What Are Split Interest Agreements

The complications associated with interest-sharing agreements are enormous. First, it can often be difficult to tell when the donations a nonprofit actually receives come from an interest-sharing agreement and not from more traditional annual donations. While the flow of assets (constant annual amounts) cannot differ from one type of transfer to another, appropriate accounting in accordance with generally accepted accounting principles (GAAP) can vary significantly. If regular donations come from the same source, it`s likely that a nonprofit will raise money and income with each receipt each year. However, if these regular cash flows are the primary interest rates of a split interest agreement, the sum of all cash income (discounted to a present value) could have been recognised as revenue at the time of the first execution of the split interest agreement. If the interest-sharing agreement is irrevocable and the assets are held by a third party, the not-for-profit organization should recognize premium income and a balance of receivables when announcing the existence of the split interest agreement, with amounts recognised at fair value. If the interest-sharing agreement is revocable (by the donor) or if the trustee holding the assets is allowed to redirect the benefits to another organization, the nonprofit should not recognize its economic share of these future entries and instead capture the revenues when they are actually received. As a member of your nonprofit`s finance and accounting staff, know if you find that constant donations come from the same source, especially if they come from a trust organization on behalf of a donor. An interest-sharing agreement could very well be the source of these donations, and you may need to make significant changes to the balance sheet. Contacting the trustee or donor is the best place to understand if there is a formal interest-sharing agreement. Another complication to watch out for is whether your nonprofit is the trustee of the interest-sharing agreement and therefore holds the assets in custody and is the company that distributes the primary stake to the other beneficiaries. .