The Financial Accounting Standards Board (FASB) has new rules for how nonprofits that follow Generally Accepted Accounting Principles (GAAP) must report and value “nonfinancial assistance” — commonly known as gifts in kind. The changes are effective for annual periods beginning after June 15, 2021, and interim periods within annual periods beginning after June 15, 2022. If your nonprofit didn’t adopt the standards early, here’s what you need to know.
First of their kind
The FASB issued Accounting Standard Update (ASU) No. 2020-07, Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets, in September 2020. It applies to any GAAP-adhering nonprofit that receives gifts in kind.
Common examples of gifts in kind include materials, supplies, food, clothing, contributed services, intangible assets, utilities or use of facilities, and fixed assets such as land, buildings and equipment. Many organizations already relied heavily on such donations when the FASB issued the ASU. Since then, circumstances have forced some nonprofits that previously avoided gifts in kind to accept them.
Except for contributed services (which are covered by the revenue recognition rules), the FASB hasn’t had specific requirements for the reporting of such donations on financial statements or as disclosures. The new rules are intended to provide financial statement users, such as governmental bodies, grant makers and donors, with clear information on the extent to which an organization relies on gifts in kind and how it uses such gifts.
The ASU is relatively short compared with other FASB guidance, but the changes it incorporates could prove significant for some nonprofits. Note, though, that it doesn’t alter the existing requirements for recognizing and measuring gifts in kind. The ASU includes only new presentation and disclosure requirements.
Under the ASU, your nonprofit must present gifts in kind as a separate line item in the statement of activities, broken out from contributions of cash or other financial assets. In addition, gifts in kind must be reported by category of asset (for example, food, equipment and pharmaceuticals).
For each category of gifts in kind, your organization must disclose:
- Information about whether the gifts were either monetized (for example, by selling them) or used during the reporting period. If they were used, the disclosure must include a description of the programs or other activities for which they were used.
- Its policy (if any) for monetizing rather than using gifts in kind.
- Any donor-imposed restrictions associated with the gifts in kind.
- The valuation techniques and data used to arrive at a measure of value for the gifts.
In some cases, you also may need to disclose the principal market or most advantageous market that was used to determine value. This information is required if it’s a market where a donor-imposed restriction prohibits your organization from selling or using the gifts in kind.
The ASU defines the principal market as the market with the highest volume of sales activity for the donated asset. The most advantageous market generally is the market that maximizes the amount the nonprofit would receive if the gift were sold.
Steps to compliance
Nonprofits that accept gifts should ensure they have the necessary information on hand to comply with ASU 2020-07. If your organization presents comparative financial statements, you should remember to make the requisite presentation and disclosures for the prior comparative year.
You may need to develop new processes and controls for collecting data on gifts in kind. This includes monitoring and tracking these gifts by asset category, while also noting any donor-imposed restrictions. Also, maintain detailed records of your nonprofit’s valuation techniques and calculations.
Some nonprofits paid little attention to the ASU when it was first released — whether because the effective date seemed far off or they didn’t accept gifts in kind. The requirements are kicking in, though, and it’s time to take the necessary steps to meet the FASB’s expectations.
The impetus for the new requirements
According to the Financial Accounting Standards Board, it recently issued the new requirements for reporting gifts in kind (see main article) in response to stakeholder concerns. Some stakeholders, for example, were worried about the lack of transparency surrounding gifts in kind, specifically the amount received and used in nonprofit programs and activities.
Other stakeholders expressed concerns about the clarity — or lack thereof — of certain aspects of the existing guidance for valuing gifts in kind. Specifically, they noted that some nonprofits have applied U.S. wholesale market prices when determining the value of donated pharmaceuticals that can’t legally be sold in the United States (when, for example, such items are donated for use outside the country).
Inflating those values could distort an organization’s revenue and program expense, making them appear higher than they are. This could result in the organization appearing larger and more efficient than smaller nonprofits or ones that use lower values for gifts in kind.