Question

DasGute, a not-for-profit (NFP) organization located in Frankfurt, Germany, directly solicited CoolSchool, an NFP university located in Westport, CT, to enter into an agreement to establish a branch campus of CoolSchool in Frankfurt called CoolNewSchool. CoolNewSchool is not a separate legal entity and will operate as adegree-granting branch campus of CoolSchool in Frankfurt with the intent to provide students the same level of undergraduate education that it provides to students enrolled at its main campus in Westport. DasGute has entered into similar agreements with other U.S. universities in fulfillment of its mission to develop human resources through highquality education and research in Frankfurt. The boards of directors for both DasGute and CoolSchool require that CoolNewSchool prepare stand-alone financial statements in accordance with U.S. GAAP to demonstrate that revenue and expenses of CoolNewSchool have been generated and incurred inaccordance with the operating budgets described below.Eddie V., the new controller of CoolNewSchool isn’t sure how to account for its formation under U.S. GAAP but has knowledge of NFP accounting principles, specifically whether an agreement should be accounted for as an exchange transaction or a contribution within the stand-alone financial statements.Case FactsResponsibilities of CoolSchoolThe agreement requires that CoolSchool be responsible for the following activities:(1) hiring and terminating of personnel (including the dean, who will function as the CEO of CoolNewSchool) (2) recruiting, admitting, and enrolling students; (3) designing and delivering the academic curriculum; (4) establishing and implementing operational policies and procedures (including compensation for employees and tuition rates for students); and (5) authorizing expenditures once a budget is approved.Responsibilities of DasGuteThe agreement requires that DasGute be responsible to (1) construct, own, furnish, and maintain the site; (2) bear the costs of the joint advisory board; and (3) fund all necessary expenditures for CoolNewSchool, as stipulated by the annual budget.Shared Responsibilities of CoolSchool and DasGuteA nine-member joint advisory board will be established, consisting of three appointed members by CoolSchool, three appointed members by DasGute, and three jointly appointed members. The joint advisory board does not have decision-making authority but will provide guidance on CoolNewSchool’s operations and final approval of the annual budget.Operating BudgetEach year, CoolNewSchool will develop an operating budget that is subject to approval by the joint advisory board. If an agreement is not reached on a proposed budget, the operating budget for the fiscal year in question will be based on the previous year’s budget. Any unresolved issue, whether related to the budget or any other matter, will be settled by arbitration.• Once the annual budget has been approved, CoolSchool has full expenditure authority for CoolNewSchool’s operating expenses. DasGute will reimburseCoolSchool for all expenditures incurred in accordance with the annual budget. In addition, DasGute will pay an annual management fee to CoolSchool.• While CoolSchool is responsible for tuition billing, DasGute is required to fundany shortfall between the tuition rates established for CoolNewSchool and theactual amounts paid by the students, to cover the annual budgeted operatingexpenses.Required:1. Determine whether CoolNewSchool represents an extension of DasGute orCoolSchool by identifying which entity exercises control of CoolNewSchool(analogous to the idea of control if consolidated financial statements wererequired) and from whose perspective (DasGute or CoolSchool) the controllingentity’s agreement should be analyzed as either an exchange transaction or acontribution.2. Does the agreement represent an exchange transaction (and therefore all tuitionamounts should be recorded as "Tuition Revenue") or a contribution (andtherefore the amounts received from DasGute in the form of tuition subsidiesshould be recorded as "Cont?

Answer 1

Answer:

DasGute, a not-for-profit (NFP), Frankfurt / CoolSchool, Westport, CT, and CoolNewSchool, Frankfurt

1. Determination of Control:

DasGute exercises control over CoolNewSchool.  CoolSchool is just in a management consultancy position.

It is from DasGute's perspective that the controlling entity's agreement should be analyzed as a contribution transaction.  It is not an exchange transaction.

2. Determination of Exchange and Consideration Transactions:  In an exchange transaction, there will be consideration for the parties, especially DasGute and CoolSchool.  The facts do not support an exchange transaction.  The IFAC definition do not support an exchange transaction.  The FASB ASC 958-605 rules and FASB ASU 2018-08 update do not support an exchange transaction.

3. Therefore, the amount received from DasGute in the form of tuition subsidies should be recorded as "Contribution Revenue."

Explanation:

a) International Federation of Accountants (IFAC) define exchange transactions, thus: "Exchange transactions are transactions in which one entity receives assets or services, or has liabilities extinguished, and directly gives approximately equal value (primarily in the form of cash, goods, services, or use of assets) to another entity in exchange."

b) The FASB ASC 958-605 provides guidance for contribution and exchange transactions.  "The indicators to use to determine whether a contribution should be recorded as a contribution transaction or an exchange transaction are:

1. What is the recipient nonprofit’s intent in soliciting the asset?

a) Soliciting the asset as a contribution – contribution transaction

b) Seeking resources in exchange for specified benefits – exchange transaction

2. What is the resource provider’s expressed intent about the purpose of the asset to be provided by the recipient nonprofit?  

a) Provider is making a donation to support the nonprofit’s programs – contribution

b) Provider is transferring resources in exchange for specific benefits – exchange

3. What is the method of delivery by recipient nonprofit to third-party recipients?

a) At the discretion of the recipient nonprofit – contribution

b) Specified by the resource provider – exchange

4. What is the method of determining the amount of the contribution?

a) Resource provider determines amount – contribution

b) Amount contributed equals the value of the assets to be provided by the recipient nonprofit, or the assets’ cost plus markup – exchange

5. Are there penalties assessed if the nonprofit fails to make timely delivery of assets?

a) Recipient nonprofit not penalized for nonperformance – contribution

b) Recipient nonprofit penalized for nonperformance – exchange

6. To whom will the recipient nonprofit deliver the assets?

a) Delivered to individuals or organizations other than the resource provider – contribution

b) Delivered to the resource provider or to individuals or organizations closely connected to the resource provider – exchange"

c) FASB ASU 2018-08 update, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, explains clearly when revenue is exchange versus contribution:

"The first step in determining the accounting is determining who is paying the money and who, if anyone, is getting goods or services from the transaction.

If the nonprofit gets funds from a payor and provides that payor direct, commensurate value in return, that is an exchange transaction. An example would be when you purchase a training class from your membership organization; you are paying the value of what you are receiving.

If the nonprofit gets funds from a payor and no value is paid out to anyone at that time, that is clearly a contribution.

If the nonprofit gets funds from a payor, such as the federal government, with the purpose of the nonprofit providing the goods and services to a third party, the general public or a subsegment thereof, that is also a contribution. When the general public, or someone other than the payor, receives the goods or services, it is a contribution."