What Are Agency Transactions (explained with journal entries)
Posted by: V.Weber
Agency transaction is a type of exchange transaction in which the organization acts as an agent trustee or intermediary for another party who may be either a donor or a donee. In an agency transaction there are typically three parties involved: 1) donor – who makes the contribution; 2) recipient entity – entity that accepts assets from the donor; 3) beneficiary – unaffiliated entity specified by the donor.
When a recipient entity (intermediary nonprofit) received funds on behalf of the beneficiary, the funds would be recognized as a liability. Here is an example of the entry that would be made:
| Dr. | Cash | $1,000,000 |
| Cr. | Liability to beneficiary | $1,000,000 |
And then when the funds are passed to the beneficiary, the entry would be reversed:
| Dr. | Liability to beneficiary | $1,000,000 |
| Cr. | Cash | $1,000,000 |
In this case the funds only flow through the statement of financial position (balance sheet) and do not flow through the statement of activities (income statement).
On the beneficiary’s side the entry to record the funds received would be the following:
| Dr. | Cash | $1,000,000 |
| Cr. | Contribution Revenue | $1,000,000 |
The complexity comes in when it is not clear whether the intermediary acts as an agency for beneficiary or whether intermediary needs to recognize the contribution revenue. An agency transaction occurs when the recipient (intermediary nonprofit) does not get to choose the beneficiary. If the donor selected the beneficiary at his or her own discretion, then this would be an agency transaction. In order to determine whether this is an agency transaction or contribution revenue we need to answer the question who has the discretion over beneficiary selection.
How do you specify beneficiary in an agency transaction?
To specify beneficiary in an agency transaction the donor can do one of the following:
- Stating the beneficiary by name
- By stating that all entities that meet a set of donor-defined criteria are beneficiaries
- By actions surrounding the transfer that make clear the identity of the beneficiary
When it comes to specification of the beneficiary – the litmus test question here is who has the discretion to determine who gets the money. For example, if a donor selects a beneficiary from a predetermined list of beneficiaries that have been prequalified or otherwise identified by the recipient entity (intermediary) – this would constitute an agency transaction. This is because even though the intermediary put together a list – the donor selected the specific qualified beneficiary.
When it comes to grants the donor can specify a beneficiary that meets all predefined eligibility criteria. In this case, this would also constitute an agency transaction and the intermediary would not record contribution revenue but rather record liability on the statement of financial position.
On the other hand, if a recipient organization (intermediary nonprofit) asks the donor to specify an area of interest – then this would be too broad, and the intermediary nonprofit would still have to select the beneficiary. In this case, this would constitute a contribution revenue for the intermediary nonprofit flowing through the statement of activities.
Another example of a contribution revenue for the intermediary would be a scenario in which a donor would use board generalization (for example help for low-income families) – this would also be considered way too broad, and the intermediary nonprofit would have to select the beneficiary on its own, hence resulting in a contribution revenue recognition for the intermediary nonprofit.
What is not an agency transaction?
We discussed above some of the general rules to agency transactions, however, there are also a few exceptions to those rules. We will discuss these exceptions next.
So what does not constitute an agency transaction? An organization acts as an agent when it acts on behalf of another, unless:
- The donor grants it variance power
- The recipient and beneficiary are financially interrelated
What is variance power?
Variance power is a unilateral power to redirect the use of the transferred assets to another beneficiary (it must be explicit). Unilateral power in this case means that the recipient entity (intermediary nonprofit) can override the donor’s instructions without approval from the donor, specified beneficiary, or any other interested party.
An example of variance power would be when a donor specifies in the agreement that the funds can be given to Humane Society, American Kennel Club or another charity helping animals. In this case this wording of “another charity that helps animals” would grant the recipient agency (intermediary nonprofit) a variance power. The ability to redirect the funds changes this transaction. As such, in this case this ability to redirect funds by the recipient (intermediary nonprofit) means that this would not be considered an agency transaction and contribution revenue would be recognized on the intermediary nonprofit’s statement of activities.
Financially interrelated organizations
Financially interrelated organizations are typically two organizations one of which is the recipient of the funds, and the other one is the beneficiary, and one organization has the ability to influence the other entity’s operations and financial decisions as well as one organization has an ongoing economic interest in the other organization’s net assets. An example would be where a not-for-profit organization established a foundation for a specific purpose (for example to provide college scholarships to children of veterans who served in the US army).
So, in this example the organizations would be financially interrelated, and the recipient (intermediary not-for-profit organization) would recognize contribution revenue even when the ultimate beneficiary is the foundation. As such, in this case the contribution revenue would be recognized on the not-for-profit statement of activities.Here is a visual representation of financially interrelated organizations.
In conclusion, I want to say that this is a very high-level overview of agency transactions. Is it of paramount importance to have proper accounting for agency transactions for financial statements presentation. If you need additional guidance on this topic – be on the lookout for future articles related to this topic. If you need help with not-for-profit accounting from a not-for-profit CPA – do not hesitate to contact us directly. At WCC we specialize in not-for-profit accounting, and it is our mission to help mission-based organizations to achieve their mission.