We have a time of year when we clean out our closets or garage. What do you do with all the stuff you are no longer using? Most of us donate the items to one of our local non-profits. You may also respond to a call to action from a local non-profit to donate new toys at Christmas or, in San Antonio, box fans in the summer. Have you ever wondered how a non-profit keeps track of this information or how they report it to their boards?
In the non-profit sector, these types of donations are referred to as gifts-in-kind or in-kind contributions. As with any business (just because the industry is a non-profit doesn’t mean it isn’t run as a business), the non-profit is required to put together financial statements.
The Financial Accounting Standards Board (FASB) writes the rules or principles that are used for financial statements. These rules are referred to as generally accepted accounting principles or GAAP. At times, the FASB determines that the rules are not clear and provide clarity. In September 2020, the FASB did this for non-profits who receive contributions of nonfinancial assets. In other words, when a non-profit receives items such as donations of food, supplies, materials, gift cards, works of art, or donated services performed by a skilled professional that would have been paid for if not contributed (e.g., accounting, legal, medical, etc.); the FASB provided additional guidance. Interestingly enough, contributions of stock are considered nonfinancial assets. Historically, GAAP has never included clear disclosure requirements in terms of how gifts-in-kind are required to be presented in a NFP financial statements. Although the accounting for a contributed non-financial asset (gifts-in-kind) has not changed, non-profits will be required to provide additional information on the contributions of non-financial assets they receive.
FASB Accounting Standard Update (ASU) 2020-07, Not–for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets, defined how these gifts-in-kind should be presented in the financial statements. First, “present contributed nonfinancial assets as a separate line item in the statement of activities, apart from contributions of cash and other financial assets” and (2) disclose additional information about how the gifts were valued and used. What does it mean and how does it affect your NFP?
The ASU requires nonfinancial assets to be presented as a separate line item in the statement of activities separate from cash and other financial assets. The statement of activities will include a revenue line item titled “In-kind contributions” or a similar title. Some non-profits may present this line item already.
The update also requires disclosures, in the footnotes, for each type of contributed nonfinancial assets recognized. The disclosures include:
- “Qualitative information,” as to whether the contributed nonfinancial asset was either monetized (i.e., liquidated) or used. If monetized, the policy established by the non-profit to liquidate the contributed nonfinancial assets. If used, a description of how the nonfinancial asset contributed to the entity programs, projects, or other activities during the reporting period.
- The donor-imposed restrictions related to the contributed nonfinancial assets, if any. Some donors may dictate how the gift should be used. For example, a donation of food must be used in the lunch program.
- Description of the valuation method, in other words, how did the non-profit determine the dollar value to record the assets. GAAP requires the asset be reported at fair value, what you would pay for the assets if you were to purchase it.
When does your non-profit need to start using ASU 2020-07? For annual reporting periods beginning after June 15, 2022. In other words, for most non-profits, this would be for financial statements with a 2023 year-end. Early adoption is permitted, FASB is requiring the standard to be applied retrospectively, which means you need to reflect it for the years presented within your financial statements.
Every organization is different so the implementation of ASU 2020-07 can be challenging and vary between nonprofit organizations. ADKF is here to help with any questions you might have in implementing or reviewing ASU 2020-07 for your organization!