Does your organization accept donations of nonfinancial assets, such as vehicles, food, clothing, supplies, equipment or services? If so, be sure you are familiar with the new accounting rules that enhance the reporting requirements for contributed nonfinancial assets, commonly known as in-kind donations or gifts-in-kind. The new rules — issued in 2020 by the Financial Accounting Standards Board (FASB) — are found in Accounting Standards Update (ASU) 2020-07.
WHO IS AFFECTED?
The new rules apply to not-for-profit entities that receive contributed nonfinancial assets and prepare their financial statements in accordance with generally accepted accounting principles (GAAP). Nonfinancial assets may include:
- Fixed assets, such as land, buildings and equipment;
- Use of fixed assets or utilities;
- Used clothing and household items;
- Vehicles;
- Pharmaceuticals;
- Materials and supplies;
- Intangible assets; and/or
- Services.
WHAT HAS CHANGED?
ASU 2020-07 does not change existing requirements for recognizing and valuing in-kind donations. Rather, it imposes new presentation and disclosure requirements designed to improve transparency about how these donations are valued and used. Prior to the ASU, there were no specific requirements for reporting in-kind donations, except for revenue recognition rules for certain contributed services.
WHAT IS REQUIRED?
Under the new rules, not-for-profits must:
- Present contributed nonfinancial assets as a separate line item in the statement of activities, distinct from contributions of financial assets, such as cash and securities;
- Disclose the amount of contributed nonfinancial assets by category (e.g., food, vehicles, equipment, pharmaceuticals, legal services); and
- For each category of contributed nonfinancial assets, disclose:
- Information about whether donations were monetized (e.g., by selling them) or used and, if used, a description of the programs or other activities for which they were used;
- The organization's policy (if any) for monetizing rather than using in-kind donations;
- Any donor-imposed restrictions associated with the donations; and
- The valuation techniques and inputs (data) used to determine the fair value of the donations. This includes an asset's principal or most advantageous market, if donor-imposed restrictions prohibit the organization from selling or using the assets in that market.
WHEN ARE THE NEW RULES EFFECTIVE?
ASU 2020-07 is effective for annual periods beginning after June 15, 2021, and interim periods within annual periods beginning after June 15, 2022. In other words, for calendar-year organizations, they apply starting with 2022 year-end financial statements and first-quarter 2023 interim financial statements.
HOW SHOULD YOU PREPARE?
If your organization will be affected by the new rules, you should have policies, procedures and controls in place for tracking and categorizing in-kind donations and recording any donor-imposed restrictions on those donations.
You should also revisit the techniques you use to value in-kind donations. One reason FASB changed the rules was to address concerns on the part of donors and other stakeholders that not-for-profit organizations were inflating their fair value measurements of these donations. Generally, fair value is “the price that would be received to sell an asset . . . in an orderly transaction between market participants at the measurement date.” Enhanced financial statement disclosures about the valuation techniques and pricing data you use to arrive at fair value will likely lead to greater scrutiny of your calculations, so it is critical to ensure that your valuation policies and procedures are sound.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.