How Does FASB 157 Impact Auditing?

This year, the auditors at some NFPs want to talk about FASB 157, measuring fair value, and mark-to-market accounting. This new accounting rule has wide application, causing quite a bit of controversy in the financial services industry and other industries, and requires that assets and liabilities be measured for some (but not all) purposes on financial statements at a market-based fair value rather than at book value. (Elliott, pp120-124)

What is FASB? Pronounced fazz bee, it is the Financial Accounting Standards Board, a self-regulatory body in the U.S. charged with setting accounting standards. FASB 157 is Statement of Financial Accounting Standards No. 157, Fair Value Measurements issued by FASB in September 2006.

Type of NFP

End of first fiscal year to which FASB 157 applies

Social service, religious, and other NFPs on calendar year

December 31, 2008

Colleges, universities, and other educational NFPs on academic year

June 30, 2009

Health care NFPs

September 30, 2009

Other NFPs

First fiscal year beginning after November 15, 2007

Déjà vu all over again

But wait, some old-timer in the gift planning office or financial office asks, aren't we already doing fair value accounting for planned gifts? Yes, in fact, fair value accounting took effect under FASB 116 in 1995 for contributions of split interest gifts (remainder trusts, lead trusts, gift annuities, pooled funds, and retained life estates) and other types of gifts to NFPs. FASB 157 is concerned with how that fair value is measured. (Higson, pp 164-168)

So, the fair question is, what has changed and what has not? A review of the new FASB 157 standards and their application to split interest gifts will reveal that they primarily affect the discount rate assumptions used in running FASB liability calculations. (Deegan, pp45-51)

Reports of the death of book value are greatly exaggerated

For split interest gifts under the new FASB 157 regime, fair value is still required only for the initial contribution. This means that the fair value of an irrevocable charitable interest in a split interest gift (the contribution portion) is reported as contribution revenue.

Charitable interest

Trustee or fiscal agent

When contribution revenue is recognized

Irrevocable

NFP

Year of gift

Irrevocable

Unrelated third party

When the NFP is notified of the split interest gift's existence

Revocable

-

When the power to change or revoke charitable beneficiary expires, which is often not until the donor's death, or as funds are distributed to the NFP for unconditional use

The entire gift amount is also booked, as is the value of the non-charitable interest.This non-charitable interest is called by shorthand the "FASB liability". While the exact handling of these FASB liability amounts on the books varies by gift type and other factors we won't go into here, the effect is to carry the split interest gift net of the FASB liability as a temporarily restricted net asset on the books of the NFP. The FASB liability is recomputed and entered on the books each year for the duration of the split interest gift.

Unlike for the initial contribution, fair value is not required for measurement of FASB liabilities during the term of the split interest ...