The effective date for an Accounting Standards Update (the ASU or Update) issued by the Financial Accounting Standards Board (FASB) is at hand for many nonprofit organizations. This ASU addresses presentation and disclosures by nonprofit entities for contributed nonfinancial assets. The Update is expected to increase transparency around contributed nonfinancial assets (gifts-in-kind) received by nonprofit organizations, including transparency on how those assets are used and valued. This alert highlights these changes.
ASU 2020-07, Contributed Nonfinancial Assets or Services, is effective for nonprofits with annual reporting periods beginning after June 15, 2021, i.e., for June 30 fiscal year end reporting entities, this would have been effective July 1, 2021 and will likely be reported for the first time in their fiscal year end June 30, 2022 financial statements. It is effective for interim periods within fiscal years beginning after June 15, 2022. Early adoption is permitted. The changes will be applied retrospectively.
The Update requires that nonprofit organizations present contributed nonfinancial assets as a separate line item in the statement of activities, apart from contributions of cash or other financial assets.
Additionally, it is required that a nonprofit disclose:
- A disaggregation of the amount of contributed nonfinancial assets recognized within the statement of activities by category that depicts the type of contributed nonfinancial assets.
- For each category of contributed nonfinancial assets, a nonprofit organization is required to disclose the following:
- Qualitative information about whether the contributed nonfinancial assets were either monetized (sold) or used during the reporting period. If used, a description of the programs or other activities in which those assets were used should be disclosed.
- The nonprofit organization’s policy (if any) about monetizing, rather than using, contributed nonfinancial assets.
- A description of any donor-imposed restrictions associated with the contributed nonfinancial assets.
- A description of the valuation techniques and inputs used to arrive at a fair value measure used at initial recognition.
- The principal market (or most advantageous market) used to arrive at a fair value measure if it is a market in which the recipient nonprofit organization is prohibited by a donor-imposed restriction from selling or using the contributed nonfinancial assets.
Utilization & Monetization
Whether selling gifts-in-kind or giving them to those served by programs, it is best practice to use the same program or activity named in the disclosures that are used in the expense section of the statement of activities.
If the nonprofit organization sells the gifts-in-kind immediately after donation, the sales data provides valuation evidence for the gifts-in-kind. Any fees related to the transaction are added back to the proceeds received to arrive at an estimate of fair value used in reporting the contribution revenue.
The nonprofit organization may act as an agent for the donor if it monetizes its gifts-in-kind upon receipt. When the gift-in-kind is a commodity, typically the nonprofit organization acts as an agent and therefore should recognize the proceeds of the sale as a cash grant. No revenue or costs of goods sold is recorded.
A nonprofit organization is required to describe any donor-imposed restrictions associated with the gifts-in-kind received. Note that restrictions that are characteristic of the assets received may affect the fair value of the gift-in-kind. A donor-imposed restriction may limit the use of the donated asset to a use other than its highest and best use. That restriction must be disclosed and the use by the market participant is considered when determining the donation’s fair value.
Valuation Techniques & Inputs
Contributions of gifts-in-kind are reported at fair value when received. The Update requires a nonprofit organization to disclose the valuation techniques and inputs used to arrive at the fair value measure when recognizing the contribution revenue. Considerations include:
- Because of the limitations of examples and illustrations in FASB ASC 820, Fair Value Measurement, it is necessary for nonprofit organizations to understand the steps for determining fair value and how to apply them to the types of assets they receive.
- FASB ASC 820 describes three approaches for determining fair value: the market approach, cost approach, and income approach. A nonprofit organization is required to use fair value techniques consistent with one (or more) of those approaches.
- Market Approach: This uses price and other relevant information generated by market transactions involving identical or similar assets. The Update lists detailed valuation techniques to help the nonprofit organization arrive at this amount using this approach.
- Cost Approach: This estimates the amount that currently would be required to construct a substitute asset of comparable utility (that is, taking into account physical deterioration, functional and/or economic obsolescence, etc.).
- Income Approach: This converts expectations about future amounts (typically, cash flows or income and expense amounts) to a single current amount using market discount rates that reflect uncertainty and the time value of money. The Update lists detailed valuation techniques to help the nonprofit organization arrive at this amount using this approach.
Identifying publicly available inputs to fair value measurement can be challenging for nonprofit organizations.
- Despite the challenge that valuation can present, nonprofit organizations should make a good faith estimate of fair value. To make a good faith estimate, nonprofit organizations should search for transaction data for actual transactions in active markets that they can access.
- Locating sources for exit prices in the marketplace is not always easy or inexpensive. Sometimes inputs can be found, but the prices may need to be adjusted for differences between the source item and the gifts-in-kind received. When there are differences in characteristics or quantities, the nonprofit organization should consider whether an adjustment is needed to determine fair value. The Update lists detailed adjustment scenarios to help the nonprofit organization arrive at this amount.
- For some types of gifts-in-kind, a range of valuation inputs are available for nonprofit organizations to use, and this can result in dramatically different valuation results, especially if observed inputs have not been properly adjusted. Management should consider the potential materiality of the gifts-in-kind and determine how best to use its limited resources to find inputs.
- When evaluating a potential source of prices to be used in fair value measurement, the nonprofit organization should evaluate whether the observed prices reported in the sources are:
- timely (that is, that the prices are at or near the measurement date),
- based on actual transactions (rather than nonbinding quotes or manufacturers’ suggested prices),
- for identical (or very similar) items sold under similar conditions,
- based on numerous transactions in an active market, not just a single transaction,
- from orderly transactions rather than a distressed sale or a forced liquidation, and
- from transactions between market participants that are unrelated and are knowledgeable about the asset being bought and sold.
The Principal or Most Advantageous Market
The new standard requires a nonprofit organization to disclose the principal market (or most advantageous market) used to arrive at a fair value measure. That disclosure is required only if the market used to determine fair value is a market in which the nonprofit organization is prohibited by a donor-imposed restriction from selling or using the gifts-in-kind. Some considerations:
- In some cases, a donor may require the nonprofit organization to use the gifts-in-kind in its programs rather than sell them, to get a larger tax deduction. This and other restrictions, such as geographical restrictions on the distribution of the gifts-in-kind, should be disclosed.
- The Update defines the principal market as “the market with the greatest volume and level of activity for the asset or liability.” Further, it defines the most advantageous market as “the market that maximizes the amount that would be received to sell the asset or minimizes the amount that would be paid to transfer the liability, after taking into account transaction costs and transportation costs.”
- If a nonprofit organization is prohibited from selling a gift-in-kind, then there is no market in which the organization could legally sell the asset. However, the nonprofit organization determines fair value using a hypothetical transaction making assumptions but keeping in mind that the transaction would happen in the principal or most advantageous market.
- If a nonprofit organization does not regularly purchase or sell a gift-in-kind item and does not know which market is the principal market, it can take into account all information that is reasonably available.
- If a nonprofit organization is able to sell the gifts-in-kind but does so at a value that may not be the principal or most advantageous market value based on evidence to the contrary, the organization should not use those inputs in determining the fair value of gifts-in-kind unless they are adjusted.
- Because of the complexities of valuation and contribution considerations, management should keep documentation of its assessments. Independent auditors will assess management’s gifts-in-kind valuation methodology, but the burden of support for all fair value determination lies with management.
- Nonprofit organizations have the responsibility to ensure their fair value knowledge is regularly updated and to consider new market data on a regular basis. This will likely result in changes in valuations of similar items over time—as it should—because markets and values fluctuate.
For additional information on fair value:
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