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Glenn Hegar  ·  Texas Comptroller of Public Accounts

Reporting Requirements for Annual Financial Reports of State Agencies and Universities

General Accounting

Specialized Accounting
Irrevocable Split-Interest Agreements

GASB 81 improves accounting and financial reporting by establishing recognition and measurement requirements for irrevocable split-interest agreements. Additionally, GASB 81 enhances the transparency and decision-usefulness of general purpose external financial reports — and their value for assessing accountability — by more clearly identifying resources that are available to agencies.

Irrevocable split-interest agreements are a specific type of giving arrangement used by donors to provide resources to two or more beneficiaries — including agencies.

Scope and Applicability

GASB 81 establishes accounting and financial reporting standards for irrevocable split-interest agreements created through trusts — or other legally enforceable agreements with characteristics that are equivalent to irrevocable split-interest agreements — in which a donor irrevocably transfers resources to an intermediary. The intermediary administers these resources for the unconditional benefit of an agency and at least one other beneficiary. The provisions of GASB 81 are applied to financial statements of all state and local governments.

GASB 81 supersedes Implementation Guide No. 2015-1, question 7.72.11, GASB 81 amends GASB 31, paragraph 13; GASB 33, paragraph 5; GASB 34, paragraphs 16, 18, 22, 92, and 107; and GASB 67, paragraph 24.

The provisions of GASB 81 apply to financial statements prepared using the economic resources measurement focus and the current financial resources measurement focus, unless otherwise noted.

Irrevocable Split-Interest Agreements

An irrevocable split-interest agreement is one type of split-interest agreement used by donors to provide resources to two or more beneficiaries, including agencies. Under an irrevocable split-interest agreement, the donor does not reserve (or confer to another person) the right to terminate the agreement at will and have the donated resources returned to the donor or a third party. Irrevocable split-interest agreements can be created through trusts or other legally enforceable agreements with characteristics that are equivalent to irrevocable split-interest agreements.

Examples of irrevocable split-interest agreements include:

  • Charitable lead trusts
  • Charitable remainder trusts
  • Life-interests in real estate

The other beneficiary can be:

  • The donor
  • A relative of the donor
  • Other legal person or entity (including another state’s agency)

The stipulations of individual agreements can vary with respect to:

  • The agency acting as the intermediary (which may or may not be required to be a third party)
  • The assignment of benefits
  • The term of the agreement
  • Other general provisions

For example, some donors require that the agency that has a beneficial interest also serve as the intermediary in the irrevocable split-interest agreement.

A typical irrevocable split-interest agreement has two components:

  • A lead interest
    –AND–
  • A remainder interest

Irrevocable split-interest agreements can provide resources to an agency either:

  • Throughout the term of the agreement in the form of periodic disbursements (lead interest)
    –OR–
  • As a final disbursement at the termination of the agreement (remainder interest)

In some irrevocable split-interest agreements, the amount of the disbursements to the lead interest beneficiary is pre-established as a specific amount (annuity). However, other irrevocable split-interest agreements define the periodic disbursements to the lead interest beneficiary as a variable amount — for example, as a specific percentage of the fair value of the assets measured at each disbursement date (unitrust).

An irrevocable split-interest agreement terminates after:

  • A period-certain term (for example, a specified number of years)
  • A life-contingent term (upon the occurrence of a specified event, commonly the death of either the donor or the lead interest beneficiary)
    –OR–
  • A combination of both terms

As an example, a life-contingent irrevocable split-interest agreement might stipulate that at the death of the donor, the remainder interest is remitted to the agency.

An Agency Is the Intermediary

If an Agency Is the Remainder Interest Beneficiary

If an agency is both the intermediary and the remainder interest beneficiary of an irrevocable split-interest agreement, the agency recognizes:

  • Assets for resources received or receivable
  • A liability for the lead interest that is assigned to other beneficiaries
  • A deferred inflow of resources for the agency’s unconditional remainder interest

Assets recognized pursuant to irrevocable split-interest agreements are measured in accordance with existing standards. For example, assets that meet the definition of an investment are measured at fair value according to the provisions of GASB 72, as appropriate. Assets that meet the definition of an investment are also remeasured and reported at fair value at each reporting date.

Changes in assets recognized pursuant to irrevocable split-interest agreements (such as those resulting from interest, dividends and changes in fair value) are recognized as an increase or a decrease in the related deferred inflow of resources.

The amount recognized as the liability representing the lead interest assigned to other beneficiaries is measured based on a settlement amount (the stream of payments expected to be provided to other beneficiaries). This measurement is based on an established valuation technique that incorporates assumptions that reflect the specific provisions of the agreement. The assumptions considered when measuring the amount recognized as the liability include the:

  • Payment provisions of the agreement
  • Estimated rate of return of the assets
  • Mortality rate (if the term is life-contingent)
    –AND–
  • Discount rate (if a present value technique is used)

Disbursements to other beneficiaries reduce the liability. The amount reported as the liability is remeasured at each fiscal year — based on changes in the assumptions used to determine the settlement amount. The change resulting from the remeasurement of the amount recognized as the liability is recognized as an increase or a decrease in the related deferred inflow of resources (as appropriate).

At the termination of the irrevocable split-interest agreement, the amount reported as a deferred inflow of resources associated with the agreement is recognized as revenue. The elimination of any remaining liability is recognized as a gain (or as revenue in governmental funds).

If an Agency Is the Lead Interest Beneficiary

If an agency is both the intermediary and the lead interest beneficiary of an irrevocable split-interest agreement, the agency recognizes:

  • Assets for resources received or receivable
  • Deferred inflow of resources for the agency’s unconditional lead interest
  • Liability for the remainder interest that is assigned to other beneficiaries

Assets recognized pursuant to irrevocable split-interest agreements are measured in accordance with existing standards. For example, assets that meet the definition of an investment are measured at fair value according to the provisions of GASB 72, as appropriate. Assets that meet the definition of an investment are also remeasured and reported at fair value at each reporting date.

Changes in assets recognized pursuant to irrevocable split-interest agreements (such as those resulting from interest, dividends and changes in fair value) are recognized as an increase or a decrease in the related liability.

The amount recognized as the deferred inflow of resources representing the agency’s unconditional lead interest are measured based on a settlement amount (the stream of payments that is expected to be provided to the agency beneficiary). This measurement is based on an established valuation technique that incorporates assumptions that reflect the specific provisions of the agreement. The assumptions considered when measuring the amount recognized as the deferred inflow of resources include the:

  • Payment provisions of the agreement
  • Estimated rate of return of the assets
  • Mortality rate (if the term is life-contingent)
    –AND–
  • Discount rate (if a present value technique is used)

The amount of the agency benefit for the fiscal year is recognized as revenue and a decrease in the deferred inflow of resources. The amount reported as a deferred inflow of resources is remeasured at each fiscal year, based on changes in the assumptions used to determine the settlement amount. In addition, the change resulting from the remeasurement of the amount recognized as the deferred inflow of resources is recognized as an increase or a decrease in the related liability, as appropriate.

At the termination of the irrevocable split-interest agreement, when the assets are disbursed to other beneficiaries, the liability and any remaining deferred inflow of resources related to the agreement is eliminated.

Life-Interests in Real Estate

A life-interest in real estate is a type of life-contingent irrevocable split-interest agreement in which the donor (or parties specified at inception by the donor) retains the right to use the asset (such as a residence).

When the real estate asset is recognized as an investment, the provisions in GASB 81, paragraphs 24–28, are applied under both the current financial resources measurement focus and the economic resources measurement focus. When the real estate asset is recognized as a capital asset, the provisions in GASB 81, paragraphs 24–28, are applied only under the economic resource measurement focus.

The asset is recognized as either a capital asset or an investment — depending on the terms of the agreement and management’s intent at the time of the donation. If the asset is recognized as a capital asset, the asset is measured at acquisition value. If the asset meets the definition of an investment as set forth in GASB 72, paragraph 64, it is initially measured according to the provisions of GASB 72.

A liability is recognized if an agency assumes a legal obligation to sacrifice financial resources pursuant to the provisions of the life-interest in the real estate agreement (such as for insurance, maintenance or repairs of the asset). If a liability is recognized, it is reduced as the agency satisfies the obligations.

A related deferred inflow of resources is recognized in the amount of the difference between the asset and the liability (if a liability is recognized).

If the asset is recognized as:

  • An investment — changes in the fair value of the investment are recognized as an increase or a decrease in the related deferred inflow of resources
  • A capital asset — a systematic and rational allocation of the asset’s initial acquisition value reduces the carrying value of the asset and the deferred inflow of resources throughout the life of the agreement

At the termination of the agreement, revenues are recognized for the deferred inflow of resources and for any remaining portion of the liability.

A Third Party Is the Intermediary

Beneficial Interests

A beneficial interest is the right to receive a portion of the benefits from donated resources pursuant to an irrevocable split-interest agreement in which the donor enters into a trust — or other legally enforceable agreement with characteristics that are equivalent to irrevocable split-interest agreements — and transfers the resources to an intermediary. When a third party is the intermediary, an agency shares beneficial interests with at least one other beneficiary.

Recognition

If a third party is the intermediary of an irrevocable split-interest agreement, an agency recognizes an asset and a deferred inflow of resources when the agency becomes aware of the agreement and has sufficient information to measure the beneficial interest — provided that the criteria in GASB 81 paragraph 31 are met.

Asset Recognition Criteria

Assets are recognized for beneficial interests that meet all of the following criteria:

  • Agency is specified by name as beneficiary in the legal document underlying the donation
  • Donation agreement is irrevocable
  • Donor has not granted variance power to the intermediary with respect to the donated resources
  • Donor does not control the intermediary, such that the actions of the intermediary are not influenced by the donor beyond the specified stipulations of the agreement
  • Irrevocable split-interest agreement establishes a legally enforceable right for the agency’s benefit (an unconditional beneficial interest)

Measurement

The beneficial interest asset is initially measured at fair value and remeasured at fair value at each fiscal year. Changes in the fair value of the beneficial interest asset are also recognized as an increase or a decrease in the related deferred inflow of resources.

If an agency is the lead interest beneficiary, the agency:

  • Recognizes revenue for the beneficial interest applicable to the fiscal year (as stipulated in the irrevocable split-interest agreement)
  • Reduces the beneficial interest asset for the same amount for the fiscal year

If an agency is the remainder interest beneficiary, the agency:

  • Recognizes revenue for the beneficial interest at the termination of the agreement (as stipulated in the irrevocable split-interest agreement)
  • At the termination of the agreement, the beneficial interest asset and the related deferred inflow of resources is eliminated
Glenn Hegar
Texas Comptroller of Public Accounts
Questions? Contact statewide.accounting@cpa.texas.gov
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