ACCT 632 – Advanced Financial Accounting Theory
Case 9-1 Donated Assets
Liberty University
CASE 9-1, WEEK FIVE 2
Case 9-1 Donated Assets
The City of Martinsville donated land to Essex Company. The fair value of the land was
$100,000. The land had cost the city $45,000.
A.Describe the current accounting treatment for the land. Include in your answer
the among at which the land would be valued by Essex Company and any other
income statement or balance sheet effect.
When recording donated assets previously, they would be recorded at their fair market values
and increase the equity account titled donated capital. The reasoning behind recording the
donated assets at their fair market values was based on the fact that if the donation had instead
been a cash donation it would have been used to purchase the asset regardless at the fair market
value (Schroeder, Clark, Cathey, 2020). The fair market value of the land that was donated to
Essex Company is $100,000 and would currently show on the income statement of Essex
Company as an increase in revenue (per SFAS No. 116, that requires the inflow of assets from a
donation be considered revenue) instead of an increase in capital. On the City of Martinsville
balance sheet, their fixed assets account would then show a decrease.
B.Under the recommendations outlined in SFAS No. 116 (see FASB ASC 720), the
FASB required that donated assets be recorded at fair value and that revenue be
recognized equivalent to the amount recorded for a donation.
a.Defend the FASB’s position. In your answer, refer to the conceptual
framework.
Using the fair market value of the donated asset instead of its original
purchase price is a fair assumption that incorporates the gain or loss on the
asset. Had the donee received a cash contribution instead as stated above,
CASE 9-1, WEEK FIVE3
there is the assumption that they would have purchased the asset themselves at
a cost represented by the fair market value. SFAS No. 116 then requires that
the donated asset be recognized as revenue and asset instead of increasing the
donee’s equity. Further, the donation must be considered a restricted net asset,
temporarily restricted net asset, and unrestricted net asset (SFAS No. 116).
b.Criticize the FASB’s position. In your answer, refer to the conceptual
framework.
Revenue is defined in the IRC as income earned from a good or
service. A donated asset does not meet this definition as it lacks reciprocation.
Further, the conceptual framework does not allow a gain on a donated asset to
be recorded as revenue and the Board believes that if the asset is recorded at
the fair value and can settle the transfer. APB Opinion No. 29 states, “a
transfer of a nonmonetary assets…in a nonreciprocal transfer should be
recorded at the fair value of the asset transferred, and a gain or loss should be
recognized on the disposition of that asset” (paragraph 18).
C.Assume that immediately before donation, Essex had assets totaling $800,000
and liabilities totaling $350,000. Compare the financial statement effects of the
FASB requirement with previous practice. For example, how would EPS or
ratios such as debt to equity be affected.
Essex Company’s assets would increase to $900,000 by adding the fair market value of
the land ($100,000) to their total previous assets of $800,000. The equity would also
increase by $100,000 as well. Liabilities would have no change to record. EPS would not
change unless there was a gain that was realized. Since the capital of Essex Company is
CASE 9-1, WEEK FIVE4
increasing from the donation of the asset, then debt to equity ratio would then decrease
because additionally there would be no change as to the debt.
Biblical Perspective
We are given council in the Bible to “support the weak, and to remember the words of the Lord
Jesus, how he said, it is more blessed to give than to receive.” (Acts 20:35) Giving a donation is
about the positive benefit and change one might be giving to another party. Through that positive
impact to the donee, additional benefit and blessings are then bestowed upon the donor. Christ’s
impact on the world and his life was always in the service of his fellow man, and he paid the
ultimate price to give us the same salvation.
CASE 9-1, WEEK FIVE 5
References
Schroeder, R. G., Clark, M., Cathey, J. M. (2020). Financial Accounting Theory and
analysis: Text and cases. Wiley.
Statement of Financial Accounting Standards No. 116
APB 29: Accounting for Nonmonetary Transactions
Acts 20:35. The Church of Jesus Christ of Latter-day Saints. (n.d.). Retrieved from
https://www.churchofjesuschrist.org/study/scriptures/nt/acts/20?lang=eng.
