New Reporting and Disclosure Requirements for Contributed Nonfinancial Assets or Contributed Services for Not-for-Profit Organizations
Almost all not-for-profits rely on contributions to help fulfill their mission. Contributions can either be in the form of financial assets such as cash and investments or non-financial assets, generally referred to as gifts-in-kind.
But all not-for-profits are required to be transparent in reporting those contributions, which may be less straightforward to quantify than cash donations.
To increase the reporting transparency, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-07, Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets in September 2020. It amends the Accounting Standard Codification (ASC) 958-605, which is the accounting standard for revenue for not-for-profits.
The ASU was issued to enhance the presentation and disclosures when not-for-profits receive donations of nonfinancial assets and/or contributed services. Contributed securities and other financial assets are outside the scope of ASU 2020-07.
The effective date for these changes is for fiscal years beginning after June 15, 2021 (that is, fiscal year-ends of June 30, 2022, and thereafter). Early adoption is permitted.
FASB issued this ASU in response to concerns regarding certain not-for-profits that were improperly valuing the fair market value of donated pharmaceuticals to increase their revenues and program expenses. Program and revenue expenses are used as inputs into overhead ratio, a metric commonly used to judge the efficiency of a not-for-profit’s operations. If program expenses are overestimated, a not-for-profit runs the risk of artificially improving its overhead ratio, which would make the not-for-profit appear to be more operationally efficient than it is in real life.
ASU 2020-07 does not change the recognition and fair value measurement requirements for contributed nonfinancial assets.
What are Considered to be Gifts-in-Kind?
Nonfinancial assets include food, clothing, pharmaceuticals, supplies, equipment, vehicles, buildings, and gifts to be auctioned off at a special event. These assets also include free or reduced rent for use of land, buildings or equipment. Cryptocurrencies are also considered nonfinancial assets.
Contributed services need to be recorded if they meet any of the following criteria:
- They create or enhance a nonfinancial asset
- They require specialized skills, are provided by individuals possessing those skills and would typically need to be purchased if not provided by donation. Services requiring specialized skills are provided by accountants, architects, carpenters, doctors, electricians, lawyers, nurses, plumbers, teachers and other professionals and craftspeople.
- The services received from personnel of an affiliate directly benefit the recipient not-for-profit and the affiliate does not charge the recipient not-for-profit. An affiliate is a party that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with an entity.
Recognized contributed services should be reported as contribution revenue and as assets or expenses.
How to Report Contributed Nonfinancial Assets or Services
Not-for-profits that receive contributed services must describe the programs or activities for which those services were used. Entities are encouraged to disclose the fair value of contributed services that are received but not recognized as revenues if that is practicable and can be described by nonmonetary information, such as the number of donated hours received and/or number of meals served by volunteers. Disclosure of contributed services is required regardless of whether the services received are recognized as revenue in the financial statements.
ASU 2020-07 does not change the recognition and fair value measurement requirements for contributed nonfinancial assets. The FASB’s fair value measurement framework (ASC Topic 820) already requires an entity to record contributed nonfinancial assets at fair value when received and initially recorded in the financial statements. Not-for-profit organizations should continue to follow disclosure requirements under ASC 820 for assets and liabilities measured at fair value on a recurring or nonrecurring basis after initial recognition if remeasurements to fair value are necessary (such as impairments).
Under ASU 2020-07, not-for-profits will report contributions of nonfinancial assets and services as a separate line item in the Statement of Activities and not included with other contributions. There is no requirement to report the related expenses on separate lines; however, the related expense needs to be properly functionalized as either a program, management & general or fundraising cost.
When presenting comparative financial statements, the ASU must be applied retrospectively; therefore, the required presentation and disclosures will be needed for prior periods presented.
Not-for-profit organizations must also provide the transition disclosures in the period of adoption, including:
- The nature of, and reason for, the change in accounting principle, including an explanation of the newly adopted accounting principle;
- The method of applying the change;
- A description of the prior-period information that has been retrospectively adjusted, if any; and
- The effect of the change on relevant financial statement line items.
Significant Account Policies for Contributions
ASU 2020-07 also requires enhanced disclosures of the nonfinancial contributions. To properly disclose this information, not-for-profits will need to release certain information in their significant accounting policies for contributions and a separate footnote for contributions of nonfinancial assets.
The following information should be included in the significant account policies for contributions:
- Qualitative information about whether contributed nonfinancial assets were monetized or utilized during the reporting period;
- If monetized, disclose the policy (if any) about monetizing;
- Description of the valuation techniques and imputes used to arrive at the fair value measurement in accordance with the requirements in ASC 820 at initial recognition; and
- Principal market or most advantageous market used to arrive at the fair value measurement.
The following information should be included in a separate note to the financial statements:
- Disaggregation by category of nonfinancial assets; and
- Description of any donor-imposed restrictions associated with nonfinancial assets.
Not-for-profits that receive substantial nonfinancial assets should prepare for the new requirements under ASU 2020-07 and consult with an experienced accounting provider if they have any questions or concerns about applying the new standard.
For more information about ASU 2020-07, please contact a member of our team. Published on March 29, 2022