Posted by Jonathan D. Moll, CPA
This past Saturday my wife sent me on a chore that I initially referred to as “Mission Impossible.”
The Mission: Successfully purchase a birthday gift for our niece’s 1st birthday at a local toy store with my 4-year old son and 3-year old daughter…with no melt-downs.
The idea of explaining to my children that they would have no vested interest in this journey was not a path I wished to travel. So I resorted to the technique that every over-matched father keeps in his parenting repertoire: Bribery. In exchange for twenty minutes of perfect behavior, their reward would be a monetarily restricted toy of their choice. But then something happened that I did not anticipate. Somewhere between the Play-Doh and the bicycles, my children realized that by combining their interests, they can bring home a toy of greater value. When we left the store with one Toy Story Lego set, the debating began. My son thought the set should be maintained and accounted for in his toy-box with my daughter having rights to use it when she wanted. My daughter thought that she had a 50% interest; therefore, she should maintain one-half of the set in her toy-box.
Since I work with nonprofit organizations on a daily basis, I should have anticipated this dilemma. In this current environment of increased competition over private and public funding, we are seeing more organizations join forces to gain a competitive advantage in order to secure funding. In these situations, despite the intention for multiple organizations to benefit from the funding, there is usually a lead organization that enters into the grant contract or receives the charitable donation. The question of accounting that presents itself is whether or not that lead organization should recognize the full grant or donation as revenue or if it is acting as an agent on behalf of another entity.
According to FASB ASC 958-605, generally speaking, a recipient entity acting as an agent recognizes a liability to the specified beneficiary concurrent with its receipt of cash or other assets from the donor. A recipient organization is considered an agent if:
- It receives assets and agrees to use those assets on behalf of or transfer those assets to a specified beneficiary;
- It agrees to solicit assets from donors specifically for the benefit of a beneficiary; or
- A beneficiary can compel the recipient entity to make distributions to it or on its behalf.
If your organization plans to be a party to an agency transaction, be sure to have all agreements in writing. As my son found out the hard way, an agreement that is not well documented is difficult to interpret and account for.