Is it an asset?

[AccTaxMan]

Client participated in the Gift Annuity program of the Salvation Army a few years ago. He paid the Salvation Army $10,000. Out of this amount, about $3,000 is considered charitable donation to the Salvation Army. And the other $7,000 will be paid back to him in the form of an annuity until both he and his wife has passed away.

Now client needs to compile a balance sheet. My question is: Is this annuity from the Salvation Army considered an asset in his balance sheet?

Thank you for your opinion?

[DaveO]

I'm guessing that they are preparing a net worth statement. The question is "Can they redeem the annuity from the Salvo?" If not, then it is not their asset. I'm going to guess they can't redeem it since it is likely a charitable remainder arrangement of some sort. In that case it doesn’t belong on a statement of net worth.

[taxxcpa]

Present value of an annuity

The present value of the annuity would be an asset. The PVA would depend on what interest rate you used and the expected life of the person(s) covered.

First you need to calculate their joint life expectancy, multiply the periodic payments under the annuity by that number of years, then calculate the present value of those future payments.

My advanced accounting book had a group of actuarial tables showing how to calculate it. It can also be done with excel.

[Snaggletooth]

Asset

I believe this to be an asset, even though they do not have access to cash it out early.

Should be recorded at present value, and the recording of same one year hence will show a greater
value. The present value will amortize into the face value over time.

My opinion is based on conventional accounting - I'm not an expert on "statement of affairs"
that may need to be reported for various different reasons. DaveO could be correct from this
perspective, for all I know.

[Roland Slugg]

FWIW I concur with DaveO's reply above. If the annuity can be cashed-in by the buyer, that "redemption value" is a legitimate asset for a personal balance sheet. If it can't be cashed-in, for any amount, then it's just an income stream, not an asset. I will add that most annuities ... perhaps all ... can be cashed in early and, thus, do have a redemption value at all times. But ones connected with charitable organizations may be different. Suggestion: Call the Salvation Army and ask.

[Gary2]

I'm not an expert at all on this question, but doesn't the answer depend on the intended use of the information? I thought, for example, that the answer for bankruptcy proceedings is different from the answer for the insolvency exclusion for canceled debt, since the latter includes assets that can't be touched by creditors.

[AccTaxMan]

I'm not an expert at all on this question, but doesn't the answer depend on the intended use of the information? I thought, for example, that the answer for bankruptcy proceedings is different from the answer for the insolvency exclusion for canceled debt, since the latter includes assets that can't be touched by creditors.

Hi Gary, so if the taxpayer needs a financial statement for loan purpose, do you think it should include assets that can't be touched?