As we have seen, the accounting of full-fledged interest agreements can be complex, because there are different types of agreements – all with their own nuances. That`s why it`s important to fully understand the ins and outs of Split`s interest agreements – ensuring that your non-profit organization fully complies with all the rules. Example 2: Remainder Trust (periodically some variable payments) [also known as Unitrust General Interest] Common shares are used to control the NFP organization, which is required to make 20 annual cash payments to the donor or donor beneficiary corresponding to a certain percentage of the fair value of the assets at the beginning of each year. After 20 payments, the remaining units will be donated to the NFP organization. For the duration of the agreement (20 years), the NFP organization has a responsibility that must be reduced to two parts because it contains an integratedrivative instrument that justifies separate accounting, unless a fair value choice takes place in accordance with Declaration 155. Under paragraph 12, liabilities are a hybrid instrument, consisting of a host debt contract and an incorporated equity derivative, which is not clearly and closely linked to the debtor and which corresponds to the definition of a derivative instrument if it were independent. In other words, it has an underlying (share price) and a nominal amount (number of units in the trust at the beginning of each year), to satisfy the net non- or smaller investment characteristic of paragraph 6, point b), and to satisfy the incompreatation characteristic referred to in paragraph 6, point c) (each annual payment being adjusted to reflect the effect of derivative on shares). This analysis is consistent with the analysis outlined in Item 185 of Statement 133 on equity-indexed debt securities. (The amount of debt is the responsibility of the series of 20 annual payments that would be based on the assumption that the fair value of the common equity portfolio will not change over the 20-year period. The incorporated equity derivative refers to the increase or acceptance of each of the twenty annual payments resulting from changes in the fair value of the common share.) Some split interest agreements may include the provision of corporate or U.S.
bonds or other non-equity securities. To determine whether these split interest agreements contain an embedded derivative, the same analysis described in the above examples described in Note 133 of Note 133 should be applied. The concept of a separate and closely related entity, as defined in paragraph 12, point a), includes an assessment of the economic characteristics and risks associated with non-equity securities with respect to the economic characteristics and risks of the NFP debt contract. Due to the diversity of credit risks, the change in the fair value of corporate bonds (based on the company`s credit and interest rate risk) is generally not clearly and closely related to the change in the economic characteristics and risks of the NFP borrowing contract. Therefore, there would be an embedded derivative that would require separate branching and accounting of the embedded derivative, unless a fair value choice is made pursuant to Statement 155. Example 6: Lead Trust (firm or variable payments) An NFP organization receives money from a donor invested in joint actions by the NFP organization. The donor designates the organization as the main beneficiary. At the beginning of each annual period, the PFNP organization receives, for a specified period, an annual cash payment equal to a fixed amount or a certain percentage of the fair value of the amount of the investment. The remaining assets will then be repaid to the donor or the donor`s beneficiary.