Sales Proceeds of Donated Assets – The FASB Duck Test

FASB Duck TestA wise philosopher once said, “If it looks like a duck, swims like a duck, and quacks like a duck, then it is probably a duck.” This keen form of inductive reasoning may have led to a not-so-widely known accounting standard update in 2012.

FASB has recently issued ASU 2012-05, Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows, to clarify the practice of classifying cash receipts originating from the sale of donated financial assets in the cash flow statement of not-for-profit entities. The need for this update arose from the differing views of financial statement preparers regarding these donated securities. Some preparers have viewed the sale of a donated financial asset to be consistent with any other investment transaction, and therefore would classify the receipt of sale as an investment activity on the cash flow statement. Others have found it more appropriate to classify these transactions in a manner consistent with the treatment of cash contributions (an operating activity), since the organization’s intent is usually to liquidate the donated security as soon as possible rather than holding it as an investment.

ASU 2012-05 amends topic 230, Statement of Cash Flows, in the FASB Codification and requires Not-For-Profit Entities to classify cash receipts from the sale of donated financial assets in a manner consistent with the reporting of cash donations. These cash receipts will be classified as an operating activity rather than as investing activity on the statement of cash flows if the donor did not impose any limitations for sale and if the donated securities were nearly immediately converted into cash. Although the phrase “nearly immediately” isn’t defined by ASU 2012-05, the background information explains that the time period should mean a period of days rather than months. If the donor restricted the use of the contributed securities to long-term purposes, the cash receipts should be classified as cash flows from financing activities.

This amendment affects any Not-For-Profit Entity that accepts donated financial assets and is effective prospectively for fiscal years beginning after June 15, 2013. However, early adoption of the fiscal year is permitted as well as retrospective application to prior periods presented upon the date of adoption. Early adoption for fiscal years beginning before October 22, 2012 is permitted only if the financial statements have not yet been made available for issuance.

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