In the not-for-profit industry, donations or contributions has become a major game player in the sustenance of operations in many not-for-profit organizations (NPOs). These contributions provide essential funds to support the daily activities of the organization. Although these contributions or donations are primarily monetary in
nature, it is important to highlight that they can also take the form of non-financial assets. These non-financial
contributions are referred to as gifts-in-kind or in-kind contributions. In recent years, accounting practices surrounding in-kind contributions have become a subject of concern, primarily due to the focus on valuation and disclosure methods.

Instances where the valuation of in-kind contributions being overstated is now frequently being identified, leading to an inflated representation of revenue, proceeds, and program expenses. Since these metrics are crucial indicators of an NPO’s size and efficiency, it is imperative to address this issue accurately. Due to the importance of this matter, stakeholders and regulatory bodies have taken notice of this issue and are therefore demanding more transparency and detailed information regarding the measurement of nonfinancial assets contributed and their utilization in the NPO’s programs and activities.

Recognizing the importance of addressing these challenges, FASB developed Accounting Standards Update (ASU) 2020-07, Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets, to establish comprehensive guidelines for reporting and disclosure. The update aims to enhance the relevance and usefulness of financial statements by providing more detailed information about the nature, valuation, and impact of contributed nonfinancial assets or contributed services. Contributed securities and other financial assets are outside the scope of ASU 2020-07.

By issuing this update, FASB seeks to foster greater transparency and accountability in the not-for-profit sector. The update also enables organizations to provide clearer and more consistent information about the resources they receive and utilize, ensuring that stakeholders can make informed decisions and understand the value their contributions bring to the organizations they support.

What Are Considered To Be Gifts-in-Kind? https://accountants.sva.com/biz-tips/fasb-asu-and-nonfinancial-assets-nonprofits-need-to-know

The definition of nonfinancial assets has not changed. As a result, most nonprofits already know what kind of assets are affected by these new disclosure and reporting requirements. As a review, donations of the following are considered “nonfinancial assets,” so ASU 2020-07 specifically applies to:

●    Radio, social media, television, and streaming advertising

●    Physical space (such as office space or event areas)

●    Raffle items

●    Travel expenses (i.e., airline tickets, hotels, gas cards, etc.)

●    Personal protective equipment

●    Commodities

●    Pharmaceuticals

●    IT services

●    Professional services (such as legal services or accounting
services)

●    Utility payments or services

In general, if the item or service has a dollar value but the nonprofit does not have to pay for that dollar value (or there is a price reduction), that is a nonfinancial asset.

How to Report Contributed Nonfinancial Assets or Services https://www.cbiz.com/insights/articles/article-details/new-reporting-and-disclosure-requirements-for-contributed-nonfinancial-assets-or-contributed-services-for-not-for-profit-organizations

 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 and/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. The 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 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 (such as 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 report the related expenses on separate lines; however, the related expense needs to be properly functionalized as either a program, management & 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 prior periods presented.

Not-for-profit organizations must also provide the transition disclosures in the period of adoption, including:

●    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.

●    The effect of the change on relevant financial statement line
items.

Significant Account Policies for Contributions https://www.cbiz.com/insights/articles/article-details/new-reporting-and-disclosure-requirements-for-contributed-nonfinancial-assets-or-contributed-services-for-not-for-profit-organizations

ASU 2020-07 also requires enhanced disclosures of the nonfinancial 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 footnote for contributions of nonfinancial assets.

The following information should be included in the significant account policies for contributions:

●    Qualitative information about whether contributed nonfinancial
assets were monetized or utilized during the reporting period.

●    If monetized, disclose the policy (if any) about monetizing.

●    Description of the valuation techniques and imputes used to arrive
at the fair value measurement in accordance with the requirements in ASC 820 at
initial recognition.

●    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.

●    Description of any donor-imposed restrictions associated with
nonfinancial assets. 

The ASU provides several examples of what disclosures related to contributed nonfinancial assets could look like. The following is one example: