New guidelines from the Financial Accounting Standards Board (FASB) govern how gifts in kind must be reported and valued by nonprofit organizations that follow Generally Accepted Accounting Principles (GAAP). The changes are effective for interim periods within annual periods beginning after June 15, 2022, and annual periods beginning after June 15, 2021. Here is what you need to know if your nonprofit didn’t implement the guidelines right away.
New Gifts-in-Kind Standard
The 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, was released by the FASB in September 2020. It applies to any organization that follows GAAP and accepts gifts in kind.
Materials, supplies, food, clothes, donated services, intangible assets, utilities or facility usage, and fixed assets like land, buildings, and equipment are typical examples of gifts in kind. When the FASB released the ASU, many organizations already relied heavily on these types of donations. Since then, circumstances have forced some organizations to accept gifts in kind that they had previously avoided.
The FASB has not established any specific requirements for the disclosures or reporting of such gifts in financial statements, with the exception of provided services (which are governed by revenue recognition standards). The new regulations are designed to give those who read financial statements—such as governing bodies, grant-makers, and donors—clear information about how much an organization depends on contributions in kind and how it uses those gifts.
Although the ASU is brief in comparison to prior FASB guidance, certain organizations may find the changes it contains to be substantial. But keep in mind that it doesn’t change the guidelines now in place for recognizing and measuring gifts in kind. Only new presentation and disclosure requirements are included in the ASU.
The reason for the new requirements
The Financial Accounting Standards Board states that in response to stakeholder concerns, it has established new requirements for disclosing gifts in kind. For instance, certain stakeholders expressed concern about the lack of transparency regarding gifts in kind, particularly the amount received and used in nonprofit programs and activities.
Some of the existing guidance for valuing gifts in kind has drawn criticism from other parties for its lack of clarity. They specifically pointed out that when calculating the value of donated drugs that aren’t permitted to be sold in the United States, some nonprofits used U.S. wholesale market pricing (when, for example, such items are donated for use outside the country).
An organization’s revenue and program expense might be distorted by inflating such value, making them look higher than they actually are. In comparison to smaller organizations or those that place a lower value on gifts in kind, this might give the organization the appearance of being bigger and more effective.
According to the ASU, your nonprofit must differentiate gifts in kind from contributions of cash or other financial assets and include them as a separate line item in the statement of activities. Additionally, gifts in kind must be reported by asset category (for example, food, equipment or pharmaceuticals).
Your organization must provide the following disclosures for each type of gift in kind:
•Information on whether the gifts were used throughout the reporting period or monetized (for instance, by selling them). A description of the programs or other activities for which they were used must be included in the disclosure if they were used.
•If the organization has a policy for monetizing instead of using gifts in kind.
•Any restrictions set by the donors on the gifts in kind.
•The data and valuation methods used to determine the gift’s worth.
In some circumstances, you also may need to disclose the principal market or most advantageous market that was used to determine value. If a donor-imposed restriction prevents your organization from utilizing or selling the gifts in kind, this information is required.
The principal market, according to the ASU, is the one where the donated asset has the highest volume of sales activity.
How to comply
Organizations that receive gifts should make sure they have the information required by ASU 2020-07 available. If your organization presents comparative financial statements, don’t forget to include the necessary disclosures and presentations for the prior comparable year.
For the purpose of gathering information on gifts in kind, you might need to create additional procedures and controls. This involves keeping track of these gifts by asset category and noting any restrictions put in place by the donors. Keep thorough records of the valuation methods and calculations used by your organization.
Check out our Records Retention Guide.
Take action now
When the ASU was initially announced, several nonprofits paid little attention, either because the effective date appeared far off or because they didn’t receive gifts in kind. But now that the rules have begun to apply, it’s imperative to take the required actions to satisfy the FASB’s expectations. Contact us for assistance with implementing this new standard.