in the statement of cash flows of NFPs. Here's why.TRANSCRIPT
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To accommodate specific tax goals, some donors give not-for-profit entities (NFPs) appreciated securities. As a matter of policy, most NFPs quickly sell those securities to convert them into cash available for immediate use. The issue, which applies only to the sale of donated securities that are not restricted for long-term purposes or permanently restricted, revolves around how those proceeds are classified. Some NFPs classify them as an investing activity, while others classify such proceeds as an operating activity.
Topic 230, Statement of Cash Flows, has been interpreted to allow as either investing or operating activities the practice of presenting the sale of donated securities in the statement of cash flows of NFPs.
Here’s why. Topic 230 (paragraph 230-10-50-4) and Topic 958, Not-for-Profit Entities (paragraph 958-230-55-5), both offer as an example of a non-cash investing or financing transaction the receipt of a contributed investment. Cash receipts from the sale of debt and equity securities of other entities are generally classified as investing cash inflows (except in the case of certain securities that are accounted for as trading securities). Therefore, the classification of the receipts from the sale of donated securities could reasonably be classified as an investing activity.
MAYER HOFFMAN MCCANN P.C. – AN INDEPENDENT CPA FIRM
A publication of the Professional Standards Group
October 2012
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How Not-For-Profits Should Classify the Sale of Donated Securities in the Statement of Cash Flows
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Conversely, some believe that cash flows resulting from the sale of contributed securities should instead be classified as operating cash flows if those assets are held for only a short period of time. According to this viewpoint, assets acquired by gift and sold in accordance with the NFP’s policy of selling donated securities shortly after they are contributed are similar to receiving cash and therefore should be classified on the statement of cash flows in that way.
Given these conflicting views, the Financial Accounting Standards Board’s (FASB) EITF intervened to determine precisely how NFPs should classify the proceeds from the immediate sale of unrestricted donated securities.
On March 15, 2012 the EITF reached a consensus-for-exposure that NFPs’ cash receipts “resulting from the sale of donated securities that are directed upon receipt for sale and for which the NFPs have the ability to avoid significant investment risks and rewards through near immediate conversion into cash should be classified as operating cash flows.”
However, according to the EITF, if the donor restricted the use of the contributed resource to a long-term purpose, “such acquisition, construction, or improvement of long-lived assets or to establish or increase a permanent or term endowment, then those cash receipts should be classified as financing cash flows.”
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The FASB ratified this consensus-for-exposure on April 9, 2012 and exposed it for a 90-day comment period, which ended July 16, 2012. On September 11, 2012 a final consensus was reached on this issue that differs somewhat from the guidance offered in the consensus-for-exposure.
Here’s the final word from the EITF:
The scope has been broadened to apply to “all donated financial assets for which the NFP has the intent to sell upon receipt.” In addition:
• The entity is required to sell the financial assets in the near immediate future.
• The effective date is for fiscal years, and interim periods within those years, beginning after June 15, 2013.
• Prospective application is required with retrospective application permitted.
• Early adoption is allowed.
If you have any questions related to the final guidance issued by the EITF or how it may impact your organization, please contact Michelle Spriggs or your MHM service professional. Michelle can be reached at [email protected] or 774.206.8336.
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The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation. Please contact your MHM service provider to further discuss the impact on your financial statements.