To increase the reporting transparency, FASB issued Accounting Standards Update (ASU) 2020-07, Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets, in September 2020. It amends Accounting Standard Codification (ASC) 958-605, which covers revenue for not-for-profit entities.
ASU 2020-07 was intended to enhance the presentation and disclosures when not-for-profits receive donations of nonfinancial assets or contributed services. Contributed securities and other financial assets are outside the scope of ASU 2020-07.
The effective date for these changes is for fiscal years beginning after June 15, 2021 (that is, fiscal year-ends of June 30, 2022, and thereafter). Early adoption is permitted.
FASB issued ASU 2020-07 in response to concerns that certain not-for-profits were improperly valuing the fair market value of donated pharmaceuticals to increase their revenues and program expenses. Program revenue and expenses are used as inputs into overhead ratio, a metric commonly used to judge the efficiency of a not-for-profit’s operations. If program expenses are overestimated, a not-for-profit runs the risk of artificially improving its overhead ratio, which would make the not-for-profit appear to be more operationally efficient than it really is.
ASU 2020-07 does not change the recognition and fair value measurement requirements for contributed nonfinancial assets.
What Are Considered to be Gifts-in-Kind?
Nonfinancial assets include food, clothing, pharmaceuticals, supplies, equipment, vehicles, buildings, and gifts to be auctioned off at a special event. These assets also include free or reduced rent for use of land, buildings, or equipment. Cryptocurrencies are also considered nonfinancial assets.
Contributed services need to be recorded if they meet any of the following criteria:
- They have created or enhanced a nonfinancial asset.
- They require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. Services requiring specialized skills are provided by accountants, architects, carpenters, doctors, electricians, lawyers, nurses, plumbers, teachers, and other professionals and craftspeople.
- The services received from personnel of an affiliate directly benefit the recipient not-for-profit 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 contributed services should be reported as contribution revenue and as assets or expenses.
How to Report Contributed Nonfinancial Assets or Services
Not-for-profits that receive contributed services must describe the programs or activities for which those services were used. Entities are encouraged to disclose the fair value of contributed services that are received but not recognized as revenues if that is practicable and can be described by nonmonetary information, such as the number of donated hours received or number of meals served by volunteers. Disclosure of contributed services is required regardless of whether the services received are recognized as revenue in the financial statements.
ASU 2020-07 does not change the recognition and fair value measurement requirements for contributed nonfinancial assets. FASB’s fair value measurement framework (ASC Topic 820) already requires an entity to record contributed nonfinancial assets at fair value when received and initially recorded in the financial statements. Not-for-profit organizations should continue to follow the disclosure requirements under ASC 820 for assets and liabilities measured at fair value on a recurring or nonrecurring basis after initial recognition if remeasurements to fair value are necessary (e.g., impairments).
Under ASU 2020-07, not-for-profits will report contributions of nonfinancial assets and services as a separate line item in the statement of activities and not included with other contributions. There is no requirement to separately report the related expenses on a separate line; however, the related expense needs to be properly functionalized as either a program, management and general, or fundraising cost.
When presenting comparative financial statements, the ASU must be applied retrospectively; therefore, the required presentation and disclosures will be needed for any prior periods presented.
Not-for-profit organizations must also provide the transition disclosures in the period of adoption, including the following:
- The nature of, 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 the prior-period information that has been retrospectively adjusted, if any; and
- The effect of the change on relevant financial statement line items.
Exhibit 1 shows an example of how ASU 2020-07 would modify a not-for-profit’s statement of activities (changes from legacy U.S. GAAP noted in red).
Sample Statement of Activities
Significant Accounting Policies for Contributions
ASU 2020-07 also requires enhanced disclosures of non-financial contributions. To properly disclose this information, not-for-profits will need to release certain information in their significant accounting policies for contributions and a separate note for contributions of nonfinancial assets, as shown in Exhibit 2.
Sample Note Disclosure Contributed Nonfinancial Assets
The following information should be included in the significant account policies for contributions:
- Qualitative information about whether contributed non-financial assets were monetized or utilized during the reporting period;
- If monetized, disclose the policy (if any) about monetizing;
- Description of the valuation techniques and inputs used to arrive at the fair value measurement in accordance with the requirements in ASC 820 at initial recognition; and
- Principal market 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:
- Disaggregation by category of nonfinancial assets, and
- Description of any donor-imposed restrictions associated with nonfinancial assets.
Not-for-profits that receive substantial contributions of nonfinancial assets should prepare for the new requirements under ASU 2020-07 and consult with their CPA when applying the new standard.