According to U.S. GAAP an agency transaction is a transaction in which the reporting organization acts as an agent, trustee, or intermediary for another party. Nonprofit entities may also act as agents, trustees, or intermediaries by facilitating donations from one entity to another. When a nonprofit acts in such a capacity the nonprofit does not recognize a donation in its own books. It mush instead record the asset, such as cash, and a corresponding liability, such as a payable or due to. Below are some examples of agency transactions:
- A donor selects the beneficiary either by including the named beneficiary in a letter or other agreement or by selecting from a list of potential beneficiaries that have been identified by the recipient entity. This is an agency transaction because the nonprofit did not have the final determination of who the contribution went to. Instead the resource provider had the final say of the actual beneficiary.
- Again since the donor responding to the campaign is making the final say as to who the funds are going to the transaction would be considered an agency transaction.
How do you identify if a nonprofit is acting as an agent or receiving and making a donation? The simple answer is variance power. According to U.S. GAAP variance power is the unilateral power to redirect the use of the transferred assets to another beneficiary. So, you simply need determine if the nonprofit makes decisions as to how the assets it receives will be used or whether they must in turn pass a contribution to an entity directed to them by the donor. Below are some examples in which the nonprofit has variance power:
- A nonprofit is asked by the donor to select one or more fields of interest from among a list of community needs prepared by the nonprofit. The nonprofit retains the right to choose how the resources will be spent.
- A donor uses broad generalizations to describe the beneficiaries, such as homeless individuals. The nonprofit still retains the right to choose the specific beneficiaries while the donor has merely placed a restriction on the purpose of the contribution.
- A nonprofit asks its donors to indicate a nonprofit for consideration by its allocation committee. If the role of the donor is simply to propose possible allocations the nonprofit still retains the final say as to the allocations and beneficiaries.