FASB Liabilities calculations explained

The FASB Liabilities routine produces a report of payment liabilities that satisfy FASB 116 and 117 accounting standards. These standards provide guidelines for how to compute the size of the liability represented by a charity obligation to make payments to a gift income beneficiaries for the rest of the gift term. Depending on the type of gift, the term may be based on measuring lives, a fixed number of years, or a combination of the two.

Choosing an interest rate
The FASB liability amount for a gift is the calculated present value of the income stream the gift will provide in the future. The size of the liability depends on the size, nature, and duration of the income stream, the mortality table you choose, and the interest rate you apply. The interest rate you apply may be a single rate entered at the time you produce the report or the rate entered in the IRS D. Rate/PIF % field in the General tab of each Gift Information page. This field is designed to contain the discount rate or pooled fund valuation rate used to compute the donor charitable deduction at the time of the gift.

FASB 116 and 117 allow each charity some flexibility in computing liabilities. For one, they state that the charity should use an appropriate interest rate when making the computations, but leave it to the charity and its auditors or accountants to determine what that rate is. For all gift types except for pooled income funds, the higher the interest rate used to compute a liability, the lower the liability will be. For pooled income funds, the higher the interest rate used, the higher the liability.

In our experience with performing FASB liability calculations for clients, three approaches to choosing an interest rate are common. Consult with your financial office or auditors to determine the interest rate(s) that is most appropriate for your charity.

1. Use the IRS discount rate or pooled fund valuation rate on which the deduction for each gift was based.

2. Use a single interest rate for all gifts. The rate is determined with the help of the financial office or auditors and should reflect the charityown investment experience and market conditions.

3. Use a single interest rate for each gift type. The rate to use for each gift type is determined with the help of the financial office or auditors and should reflect the charity own investment experience with each gift type and market conditions.

Choosing a mortality table
The FASB Liabilities routine lets you choose among several mortality tables. 2000CM is the mortality table required by the IRS for computing planned gift charitable deductions (it replaced 90CM for this purpose as of July 1, 2009). It is a unisex table, meaning it assigns males and females the same mortality. In our experience, most charities use 2000CM to compute FASB liabilities because doing so is consistent with their computation of the gift charitable value at the time of donation, i.e., the charitable deduction. This may change soon, however, because the IRS published in proposed regulations on May 5, 2022 a new 2010CM mortality table. 2010CM will replace 2000CM as the table required for computing charitable deductions for planned gifts once the IRS publishes final regulations. In the meantime, Donors may compute deductions for planned gifts and other split interest transfers made on or after January 1, 2021 using either 2010CM or 2000CM. Per the proposed regulations, 2000CM will cease to be an option and 2010CM will become the required table on the first day of the month following publication of final regulations. Some charities have already started using 2010CM in place of 2000CM because they feel it results in a better (and greater) determination of the charity's planned gift liabilities.

Before the late 1990s, 1983 A was the mortality table for computing annuity reserves accepted by most states that regulate gift annuities. It is a gender-biased table, meaning it assigns different mortalities to males and females. These states then moved to requiring the Ann2000 mortality table for reserve calculations. Ann2000 is also a gender-biased table and is based on more recent mortality data than 1983 A. For gift annuities issued on or after January 1, 2015, most of these states now require use of the 2012 IAR mortality table, which is both a gender-biased and generational table that is based on still more recent mortality table. The generational aspect of 2012 IAR means that the table incorporates assumed mortality improvements in all future years. As a consequence, the reserve for identical annuities under identical assumptions will increase as the year of valuation increases.

See computing the annuity reserves for lists of the states that adopted the Ann2000 and 2012 IAR mortality tables and when.

Choosing a valuation date
If you are running FASB Liabilities to compute liabilities that satisfy FASB 116 and 117 standards, enter the last day of your charity fiscal year as the Valuation Date. If you are running FASB Liabilities for other reasons, such as internal analysis of your planned gift obligations, enter the date as of which you wish to compute liabilities.

Gift information used to compute FASB liabilities
In addition to the interest rate, FASB valuation date, and mortality table that you select at the time you produce the report, the FASB Liabilities routine uses the following information in performing its calculations for each gift type.

Gift Annuities:
payout %; gift amount; beneficiary actuarial ages on valuation date; payment frequency; payment timing; date of first payment; gender (if sex-biased mortality table chosen)

Remainder Unitrusts:
market value; payout rate; beneficiary actuarial ages on valuation date, remaining fixed term, or combination of the two; payment frequency; months from valuation to payment; gender (if sex-biased mortality table chosen)

Remainder Annuity Trusts:
payout %; gift amount; beneficiary actuarial ages on valuation date, remaining fixed term, or combination of the two; payment frequency; payment timing; gender (if sex-biased mortality table chosen)

Pooled Income Funds:
market value; beneficiary actuarial ages on valuation date; gender (if sex-biased mortality table chosen)

Lead Annuity Trusts:
payout %; gift amount; beneficiary actuarial ages on valuation date, remaining fixed term, or combination of the two; payment frequency; payment timing; gender (if sex-biased mortality table chosen)

Lead Unitrusts:
market value; payout rate; beneficiary actuarial ages on valuation date, remaining fixed term, or combination of the two; payment frequency; months from valuation to payment; gender (if sex-biased mortality table chosen)

Calculation method
The FASB liabilities routine uses the same calculation method that the IRS requires for computing each gift liability and charitable deduction.

Each future payment is discounted by an interest factor and by the probability that the payment will be made. The probability the payment will be made is based on the mortality table you choose for the report. Adjustments are made for payment frequency and to bring payments into the middle of each period. The liability equals the sum of all the possible discounted payments.

Gift annuities, remainder and lead annuity trusts, and pooled funds
The interest factor is the rate of return you choose for the report.

Remainder and lead unitrusts
The interest factor is the payout rate of the trust. The adjustment for payment frequency, however, depends on the rate of return you choose for the report.

On the date of the gift, the liability plus the charitable deduction equals the gift amount. Consequently, for gifts other than lead trusts, if you choose 2000CM as the mortality table (valid for gifts made on or after 7/1/2009), the gift IRS discount rate as the interest rate, and the gift date as the FASB liability valuation date, the FASB liability amount calculated by GiftWrap exactly equals the gift amount minus the charitable deduction. In the case of a gift annuity, the gift amount minus the charitable deduction is known as the investment in contract. For lead trusts, the FASB liability amount calculated using the assumptions above exactly equals the charitable deduction itself.

Liability calculations for flexible gift annuities
The method for computing FASB liabilities for flexible gift annuities (FGAs) depends on whether or not the annuitant has elected an annuity starting date as of the liability valuation date.

If the annuitant has elected a date of first payment as of this date, GiftWrap can perform this liability calculation correctly as long as the elected date of first payment and the annuity rate that goes with it are entered in the Gift Information screen for the gift.

If the annuitant has not elected a date of first payment as of this date, the liability equals the highest liability calculated among all of the individual elective combinations of dates of first payment and annuity rate. In this case, the way to determine the liability for a flexible gift annuity with absolute certainty is to compute the liability for a deferred gift annuity based on each elective date of first payment and annuity rate pair, determine the greatest liability among the results, and then enter that elective start date and annuity rate in the Gift Information screen for the gift. In many cases, the earliest date of first payment and annuity rate will result in the greatest liability, but not all.

More details on computing the FASB liability for a flexible gift annuity

Liability calculations for commuted payment gift annuities
The method for computing FASB liabilities for commuted payment gift annuities (CPGAs) depends on whether or not the annuitant has commuted the annuity payments as of the liability valuation date.

If the annuitant has not commuted the annuity payments as of this date, the liability calculation is the same as it is for a standard deferred gift annuity and GiftWrap can perform the calculation correctly.

If the annuitant has commuted the annuity payments, however, the liability computed using the standard deferred gift annuity approach will be insufficient. In this case, GiftWrap can compute the liability by determining the net present value of the payments based on the amount of the commuted payment, the start and end date of the payments, and the applicable interest rate.

Computing the FASB liability for a commuted payment gift annuity

Liability calculations for charitable lead trusts

When the charity is not the trustee of the CLT
The charity should measure and report the value of its beneficial interest only. This beneficial interest is the PV of Payments value that appears on the FASB Liabilities report.

When the charity is the trustee of a CLT

1. The contribution revenue, assets held in trust, and liability for amounts held for others (i.e., the donor's heirs) should be recognized by the charity in the year of the gift. The "fair value" of the contribution can be measured as the present value of the payment stream, which is what the FASB Liabilities report shows in the PV of Payments column. The assets held in trust is shown in the Market Value column of the FASB Liabilities report. The liability is not shown on the FASB Liabilities report, but is the difference between the PV of Payments and the Market Value values. Repeat this process each year.

2. Per FASB Statement 157, if the trust has a fixed term (almost all of them do), its assets should be bifurcated between a "debt host contract" and an "embedded derivative." The debt host contract is the liability required if the fair value of the trust assets don't change over the trust term. The embedded derivative is the liability for the increase (or "contra-liability" for the decrease) in payment to the ultimate beneficiaries (the heirs) due to changes in the fair value of the trust assets over the trust term. To value the debt host contract you use the same interest rate every year. To value the embedded derivative, you use an interest rate each year that reflects current market conditions.

If determining the proper bifurcation between debt host contract and embedded derivative is too hard for the charity to do, it can choose to treat the whole liability as an embedded derivative, which means measuring the liability using an interest rate each year that reflects current market conditions. If you treat the whole liability as an embedded derivative, the FASB Liability report can compute the proper PV of Payments if you enter as the rate of return an interest rate that reflects current market conditions. The liability that year will be the Market Value minus the PV of Payments. GiftWrap doesn't offer an easy way to handle bifurcating a lead trust's assets between debt host contract and embedded derivative..

Liability calculations for step charitable lead trusts
The liability for a charitable lead trust that increases its payments on a pre-determined schedule, a so-called "step" lead trust, can be calculated by determining first the PV of Payments based on the trust's remaining term on the date of valuation and a payment amount that is inclusive of all the step increases (in other words, the payment amount at the end of the trust term). Then, compute separately the PV of Payments for each step amount and a term length that is from the date of valuation to the year the step increase occurs. When you have computed all of these PVs of Payments, subtract each of them from the initial PV of Payments you computed. What’s left will be the PV of the step payment stream. The lead trust's liability for the year is its market value on the valuation date minus the PV of its step payment stream.

For example, if a CLAT that will terminate 15 years after the liability valuation date is currently paying 5% of its initial value and this percentage will increase to 6% in five years and then to 8% in another five years, you would compute the present value of its payments as follows:

Compute the PV of Payments for a CLAT with a 15-year term and a 8% payout.
Compute the PV of Payments for a CLAT with a 10-year term and a 2% payout.
Compute the PV of Payments for a CLAT with a 5-year term and a 1% payout.
Subtract the PVs of Payments determined in steps (2) and (3) from the PV of Payment determined in step (1)