Many nonprofits rely on contributions of nonfinancial assets, such as fixed assets (land, buildings, equipment), services, and materials and supplies, called gifts-in-kind. New rules from the Financial Accounting Standards Board (FASB) are intended to increase transparency around such donations.
The FASB is finalizing a new standard on handling gifts-in-kind donations. It released a proposed Accounting Standards Update (ASU), Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets, in early 2020 and in June voted to move ahead on final rules.
Genesis of the standard
The FASB is responding to concerns about nonprofits using U.S. wholesale market prices to determine the value of donated pharmaceuticals that can’t legally be sold in the United States. A donor, for example, might contribute such drugs for use only outside the country. Specifically, stakeholders worry that the values will be inflated, which could increase an organization’s revenue and program expenses. The organization would therefore appear larger and more efficient than a smaller organization or one with lower values for its gifts-in-kind donations.
Some key provisions
FASB staff is drafting a final version for vote. Among other things, it will make an important clarification: The amount of gifts-in-kind donations should be reported by type of asset (for example, building, food or pharmaceuticals), rather than reported in aggregate.
It also will require nonprofits to:
- Report gifts-in-kind donations as a separate line item in the statement of activities,
- Disclose their policies (if any) for monetizing such donations (such as by selling them), rather than actually using the donations in their operations,
- Disclose any donor restrictions, and
- Provide a description of the valuation techniques and data used to calculate a donation’s value.
Nonprofits also must disclose the principal market or most advantageous market used to calculate the value. This disclosure is necessary if it’s a market in which donor restrictions prohibit the nonprofit from selling or using the donation. The principal market has the highest volume of activity for the donated asset. The most advantageous market generally maximizes the amount that would be received if the donation were sold. Contrary to a provision in the proposed ASU, the FASB decided not to require nonprofits to disclose their intent for future use of gifts-in-kind donations.
The new accounting standard will take effect for nonprofits for annual reporting periods starting after June 15, 2021, and interim periods within fiscal years starting after June 15, 2022. Nonprofits may adopt it early. We can help you decide the optimal time to start applying the rules.