This article was written by Taylor Kavanagh, CPA, Manager.
Contributions are vital funding resources for almost all tax-exempt organizations. There are several different types of contributions an organization can receive. Contributions can be financial such as cash and investments or nonfinancial sometimes referred to as gifts-in-kind. These nonfinancial assets are what is covered by Accounting Standards Update (ASU) 2020-07 Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets. Nonfinancial assets come in a variety of forms such as supplies, food, clothing, property and equipment, household items, and services. The focus of ASU 2020-07 is to increase the transparency of contributed nonfinancial assets.
First and foremost, how, and when will this impact an organization’s financial statements? ASU 2020-07 is effective for annual periods beginning after June 15, 2021, and applied retrospectively. The main provisions are to enhance the presentation and disclosures requiring that gifts-in-kind be presented as a separate item in the statement of activities, apart from contributions of cash and other financial assets. Additionally, the financial statements will need to disaggregate the contributed nonfinancial assets reported on the statement of activities by category that depicts the type of contributed nonfinancial asset. For example, if a donor contributes a building to the organization and another donor provides free legal services to the organization, these nonfinancial contributions should be disclosed separately in the statement of activities or footnote disclosure.
Organizations will also need to include certain disclosures related to nonfinancial contributions. They will need to disclose qualitative information about whether the nonfinancial contributions were monetized or used during the reporting period, and which programs or activities benefited from its use. An example of monetization is a contributed building that is sold by the organization. The organization will also have to disclose its policy, if it has one, on whether to monetize or utilize the contributed nonfinancial assets. In addition, the valuation methods and inputs used to arrive at fair value must be disclosed along with a description of any donor-imposed restrictions and the concepts of the principal market, or most advantageous market, for arriving at a fair value measurement. The disclosures can be presented in a table or narrative form. The tabular presentation tends to be more transparent and informative to the reader of the financial statements.
Organizations that receive gifts-in-kind should consider drafting policies and establishing procedures and controls for tracking and categorizing contributions. Thresholds for disclosure items should be considered when implementing the new rules, as smaller nonfinancial contributions that are deemed immaterial to the overall financial statements may not be cost-effective to track given the organization’s size. For instance, a large organization may not need to implement ASU 2020-07 disclosures for contributions such as donated food valued at $100, but a major building donated to the organization would be considered material and require disclosures under the requirements of the ASU. It is important for organizations to enhance their current policies to address the use of nonfinancial assets, valuation methods, and purpose/time restriction from the donor regarding donated nonfinancial assets.
To aid in implementation of the ASU, organizations should utilize their general ledger system and create separate accounts to track contributed nonfinancial assets. The standard requires categorizing nonfinancial assets with applicable disclosures however, those categories are not pre-determined under ASU 2020-07. This allows for some flexibility in reporting. For instance, a hospital may choose to categorize types of supplies they receive given the ultimate use (surgical supplies, lab supplies, etc.), compared to other types of organizations that may present supplies as a single category. Utilizing the general ledger accounts to facilitate reporting by category can be helpful to further disaggregate contribution revenue by types of in-kind contribution revenue (i.e., food, supplies, consulting/legal services, equipment, etc.). Additionally, the general ledger can be used to track donor restrictions associated with contributed nonfinancial assets.
It is important to understand what nonfinancial assets are to be considered under the new standard. As previously defined above, examples of nonfinancial assets contributed to the organization such as equipment, buildings, food, clothing, pharmaceuticals, gifts held for auction at a NFP special event, and services provided. Organizations should evaluate contributed services they receive and determine if they should be recorded under the new standard. Contributed services should be recognized when those services create or enhance a nonfinancial asset, specialized skills are required, and services received from an affiliated party directly benefit the NFP organization without charge. In the case of services provided by an individual who possesses specialized skills, those skills would ultimately have to be purchased if not provided by donation to qualify for recording under the ASU. With respect to services provided by an affiliated member, board members of the organization are considered an affiliated party to the organization. Even though these members offer specialized services to further promote and oversee the organization’s mission, these services do not result in revenue recognition and valuation unless those services would be purchased if not donated. There can be instances where services are provided by an affiliated party that would be considered as revenue under ASU 2020-07 for example, if a member of the board is a CPA and offers to provide a specialized service such as preparation of the IRS Form 990, or assisting in the preparation for the audit of the financial statements, this would be considered a specialized service that would otherwise be purchased if the board member had not volunteered, and as such would be recognized as donated services.
Organizations are required to include disclosures regarding transition under the new ASU which includes the nature and reason for the change in accounting principle, method of applying the change, description of prior-period information that has been retrospectively adjusted, and effect of the change on relevant financial statement line items. The issuance of ASU 2020-07 was implemented to bring consistency of presentation and disclosure across NFP organizations for contributed nonfinancial assets. In evaluating the impact of the new guidelines, the significance and materiality should be considered when complying with the presentation and disclosure requirements of this ASU.
If you have any questions regarding implementation of ASU 2020-07 or need further guidance, we are here to help. Please do not hesitate to reach out to our trusted experts to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
