Case 9-1 Donated Assets
Under prior accounting treatment, Essex Company would have to document the donation
as a donated asset that should probably accompany a surge in total assets and equity. However,
the present-day accounting treatment of recognizing donations has the recipient documenting the
donation as revenue. The land is valued at $100,000 since it is the fair value of that parcel.
However, this transaction would negatively affect the balance sheet by diminishing fixed assets,
or land, for the City of Martinsville. This is of great significance and importance because the
income statement would exhibit a surge in revenue of $100,000 for Essex Company. One thing
that further supports this is that SFAS No. 116 appraises donated assets to be recognized at the
fair value (Schroeder et al, 2020). The statement also allows for exclusions for some items like
works of art and historical treasures. This statement mandates that specific revelations be made
for collection items not capitalized and for receipts of contributed services and promises to be
made. Furthermore, service contributions are realized if services obtained generate or strengthen
assets that are not financial in nature or mandate expertise functional in nature, are established by
team members holding that expertise, and would normally need to be acquired if not given at
time of donation. Moreover, contributions of works of art, historical treasures, and similar assets
need not be recognized as revenues and capitalized if the donated items are added to collections
held for public exhibition, education, or research in furtherance of public service rather than
financial gain.
Furthermore, as noted, “the standard requires (among other things) that certain pledge
contributions be recognized as revenue in the period that the promise to give is made. The
standard has no effect upon net cash inflows and outflows—that is, the short-term financial
condition of the organization—but may distort financial ratios that are used to measure a
charity’s effectiveness, and therefore may have a long-term effect (Derrick, P., 2013)”.In order
to defend the FASB’s position, we must also refer to SFAS No. 116, which mandates that the
recipient of the donation recognizes the donation be documented as revenue not under donated
capital which would create a uptick in the recipient’ equity. “Recording donated assets at fair
market values is defended on the grounds that if the donation had been in cash, the amount
received would have been recorded as donated capital, and the cash could have been used to
purchase the asset at its fair market value” (Schroeder et al, 2020). By utilizing fair value, rather
than initial cost of land permits for a more well-aimed depiction to be fabricated in relation to
charitable contributions for the donor.
Many aspects could be lambasted under the FASB’s position. Specifically, one matter of
question that could arise about the FASB’s position on SFAS No. 116 is the elementary revenue
definition is earning income from distribution of goods or services. While in contrary, a donated
asset does not descend under the revenue definition therefore as it is cogitated as a nonreciprocal
transaction. Moreover, the conjectured foundation communicated that the gain from the donation
of an asset should not be directed as revenue. Another matter of question is SFAS No. 116 does
not bring forth coherent directive on donations of stock, bargain purchases between government
and business, and donation of intangible assets.
Under previous practice, the recipient of the donated land, Essex Company, would see a
surge in donated assets at the fair value of $100,000 while also realizing a surge in equity
documented as donated capital. After the donation of the land has been obtained, total assets
would surge to $100,000 from $800,000 where it was at prior to, while total liabilities of
$350,000 by no means would change or be altered. Concerning the financial statement effects
of Essex Company, the debt-to-equity ratio would decline as the donated asset would cause a
surge in capital, by no means would debt change. The debt-to-equity ratio is used to gauge a
company financial leverage or bargaining chip. It is determined by dividing the total liabilities
of a company by net assets or shareholder equity. It is an evaluation of the sorts to which a
company is subsidizing its activities with liabilities instead of company capital. Furthermore,
EPS would also surge if the donation is realized as a gain. Moreover, EPS specify how much
income a company generates for each stock share and is a universally employed metric for
approximating the value of a corporation. This surge in EPS would specify greater value for
Essex Company.
Regarding the Christian Worldview, the Bible expresses “be on your guard against all
kinds of greed; life does not consist in an abundance of possessions (Luke, 110).” In mindset of
Christian, donations should be made under the foundation that it is to supply benefit to someone
in need and not done so for the purpose of greed or personal gain. It always makes me tick and
is extremely bothersome when I hear of some much deceit and fraud in this world for personal
gain, we must always have the Christian mindset of helping others rather than simply ourselves.
The quote from Luke also helps us to understand we should protect ourselves from greed and not
live life simply by materialistic items but have joy and support for each other instead.
References
Derrick, P. (2013). Accounting for promises: The impact of SFAS No. 116 on charities.
Research in Accounting Regulation Vol. 25 Issue 2. Pages 208-219
Luke (110). Watch out! Be on your guard against all kinds of greed. Retrieved from
https://www.tlha.org/uncategorized/watch-out-be-on-your-guard-against-all-kinds-of-
greed/#:~:text=Luke%2012%3A15%20%E2%80%9CWatch%20out,which%20is
%20pleasing%20to%20God.
Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2020). Financial accounting theory and
analysis: Text and cases (13th ed.). Hoboken, NJ: Wiley.
