A nice clarification from the EITF…
One of the fuzzy places in the accounting literature for nonprofits is how to handle donated securities that are liquidated when they are received.
Here is the approach that most organizations take – Since they are not in the business of the investing in the stock market they transfer donated securities to their broker and liquidate them in an orderly manner.
How should those be presented on the cash flow statement? There’s divergence in practice, but I think the most common way is to reflect the liquidation has an investing inflow.
Exposure draft from the FASB will make the presentation consistent.
In casual terms, the proposal would call for donated securities that are liquidated upon receipt to be categorized as an operating inflow.
Finer print – This assumes the organization will not have significant market risk from an orderly liquidation. If there is market risk then the proceeds would be an investing inflow. If there is a donor restriction for the use of the funds then the liquidation would be a financing inflow.
The exposure draft is Statement of Cash Flows (Topic 230) – Not-for-Profit Entities: Classification of the Sale of Donated Securities in the Statement of Cash Flows – a consensus of the FASB Emerging Issues Task Force
The FASB’s summary is:
The amendments in this proposed Update would require an NFP to classify cash receipts from the sale of donated securities consistently with cash donations received in the statement of cash flows if those cash receipts were from the sale of donated securities (a) that upon receipt are directed for sale and (b) for which the NFP has the ability to avoid significant investment risks and rewards through near immediate conversion into cash. Accordingly, the cash receipts from the sale of those securities would be classified as cash inflows from operating activities, unless the donor restricted the use of the contributed resources to long-term purposes, in which case those cash receipts would be classified as cash flows from financing activities. Otherwise, receipts from the sale of donated securities would be classified as cash flows from investing activities by the NFP.