Some split interest agreements may include the gift of corporate or U.S. bonds or other securities that are not equity. In determining whether or not these shared interest agreements contain an embedded derivative, the same analysis should be applied as in the examples above and as set out in paragraph 12 of Declaration 133. The concept of a clear and close link within the meaning of point (a) of paragraph 12 shall include an assessment of the economic characteristics and risks associated with the non-participation documents with regard to the economic characteristics and risks of the UNDP organisation`s Debt-Host contract. Due to differences in credit risk, the change in the fair value of corporate bonds (depending on the credit and interest rate risk of that entity) will generally not be clearly and closely linked to the change in the economic characteristics and risks of the host contract of the NCB organisation. Therefore, there would be an embedded derivative requiring branching and accounting separately from the embedded derivative, unless a fair value choice is made in accordance with the statement 155. Shared interest agreements are agreements in which donors enter into trusts or other agreements in which NLP organizations enjoy benefits shared with other beneficiaries. A typical split interest agreement consists of two components: Lead Interest and a residual interest rate. The principal interest is the right to benefits (cash flow or utilization) of the assets transferred during the term of the agreement, which usually begins with the signing of the agreement and ends either (1) after a certain number of years (safe duration) or (2) with the occurrence of a given event, usually either the death of the donor or the death of the main beneficiary (life quota). The remaining interest is the right to receive all or part of the remaining assets at the end of the contract. Example 1: Remainder Trust (exercise certainty, fixed payments) [aka Charitable Remainder Annuity Trust] Ordinary shares contribute to the control of the NFP organisation, which is required to make a fixed annual payment to the donor or donor`s beneficiary for 20 years, after which the remaining shares will be returned to the NPN organisation. During the term of the agreement (20 years), the NFP organization has a responsibility that does not require branching of an embedded derivative.
Since the regular cash payment is a fixed amount in dollars, the liability has no underlying and therefore does not fulfil the criterion set out in point (a) of paragraph 6 of the definition of a derivative instrument. In the absence of an underlying, there is also no embedded derivative justifying separate recognition in accordance with paragraph 12. Example 8: Lead Trust (Period-Certain-plus-Life-Contingent, variable or fixed rate) An NFP organisation receives money from a donor invested in ordinary shares by the NFP organisation. The donor designates the organization as the primary beneficiary. NFP receives an annual cash payment either for a specified percentage of the fair value of assets at the beginning of each fiscal year or for a fixed dollar amount. This cash payment is made for the longer remaining life of the beneficiary (or donor) or for a specified period of time. After this period, the remaining assets are returned to the donor or recipient of the donor. During the term of the agreement, the NFP organization has a responsibility that is not subject to declaration 133, since, unlike the responsibility of Example 5 of the liability aspect, it is not possible to dissociate from the vital aspect of liability (since there is only one payment whose timing and value are influenced by the risk of mortality). Therefore, the remaining interest liability relates to a single payment the amount and date of which are life-related and are therefore eligible for the derogation provided for in Article 10(c). .
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