More information will be required from nonprofits that use Generally Accepted Accounting Principles (GAAP) and receive nonfinancial assistance ― also known as gifts-in-kind ― than in the past as the result of a new Financial Accounting Standards Board (FASB) rule. 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, is intended to expand the transparency around such gifts, including how they’re used and valued. Here’s what you need to know.
Gifts-in-kind include fixed assets (such as land, buildings and equipment); the use of fixed assets or utilities, materials and supplies (such as food, clothing and pharmaceuticals); and intangible assets, contributed services and the unconditional promises of those assets. Many nonprofits, including smaller organizations, rely on such contributions.
Until now, the FASB didn’t specify how nonprofits must present gifts-in-kind on their financial statements. Nonprofits also weren’t subject to specific disclosure requirements for such donations, other than for contributed services.
According to the FASB, the new ASU responds to input from nonprofit stakeholders. Some were concerned because they lacked information about the amount of gifts-in-kind received and used in their organization’s programs and other activities. Others didn’t think aspects of the FASB’s guidance on valuing certain gifts-in-kind were clear.
In particular, stakeholders raised concerns about nonprofits applying U.S. wholesale market prices to determine the value of donated pharmaceuticals that can’t be legally sold in the United States. For example, 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 nonprofit appear larger and more efficient than a smaller organization or one that uses lower values for gift-in-kind donations.
Under the new standard, a nonprofit must report gift-in-kind donations as a separate line item in its statement of activities, apart from contributions of cash or other financial assets. In the notes to the financial statements the nonprofit 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 nonprofit is required to disclose:
- Information about whether the donations were monetized (for example, by selling them) or used in its operations. If used, the nonprofit 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 nonprofit also must provide a description of the valuation techniques and data used to calculate a gift-in-kind donation value. And it might 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’s a market in which donor restrictions prohibit the nonprofit from selling or using the donation. Previously required disclosures relating to contributed services haven’t changed under the new ASU.
The ASU contains several examples of Statement of Activity presentation, as well as financial statement note 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.