Nonprofit Gifts-in-Kind Financial Statement Reporting Rules to Change
Service is at the center of any nonprofit organization, and to successfully serve their communities, nonprofits must have (1) staff members who have a deep passion for the mission, and (2) a steady stream of support. Nonprofits rely on cash donations, of course, but many organizations – especially smaller charities – rely on “gifts-in-kind.” Gifts-in-kind, commonly known as nonfinancial contributions, include:
- Tangible assets (publicly held securities, items to be auctioned at a fundraising event, materials, or supplies)
- Use of tangible assets (the right to use meeting facilities or office space)
- Services (discounted professional counseling services or pro-bono legal representation )
These donations pose a unique challenge for financial reporting. Since the introduction of new revenue recognition accounting standards, nonprofit leaders have been unsure of how to value and report gifts-in-kind. The Financial Accounting Standards Board (the Board) heard those concerns. In February 2020, the Board released its initial draft of Accounting Standards Update (ASU) 2020-100 (Topic 958), Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets. After the required 60-day comment period, the Board collected and reviewed the feedback, and on June 10, 2020, they released a revised version of the accounting standard.
What Does the New Standard Look Like?
The most significant shift for nonprofits will be the requirement to present contributions of nonfinancial assets separately from gifts of financial assets in the statement of activities. In the footnotes to the financial statements, nonprofits will also be required to disclose:
- Nonfinancial contributions disaggregated by category or type, meaning donated services should be listed separately from donated clothing or food items.
- The nonprofit organization’s gift-in-kind policies related to using the gifts or converting them into cash.
- Description of donor restrictions placed upon in-kind contributions, if any.
- Description of valuation techniques and inputs used to arrive at a fair value measure, as required by Topic 820, Fair Value Measurement.
- The primary market used to arrive at a fair value measure if it restricts the nonprofit’s use or sale of the nonfinancial asset.
The Board initially sought to require nonprofits to disclose how they intended to use in-kind contributions. Still, after hearing comments from nonprofit leaders and their accounting professionals, it decided to remove this requirement. This made the process easier for all nonprofits, but smaller organizations benefitted the most.
How Will The Changes Help Small Nonprofits?
When the Board met to review the public’s comments, there was concern that the reporting burden would fall disproportionately on smaller nonprofits. It recognized that large and small nonprofits often had access to vastly different resources and that every dollar spent on compliance meant fewer resources for furthering the mission. The Board’s modifications to the initial draft (like the removal of the requirement to disclose intended use of gifts-in-kind) were designed to make the disclosure process simpler for all and ease the reporting burden on nonprofits with fewer resources.
Contact Us
The Board plans to publish its final version of the ASU in the third quarter of 2020, just a couple of months away. Once issued, these changes will be useful for annual reporting periods that begin after June 15, 2021. We will let you know when the final draft has been released and update you on any other changes the Board makes to the ASU. If you have questions about the information outlined above or need assistance with a nonprofit-related tax or audit concern, Klatzkin can help. For additional information, click here to contact us. We look forward to speaking with you soon.
The above represents our best understanding and interpretation of the material covered as of the date of this post. The content should not be construed as accounting, tax, or financial advice.