In September 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-07, Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets. The intent of this new standard is to expand transparency around nonfinancial gifts received in-kind, including how those gifts are used and how those gifts are valued.
Many not-for-profit organizations rely on in-kind (noncash) contributions to sustain the operations of their organization. Common examples of gifts-in-kind include financial assets, such as investments, and nonfinancial assets, such as fixed assets (land, buildings and equipment), food, supplies and materials. Additionally, services received pro bono, such as legal or consulting, and the use of space (rent) are common contributed services recognized by not-for-profit organizations.
Until the issuance of ASU 2020-07, the FASB did not specify how not-for-profits must present gifts-in-kind on their financial statements, nor were specific disclosures required for such donations, other than for contributed services. Reminder: Additional disclosures for contributed services were required upon adoption of ASU 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, which was in effect for all not-for-profit organizations for fiscal years beginning after December 15, 2017.
So why now? Over the past few years, not-for-profit stakeholders have expressed concerns to the FASB about certain issues that the new ASU is intended to address. More specifically, stakeholders felt that they lacked useful information about the amount of gifts-in-kind received and used in their organization’s programs and other activities. Others believed there should be more guidance from the FASB on how to value certain gifts-in-kind. For example, stakeholders raised concerns about not-for-profit organizations applying U.S. wholesale market prices to determine the value of donated pharmaceuticals that cannot be legally sold in the U.S. A donor might contribute such items for use only outside the country. If the values are inflated, an organization’s revenue and program expense would likely increase. This could make the not-for-profit appear larger and more efficient than a smaller organization or one that uses lower values for gift-in-kind donations.
Related Read: What are Gifts-In-Kind and How Should I Record Them?
Under the new standard, a not-for-profit organization must report nonfinancial in-kind contributions as a separate line item in its statement of activities, apart from contributions of cash or other financial assets. In the footnotes to the financial statements, the not-for-profit organization is required to further report such donations by category of asset (for example, land, food or pharmaceuticals).
In addition, for each category of gifts-in-kind recognized, a not-for-profit is required to disclose:
- Information about whether the donations were monetized (for example, by selling them) or used in its operations. If used, the not-for-profit must describe the programs or other activities in which the assets were employed;
- Its policy, if any, about monetizing rather than using gifts-in-kind; and
- Any donor-imposed restrictions associated with the gifts-in-kind.
The not-for-profit also must provide a description of the valuation techniques and data used to calculate a gift-in-kind donation value. It might also be required to disclose the principal (or most advantageous) market used to calculate the value.
The principal market is that with the highest volume of activity for the donated asset. The most advantageous market generally is the one that maximizes the amount that would be received if the donated item were sold. This disclosure is necessary if it is a market in which donor restrictions prohibit the not-for-profit from selling or using the donation. Previously required disclosures relating to contributed services have not changed under the new ASU.
ASU 2020-07 contains several examples of presentation in the statement of activities and financial statement footnote disclosures, to assist in understanding the requirements. The examples also highlight various valuation techniques.
The new gifts-in-kind reporting standard is effective on a retrospective basis for annual periods starting after June 15, 2021, and interim periods with annual periods starting after June 15, 2022. Early adoption is permitted. Consult your ORBA CPA to make sure that your organization is taking the necessary steps to prepare for compliance.
For more information contact Kelly Buchheit at [email protected], or call her at 312.670.7444. Visit ORBA.com to learn more about our Not-For-Profit Group.