Sale of Donated Financial Assets
There are many accounting issues that are unique to not-for-profit organizations. One of these unique items involves the sale of donated financial assets. For instance, suppose a not-for-profit organization receives donated securities on September 1, 2014 and they sell the securities the next day. How does a not-for-profit organization classify the receipts arising from the sale?
| a. | As an operating activity |
| b. | As an investing activity |
| c. | As a financing activity |
ASU 2012-05
Prior to the implementation of ASU 2012-05, the answer was any of the above. Some organizations were classifying the cash receipts as an investing activity, while other organizations were recording the cash receipts as either an operating activity or a financing activity consistent with the classification of the contribution income. As a result, ASU 2012-05 was issued to address these inconsistencies.
ASU 2012-05 requires not-for-profit organizations to classify cash receipts from the sale of donated financial assets in the statement of cash flows consistent with its classification of cash donations received (operating activity) if all of the following conditions are met:
| a. | The donated financial assets sold were received without any limitations imposed on their sale |
| b. | The donated financial assets were converted nearly immediately into cash* |
| c. | The donor did not restrict the use of the resources for long-term purposes as described in ASC Topic 230-10-45-14(c), which includes acquiring, constructing, or improving property, plant, equipment or other long-lived assets or establishing or increasing a permanent endowment or term endowment. |
If conditions a. and b. are met, but not c., then the proceeds from the sale of the donated financial assets should be classified as a financing activity on the statement of cash flows.
If conditions a. or b. are not met, then the proceeds from the sale of the donated financial assets should be classified as an investing activity on the statement of cash flows.
*Although the ASU does not define the term “nearly immediately,” it does state that “nearly immediately” is synonymous with promptly and should generally be considered to be within days rather than months and should be interpreted to be the same regardless of the type of financial asset being sold.
Now, going back the original question – assume that the donor did not place any long-term purpose restrictions on the donation. Under that set of circumstances, the correct answer is to classify the transaction as an operating activity.
Now assume the same facts as the original question above, except the donor restricts the use of the resources to the establishment of a permanent endowment fund. Under that set of circumstances, the correct answer is as a financing activity.
Now assume that the organization sold the securities on December 29, 2014 and the donor did not place any longer-term purpose restrictions on the donation. Under that set of circumstances, the correct answer is as an investing activity.
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Author: Lisa Galinsky, CPA, CVA | [email protected]
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