MEASUREMENT OF FAIR VALUE FOR CERTAIN TRANSACTIONS OF NOT-FOR-PROFIT ENTITIES
Michael Barloewen, Sr. Manager, Assurance & Advisory
A prevailing trend in financial reporting in recent years has been a steady push more and more towards “fair-value” accounting principles. The Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820 which codifies FASB Statement 157, Fair Value Measurements is a constantly evolving area of guidance. In May 2011, FASB released Accounting Standards Update (ASU) No. 2011-04 which further refined Fair Value accounting with the aim of continuing FASB’s efforts to converge GAAP with the International Accounting Standards Board (IASB). For Nonprofit entities, this revised guidance is effective for annual periods beginning after December 15, 2011 and should be applied prospectively. In the period of adoption, an Organization will be required to disclose a change, if any, in valuation technique and related inputs resulting from the application of the amendments and quantify the total effect, if practicable.
Not-for-profit entities (NFPs) face various challenges in applying provisions of ASC 820. Many of these challenges are due to a lack of markets for certain assets and liabilities of NFP organizations which fall under this guidance. The AICPA has issued a whitepaper, Measurement of Fair Value for Certain Transactions of Not-for-Profit-Entities, which provides in-depth discussion on measurement techniques for Unconditional promises to give cash or other financial assets, Beneficial interests in trusts and Split Interest agreements.
For these assets, the white paper addresses valuation approaches and techniques, considerations for determining the appropriate valuation techniques based on facts and circumstances, determination of appropriate discount rate for use with present value techniques, use of market inputs when valuing split interest obligations (such as use of actuarial data) along with various disclosure considerations.
Of particular interest to many NFP’s, the white paper provides a comprehensive discussion about various present valuing techniques related to unconditional pledges detailing three different approaches that trade off ease of determining a discount rate, against ease of determining cash flows. The three techniques are a traditional discount rate adjustment (DRA), and an expected present value (EPV) technique which can be applied in two methods. Consistent with ASC 820, a calculation of fair value must consider the market participants willingness to take on the cash flow and acceptance of uncertainty in receipt of those cash flows and that is what the risk premium attempts to achieve. The three techniques differ in where the risk adjustment happens. In the DRA method, the adjustment happens in the discount rate (doesn’t use a risk free rate but instead uses a risk adjusted discount rate). In the EPV Methods (there are two), the risk adjustment happens in the probability weighted cash flows or in the discount rate using a different methodology then the DRA method. The difference between these present value methods is the incorporation of a risk premium. The white paper observes that no one present value technique is inherently better than another for fair valuing promises to give.
While the white paper can be dizzyingly comprehensive, this AICPA white paper should prove to be a great guide for those responsible for fair valuing these specific types of assets and liabilities at Nonprofit Organizations. If you’d like more information on this whitepaper, and its impact on the accounting of your Organization, please contact me at your convenience.
