In the litigious society in which we do business, the number of class action lawsuits seems to have multiplied exponentially. Although nonprofit organizations rarely fall victim to such lawsuits, class action lawsuits sometimes result in a positive by-product for nonprofits in the form of cy-pres awards. In the past two audit cycles, I’ve encountered several instances of clients receiving these awards and I thought I would discuss the accounting treatment.
The term cy-pres (pronounced see-pray), short for cy-pres comme possible, is a French legal term that, when translated, means “as near as possible.” Originally applied in equity courts and cases involving charitable trusts, this doctrine has been applied to class action cases when unclaimed funds remain after the claims period for members of the class has ended. Courts have distributed these residual funds to nonprofit organizations that, in the eyes of the courts, closely serve the interests of members of the class. Here ends the legal history lesson.
Cy-pres awards can sometimes arrive without much notice and can be significant depending on the class action involved and the amount of the settlement that went unclaimed. At first glance, these awards seem to be contributions. However, if we examine the accounting definition of a contribution, we see that this is not the case.
According to the glossary included in the Accounting Standards Codification, a contribution must have all of the following characteristics:
- Unconditional transfer of assets
- Transfer consist of cash, other assets, or a settlement of cancellation of liabilities
- Transfer is from another entity acting other than as an owner
- Transfer is voluntary
- Transfer is non-reciprocal
The characteristic that cy-pres awards lack is that these awards are not made voluntarily. Since the unclaimed funds from the settlement do not revert back to the defendant, the court decides how the residual funds will be disposed of when the claims period ends. This creates an involuntary transfer of assets from the defendant in the class action lawsuit to the recipient that was chosen by the court. If these awards are involuntary rather than voluntary transfers of assets, then how should these awards be accounted for when received?
The treatment is fairly simple. The amount received is recorded as other revenue or another appropriately named account for such items that are received infrequently. The presentation of the amount is usually found “below the line” on the statement of activities as the awards are not included in an organization’s measure of operations. It is usually prudent to disclose in the statement of significant accounting policies a description of the cy-pres award(s) being presented and their accounting treatment.
The increase in the number of class-action lawsuits and the doctrine employed by courts to deal with unclaimed settlements may increase the chances that a nonprofit may receive such an award. The correct accounting treatment of these awards when received can lower the chances of adjustments when it is time for the annual audit.
Rich Banner is a senior manager in the Tate & Tryon’s Audit and Assurance Services practice and can be reached at [email protected].