Almost all nonprofits depend on contributions to fulfill their mission. Contributions can either take the form of financial assets, such as cash and investments, or non-financial assets, generally referred to as in-kind donations. But all nonprofits are required to be transparent about reporting these contributions, which may be less straightforward to quantify than cash donations.
To increase reporting transparency, the FASB issued Accounting Standards Update (ASU) 2020-07, Presentation and information provided by non-profit entities for contributed non-financial assets, in September 2020. It amends Accounting Standards Codification (ASC) 958-605, which covers revenue from not-for-profit entities.
ASU 2020-07 was intended to improve presentation and disclosure when nonprofit organizations receive donations of non-financial assets or services provided. Contributed securities and other financial assets are outside the scope of ASU 2020-07.
The effective date of these changes is for fiscal years beginning after June 15, 2021 (i.e. fiscal years ending June 30, 2022 and after). Early adoption is permitted.
The FASB issued ASU 2020-07 in response to concerns that some nonprofit organizations were improperly assessing the fair market value of donated pharmaceuticals to increase their revenue and program expenses. Program revenue and expenses are used as inputs to the overhead ratio, a measure commonly used to judge the efficiency of a nonprofit’s operations. If program expenses are overstated, a nonprofit runs the risk of artificially improving its overhead ratio, making the nonprofit appear more operationally efficient than it actually is. really is.
ASU 2020-07 does not change the requirements for recognizing and measuring the fair value of contributed non-financial assets.
What are considered in-kind donations?
Non-financial assets include food, clothing, pharmaceuticals, supplies, equipment, vehicles, buildings, and gifts to be auctioned at a special event. These assets also include free or reduced rentals for the use of land, buildings or equipment. Cryptocurrencies are also considered non-financial assets.
Services provided must be registered if they meet one of the following criteria:
- They created or strengthened a non-financial asset.
- They require specialized skills, are provided by people with those skills, and would generally have to be purchased if not provided by donation. Services requiring specialist skills are provided by accountants, architects, carpenters, doctors, electricians, lawyers, nurses, plumbers, teachers and other professionals and craftsmen.
- Services received from an Affiliate’s personnel directly benefit the nonprofit recipient and the Affiliate does not charge the recipient. 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 contribution services must be reported as contribution revenue and as assets or expenses.
How to report contributed non-financial assets or services
Not-for-profit organizations that receive contribution services must describe the programs or activities for which these services were used. Entities are encouraged to disclose the fair value of contributed services that are received but not recognized as revenue if possible and can be described by non-monetary information, such as the number of donated hours received or the number of meals served by volunteers. Disclosure of services provided is required whether or not the services received are recognized as revenue in the financial statements.
ASU 2020-07 does not change the requirements for recognizing and measuring the fair value of contributed non-financial assets. The FASB’s fair value measurement framework (ASC Topic 820) already requires an entity to recognize contributed non-financial assets at fair value when received and initially recognized in the financial statements. Not-for-profit organizations must continue to follow the disclosure requirements under ASC 820 for assets and liabilities measured at fair value on a recurring or non-recurring basis after initial recognition if fair value remeasurements are necessary (for example, write-downs).
Under ASU 2020-07, nonprofit organizations will report contributions of non-financial assets and services on a separate line in the statement of activities and will not be included with other contributions. It is not necessary to report related expenses separately on a separate line; however, related expenses should be properly functionalized as program, management and overhead, or fundraising.
When presenting comparative financial statements, the ASU should be applied retrospectively; therefore, the required presentation and disclosures will be required for all prior periods presented.
Nonprofits must also provide transition information during the adoption period, including the following:
- The nature 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 prior period information that has been retrospectively adjusted, if applicable; and
- The effect of the change on the relevant financial statement line items.
Piece 1 shows an example of how ASU 2020-07 would change the statement of operations of a not-for-profit organization (changes from old US GAAP are shown in red).
Example of a statement of activities
Significant Accounting Policies for Contributions
ASU 2020-07 also requires enhanced disclosure of non-cash contributions. To properly disclose this information, not-for-profit organizations will need to disclose certain information in their significant accounting policies for contributions and a separate note for contributions of non-financial assets, as set out in Piece 2.
Example of note disclosure Contributed non-financial assets
The following information should be included in significant account policies for contributions:
- Qualitative information indicating whether the contributed non-financial assets have been monetized or used during the reporting period;
- If monetizing, disclose the policy (if any) relating to monetization;
- Description of the valuation techniques and inputs used to arrive at the fair value measurement in accordance with the requirements of ASC 820 on initial recognition; and
- Principal 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:
- Breakdown by category of non-financial assets, and
- Description of any donor-imposed restrictions associated with non-financial assets.
Nonprofit organizations that receive substantial contributions of nonfinancial assets should prepare for the new requirements of ASU 2020-07 and consult with their CPA when applying the new standard.