When a nonprofit organization receives a donation other than cash, it is known as a gift-in-kind (GIK). Nonfinancial contributions can be an important part of the donation mix at many nonprofit organizations. Gifts of appropriate supplies, equipment and expert services often can be used directly within your programs. Other items of value can be sold to fund your mission. An important aspect of accounting for these nonfinancial contributions is measuring fair value and making proper disclosures on your nonprofit financial statements.
Richard Cole, CPA has spent more than 25 years serving nonprofit organizations as a CPA specialized in nonprofit audits. Currently, he’s an Audit Partner with BKD CPAs & Advisors. He started his career at a large international accounting firm, spending 14 years focused on nonprofits. Later, he joined FASB as a supervising project manager. There, Rick began work on what became ASU 2020-07 Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets (gifts-in-kind). A member of the AICPA Not-for-Profit Expert Panel, Rick is a lecturer at Columbia University and frequent speaker at CPA societies. Recently, he delivered the Gifts-in-Kind: The Road to Greater Transparency session at the Nonprofit Finance Leaders Forum.
In his session, Rick presented the background of the ASU 2020-07 project and a review of its requirements. He then went on to present a technical overview of fair value measurement, with explanation of the challenges nonprofits face in applying fair value, and a number of enlightening examples.
In this article, we will highlight basics from the session. You will want to watch the complete session—particularly the technical overview of fair value—to become more fully informed on this important topic.
The objective, scope, and implementation of ASU 2020-07
FASB’s objective in creating ASU 2020-07 Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets is to increase transparency about contributed nonfinancial assets. The actual accounting for in-kind donations is not changing, however the presentation and disclosure requirements are changing.
In terms of scope, the identification of GIKs continues to be contributed nonfinancial contributions, therefore this ASU applies to all contributions of nonfinancial assets, including:
- Fixed assets, for example a car, computer, or medical equipment
- Use of fixed assets, that are loaned rather than given outright
- Materials and supplies such as donated food, donated medicines, etc.
- Intangibles including things like patents, copyrights and importantly, cryptocurrency
- Services such as marketing advice, legal consulting, or carpentry
Now is the time to adjust your process for presentation and disclosures. According to ASU 2020-07, the amendments are effective for years beginning after June 15, 2021, and interim periods within annual periods beginning after June 15, 2022. Retrospective transition is required, meaning for all years stated, you have to apply this standard. So, if you have a two-year financial statement, you will need to apply ASU 2020-07 to both years.
What’s the background on this guidance?
Regulators were seeing gifts-in-kind that they did not believe were fairly valued. In fact, they believed the value of these contributions to be overstated. Some of the gifts-in-kind they saw had donor restrictions attached to them, and regulators felt it would be better if the fair value accounting of those contributions reflected the donor restrictions.
GAAP specifically tells nonprofits not to consider donor restrictions when coming up with an appropriate fair value for in-kind donations. When FASB considered this, the Board decided that departing from the GAAP fair value framework was not the best course of action. Rather, they decided to find ways to increase transparency of gifts-in-kind and make sure they were recorded on the financial statement in a way that the user would be able to understand more about them, including what went into determining fair value and any associated donor restrictions.
New requirements for disclosure of nonfinancial contributions
Here are the five new requirements laid out by ASU 2020-07 for presentation and disclosures:
- Present contributed nonfinancial assets as separate line item in the statement of activities. Only the revenue is required, not the expense.
- Disclose disaggregation by category of nonfinancial asset, including whether used or monetized. Categories are broad, for example, food, clothing, medical equipment. There’s no need to get granular like shoes vs. jeans. If the asset is used in your operations, disclose in which areas and/or programs. Or if you are selling the GIK to use the funds, disclose any monetization policies.
- Disclose a description of donor restrictions associated with nonfinancial asset.
- Provide a description of the valuation techniques and inputs used to arrive at a fair value measure for contributed nonfinancial assets in accordance with paragraph 820-10-50-2(bbb)(1) of Codification for initial recognition. You have already needed to use one of the valuation techniques permitted in GAAP for fair value accounting in the past. Now, you need to disclose that technique.
- Disclose principal market (or most advantageous market) used to arrive at fair value measure if it is a market in which the recipient nonprofit is prohibited by donor restrictions from selling or using the contributed asset.
Additionally, nonprofits should continue to use the required disclosures for contributed services that existed prior to ASU 2020-07. These disclosure requirements are unchanged.
Learn fair value accounting for GIKs and how to create compliant disclosures
This article has outlined ASU 2020-07 in terms of background, objective, scope, timeline and requirements. Now that you know how the standard works, you’ll want more practical knowledge about how to do fair value accounting.
To help nonprofit accountants improve their understanding, Rick presented a technical overview of fair value accounting and talked through four challenges nonprofits encounter in measuring fair value, along with specific examples of how to present GIKs and disclosures in your financials. He also shared what your policy statement should summarize and what procedures need to be included in your disclosures.
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