How is the initial difference in a split-interest agreement recognized?

The initial difference in a split-interest agreement is recognized as gift revenue because it represents the value of a contribution made by the donor that will not be received in full by the organization until a future date or event occurs. In split-interest agreements, such as charitable remainder trusts or gift annuities, the donor retains certain rights to income or benefits from the asset while irrevocably donating the asset to the charity, creating a future obligation for the charity.

When the agreement is established, the difference—typically the present value of the future benefits or rights retained by the donor—reflects a gift made to the charity. This revenue recognition aligns with accounting principles that require non-profit organizations to recognize contributions at fair value, thus allowing the organization to account for the economic benefit that will ultimately be received. Recognizing this difference as gift revenue provides clarity in financial statements about the resources available to the organization, and properly reflects the intent and the economic reality of the transaction.