OUR THOUGHTS ON:

Not-for-Profit Entities - Classification of Gifts of Securities in the Statement of Cash Flow

Not-for-Profit

By Nick Lombardo

Many not-for-profit entities (NFPs) rely on donations to operate their programs. Many donations are made in the form of cash, but to accommodate a donor's tax goals, some donations are made and accepted in the form of appreciated securities. Most NFPs have internal policies to immediately sell the accepted securities to convert them to cash for immediate use. There is diversity in practice as to how NFPs classify the cash receipts received from the sale of these donated securities in the statement of cash flows.

The Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) met on March 15, 2012 and issued EITF 12-A: Not-for-Profit Entities: Classification of the Sale of Donated Securities in the Statement of Cash Flows, to resolve this issue. The consensus-for-exposure reached at the March 15, 2012 EITF meeting was that cash receipts of NFPs resulting from the sale of donated securities that are directed upon receipt for sale and for which the NFPs have the ability to avoid significant investment risks and rewards through near immediate conversion into cash should be classified as operating cash flows. However, if the donor restricted use of the contributed resource to a long-term purpose (for example, the acquisition, construction or improvement of long-lived assets or to establish or increase an endowment), then the cash receipts would be classified as financing cash flows.

Further discussion on this topic is expected soon, as the comment period ended in mid-July 2012 with an anticipated conclusion in the fall 2012.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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