Over the past few years, it has become more common for not-for-profit entities to receive gifts of land with conservation easements, or simply to receive a permanent conservation easement as a donation without the underlying land, partly because of the tax deductions available to businesses giving these gifts.
From an accounting perspective, not-for-profit entities would need to follow the requirements and guidance in the Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) Topic 958, Not-for-Profit Entities. In particular, FASB ASC 958-605 covers revenue recognition issues for not-for-profit entities, but there is no authoritative guidance dealing specifically with conservation easements.
Background and Definition of Conservation Easements
By legal definition, a conservation easement is a power invested in a qualified private land conservation organization (often called a “land trust”) or government to constrain, as to a specified land area, the exercise of rights otherwise held by a landowner to achieve certain conservation purposes. A conservation easement may also be called a conservation basement, conservation covenant, conservation restriction or conservation servitude.
It is an interest in real property established by agreement between a landowner and land trust or unit of government. The conservation easement “runs with the land,” meaning it applies to both present and future owners of the land.
As with other real property interests, the grant of a conservation easement is recorded in the local land records. The grant becomes a part of the chain of title for the property.
The purposes of the conservation easement will vary depending on the character of the particular property, the goals of the land trust or government unit, and the needs of the landowners.
The decision to place a conservation easement on a property is strictly a voluntary one whether the easement is sold or donated. The restrictions of the easement, once set in place, are perpetual and potentially reduce the resale value of the associated property.
The not-for-profit entity management always should consider checking with the donor to see what the special rules or requirements are associated with the conservation easement that will be received prior to accepting the gift. For example, if the entity receives land that can never be built on, there would be the need to ensure that the intent of the easement is upheld. That issue should be fully understood when accepting the donation.
Donations of Land with Permanent Conservation Easements
When a not-for-profit entity receives a gift of land that includes a permanent conservation easement, the accounting should include a debit to an asset for the land using fair value of the land as adjusted for the restriction, or easement, in accordance with FASB ASC 820, Fair Value Measurement, especially the guidance in FASB ASC 820-10-35. Keep in mind that the easement itself may reduce the fair value of the land.
The credit would be to contribution revenue. That contribution revenue would be recorded as either:
- Permanently restricted, if the donor requires the not-for-profit entity to retain the land in perpetuity with the assessment
- Unrestricted, if the donor does not require the entity to retain the land in perpetuity, but the permanent conservation easement is attached to the land in perpetuity, because the easement is a legal restriction rather than a donor restriction
Donations of Conservation Easements in Perpetuity
In some cases, a not-for-profit entity may receive a donation of just the conservation easement without receiving an interest in, or possession of, the land related to that easement. Again, this is due most likely to the tax deduction the donor can receive for gifting the easement to a qualified organization.
The not-for-profit entity financial statement preparers often struggle with whether this donation should be recorded in the financial statements and, if so, at what amount. Typically the entity should record the fair value of the conservation easement as of the date of donation as an intangible asset using the guidance in FASB ASC 350, Intangibles – Goodwill and Other, and particularly in accordance with the requirements in FASB ASC 350-30.
This easement would be a noncurrent asset if the not-for-profit entity prepares a classified statement of financial position. The credit to the entry would be to permanently restricted contribution revenue, since the underlying asset is to be held in perpetuity and, therefore, is permanently restricted.
The not-for-profit entity would then be required to assess the intangible asset at least at the end of each reporting period for impairment. Most likely, since these easements are to be held in perpetuity, it would be appropriate not to amortize them as they would have an indefinite useful life in accordance with the guidance in FASB ASC 350-30-35. – Bob Durak, CPA, CGMA, Director of AICPA Center for Plain English Accounting