In September 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-07. It amends ASC 958-605 to enhance presentation and disclosure requirements for nonprofit entities that receive contributed nonfinancial assets.
What are contributed nonfinancial assets?
Examples of contributed nonfinancial assets include fixed assets such as land, buildings and equipment; the use of facilities or utilities; materials and supplies, such as food, clothing or pharmaceuticals; intangible assets; or services.
Note that contributed securities and other financial assets are outside the scope of the ASU because they typically are monetized immediately and used similarly to cash.
Why did the FASB issue ASU 2020-07?
In July 2018, the FASB received a comment letter from the National Association of State Charity Officials (NASCO) expressing concern about nonprofits using U.S. wholesale market prices to determine the fair value of pharmaceuticals received as gifts-in-kind in situations where the sale of the pharmaceuticals was prohibited in the U.S. by donors. There was also concern that nonprofits were inflating the fair value measurement of donated pharmaceuticals to increase revenue and program expenses so the nonprofit appeared larger and more efficient in its use of donated pharmaceuticals.
Under the old guidance, the only type of contributions that specific disclosure requirements applied to were contributed services. It did not include specific presentation requirements or specific disclosure requirements for contributed nonfinancial assets other than contributed services.
The changes in ASU 2020-07: 1) allow the reader to more clearly identify the nature and amount of contributed nonfinancial assets, (2) allow the reader to more clearly identify the amount of contributed nonfinancial assets utilized in a nonprofit’s programs and other activities and 3) provide more relevant information regarding the subjective evaluations used in estimating the fair value of contributed nonfinancial assets.
The ASU does not change the recognition and measurement requirements for contributed nonfinancial assets.
What are the new presentation and disclosure requirements?
The ASU requires a nonprofit organization to presentcontributed nonfinancial assets as a separate line item in the statement of activities, separate from contributions of cash or other financial assets.
It also requires a nonprofit organization to disclose a disaggregation of the amount of contributed nonfinancial assets recognized within the statement of activities based on the relevant type of the contributed nonfinancial asset, and for each category of contributed nonfinancial assets recognized it requires them to disclose:
- A description of whether the contributed nonfinancial assets were sold immediately for financial assets or retained and used in programs during the reporting period. (If retained and used, the organization must provide an additional disclosure regarding which programs or other activities they were used in).
- 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 (e.g., for a particular program or a particular period of time).
- A description of the valuation techniques and inputs used to arrive at a fair value measure (in accordance with the requirements in Topic 820, Fair Value Measurement) at initial recognition. For example, the organization might obtain an appraisal to determine fair value of a property donation, or a professional consultant might use their standard billing rate to value donated professional services.
- A description of the market used to arrive at a fair value measurement.
Organizations may use either a table or narrative format (or combination of both) to disclose the required information.
Three key takeaways for nonprofit organizations
- Nonprofits should ensure they have adequate reporting systems and processes in place in order to provide the appropriate disaggregation of contributed nonfinancial assets in the statement of activities and under the new disclosure requirements.
- Nonprofits will need to determine whether they have a policy to sell (monetize) rather than utilize contributed nonfinancial assets and if their processes in place for determining whether contributed nonfinancial assets were either sold or used during the reporting period aligned with their policy (if any).
- Nonprofits should also ensure that they have a process for determining which contributed nonfinancial assets are subject to donor-imposed restrictions and would, therefore, require disclosure about such restrictions.
How should the amendments be applied, and when will they be effective?
The amendments in this ASU should be applied on a retrospective basis and are effective for annual periods beginning after June 15, 2021, and interim periods with annual periods beginning after June 15, 2022. Early adoption is permitted.
As the ASU must be applied retrospectively, nonprofit organizations should be prepared to provide the required disclosures for fiscal years beginning after June 15, 2020, if they present comparative financial statements.
The description of the programs and other activities in which the contributed nonfinancial assets were used should align with the programs or activities described elsewhere in the financial statements (such as the statement/schedule of functional expenses or program descriptions in the nature of operations disclosure).
Nonprofit 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.
The FASB’s fair value measurement framework (ASC 820) already requires an entity to record contributed nonfinancial assets at fair value when received and initially recorded in the financial statements. Nonprofit 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).
If you need assistance navigating the new presentation and disclosure requirements, contact Wipfli for assistance.
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