Fair Value Accounting for Nonprofits and Private Companies

Tax Professionals' Resource
March 15, 2013 — 1,871 views  
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Fair value accounting refers to an alternative approach that tries to capture alterations in liability and asset values over a period of time. According to this approach, liabilities and assets are measured regularly to reflect any changes in their worth.

The changes that are found usually impact comprehensive income for a period or the net income. A balance sheet is produced which accurately reflects the present values for liabilities and assets.

FASB and Private Companies’ Requirements

FASB stands for the Financial Accounting Standards Board and they recently issued a financial instruments standard that clarifies how certain fair value requirements are not applicable to private companies and non-profit organizations.

The FASB nonprofits requirements are discussed below.

Non-profit organizations need to frequently disclose certain assets in their financial reporting. The fair value standards have been established to help calculate the current value of these assets. In the past few years, the focus has been on investments, which has left organizations scrambling to decide the fair value of other organizations like trusts and pledges.

The Different Transaction Types

Beneficial interest in trusts

In this type of transaction, an independent trustee receives assets or cash from a donor who specifies that the non-profit organization will get the trust asset distribution.

For instance, an organization receives distribution payments annually in a trust, for which they are named the beneficiary. In case of a perpetual trust, the company can approximate its interest’s value in that particular trust by calculating their fair value of contributed assets.

Unconditional promises to give financial assets or cash

This refers to an oral or written agreement with donors that entails non-reciprocal transfers of assets or cash in the future.

For example, if a donor commits to give a non-profit organization $200,000 every year for the next decade, the organization should work to establish what the present value is by selecting a discount rate that is appropriate and also by using a good valuation technique.

Split interest agreements

This is an arrangement or trust according to which a non-profit organization receives certain advantages that are shared with other beneficiaries.

For example, someone gives an annual gift to their religious organization with a $1million payout. The religion organization invests this money and then pays the annuitant for a specific period of time. The organization should determine this liability’s fair value depending on several factors like the number of beneficiaries, beneficiary’s age, and amount of distributions.

Deciding the Approach to Valuation

The FASB understands that the investments mentioned above cannot be easily referred to like other investments that have existing markets. Instead, valuation approaches are available, which take unknown variables into consideration.

Advantages of Fair Value Accounting

Fair value accounting offers very accurate valuation of assets and liabilities on a continuous basis to the users who make use of the financial information of a company. Fair value accounting can display challenges to organizations and to those who use their financial information. Applying this accounting technique will allow companies to re-examine the present value of liabilities and assets even when the market is volatile.

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