Mount Pleasant Epilepsy Association is a not-for-profit agency. Joseph Howard is

Question

Mount Pleasant Epilepsy Association is a not-for-profit agency. Joseph Howard is the Chair of its Voluntary Board of Director. He is also the owner of Howard Insurance Company. The Association rents its facilities from Howard Insurance Company. The Company charges the Association $10 per square foot of space per month. This amount is considerably below the City’s average “market” rate of $14 for similar office space. The rental rates have not changed during the five years that the Association has occupied its present location. However, no formal agreement for this rental situation exists. Joseph has “hinted” that “one day” the Company may ask the Association to significantly increase its rental payments or move to another location. What disclosures, if any, should the Association make regarding this situation? What FASB codification supports your answer?

Explanation / Answer

In this situation it is well known by the Assocciation that the market value of the rent $14 per square foot is much more than the rent they are paying $10 per square foot and thay can be asked to increase the rent to the market rate any time by the insurance company so, they must recognize it as a Contingent Liability in the books.

In this situation the same person is in the chair of Voluntary board of directors and he is also the owner the company which is renting its premises to the association and yet he falls under the definition of Related Party.

he disclosures under FASB should be made under ASC 450 for contingencies of $4 per square foot and ASC 850 Relaed party Disclosure for paying the rent of $10 per square foot to Howard Insurance company.

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