FASB liability calculations for commuted payment gift annuities
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GiftWrap can perform FASB liability calculations. Performing FASB liability calculations for commuted payment gift annuities (CPGAs) presents special challenges. In some circumstances, you may want to compute the liability for a CPGA manually and edit the FASB Liabilities report as needed.
The FASB Liabilities report recognizes a gift as being a commuted payment gift annuity when it has a Gift Type of Charitable Gift Annuity and a Subtype of Commuted.
Computing liabilities prior to the commutation of payments
There is a check box on the Details tab of the Gift Information window labeled Payments Commuted. When this check box is empty, this means that the annuitant has not yet opted to commute the gift annuity payments. As a result, the gift annuity is still scheduled to make payments for life, like any other typical deferred gift annuity. The FASB liability for such an annuity can be computed the same way as a deferred gift annuity.
For the FASB liability calculation to be correct in these circumstances, you need to be sure that the annuity rate entered for the gift is the deferred annuity rate stated in the annuity contract prior to commutation. Note that this is the rate that is imported when you create a new gift record by importing gift information from a file created in Planned Giving Manager.
Computing FASB liabilities after commutation of payments
Once an annuitant has legally commuted the gift annuity payments via the instructions contained in the annuity contract, the maximum number of payments that will be made becomes known. As a result, a FASB liability calculation computed based on lifetime payments to the annuitant will no longer be accurate. What's more, as the annuity starting date gets closer, the FASB liability computation based on a lifetime annuity will become too small by a greater and greater margin.
GiftWrap uses the approach described below when you check the box to have it compute reserves based on the term end date for commuted payment gift annuities that have commuted their payments.
Important: For the FASB liability calculation to be done right, the following fields must be set up correctly for the gift.
- Payments Commuted check box in the Gift Information > Details tab must be marked.
- Payout % in the Gift Information > General tab must correspond to the payment amount after commutation (not the lifetime annuity amount prior to commutation).
- Term End Date in the Gift Information > Trust/Term/PIF tab must show the date of the final commuted payment.
Using the interest rate entered for computing liabilities, GiftWrap computes a net present value of the remaining commuted payments. This approach calls for discounting each payment for the number of years from the valuation date for the liability to the date of the payment. If the FASB liability interest rate is 6% and the first of four annual $5,000 payments will be made in five years, for example, then the liability is:
((1/1.06)^5 x $5,000) + ((1/1.06)^6 x $5,000) + ((1/1.06)^7 x $5,000) + ((1/1.06)^8 x $5,000) =
$3,736 + $3,525 + $3,325 + $3,137 = $13,723