Real Estate Gifts To The Foundation
Situation
Teachum State University Foundation accepts gifts of real estate on behalf of the university, sells the property, and passes the net proceeds onto the university with any restriction imposed by the donor. The gift is recognized on the foundation's accounting system at the time of the transfer of ownership, and the donor is credited on the university's central gift accounting system.
Since the real estate sales proceeds are usually greater or less than the original gift credit amount, Chief Business Officer Wayne Cate wants to know whether the foundation or the university should recognize the gain or loss on the sale.
Response
The response to Cate's question must be conditioned on whether the foundation is an independent entity or a component unit of the university.
GASB Standard 14 ¶ 20 states that component units can be governmental organizations, not-for-profit corporations, or for-profit corporations. A component unit is a legally separate entity that satisfies at least one of the following criteria:
- Elected officials of a primary government are financially accountable for the entity.
- The nature and significance of the relationship between the entity and a primary government are such that to exclude the entity from the financial reporting entity would render the financial statements misleading or incomplete.
Financial accountability is the primary basis for determining whether an entity is a component unit, but GASB was concerned that a single criterion might not provide sufficient flexibility in identifying component units. According to ¶ 21 of GASB Standard 14, financial accountability exists if the primary government appoints a voting majority of the entity's governing board (the foundation in this situation) and if either one of the following conditions exist:
- The university can impose its will on the foundation.
- The potential exists for the foundation to (1) provide specific financial benefits to or (2) impose specific financial burdens on the university.
In all probability, Teachum State University is not a primary government because the trustees are not elected, and the university does not have taxing authority. Thus, the primary government criteria would not be met. However, we do not have sufficient information to determine whether the university can impose its will on the foundation or if the potential exists for the foundation to impose specific financial burdens upon the university. Cate must investigate whether these conditions exist or not.
For the sake of argument, let us assume that the foundation is an independent entity and not a component unit of the university. In this situation, the foundation should maintain all records of the gift until the proceeds are remitted to the university. The gift would be recognized as revenue to the foundation. The remittal to the university would be recognized as an expense. This means that the university's central gift accounting system should not record the transaction until the sale of the real estate gift has been consummated and the proceeds forwarded to the university. The university's gift is the amount of the remitted proceeds not the appraised value of the real estate before its sale. The Foundation would maintain in its gift accounting system the appraised value of the real estate gift and would record any gain or loss from the sale.
On the other hand, if the foundation is determined to be a component unit of the university, the foundation activities could be recorded the same as department transactions. The University could maintain its shadow accounting system by recording the original donor gift amount as gift revenue and recognize the gain or loss on the sale of the real estate as a realized gain or loss on investments. In this situation, care must be taken so as not to double count (i.e., report) the transaction in the university's financial report.
To avoid the double reporting, some institutions do not establish a shadow accounting system for gifts received by the foundation. Instead, the records and financial data of the gift, sale, and gain or loss are maintained by the foundation. The Foundation's gift accounting records are used as the university's gift accounting records. Only when the funds are transferred to the university are entries recorded on the university's financial system. At the end of the fiscal year, the foundation's financial data are then either blended into the university's financial data or presented as a discrete column on the university annual financial report.
Who records the gain or loss on the sale of gifted real estate is contingent upon whether Teachum State University Foundation is a component unit of the university. The financial relationship between the university and the foundation is another consideration.