In September 2020 the Financial Accounting Standard Board issued ASU 2020-07. Formal title for the document is Not-for-Profit Entities (Topic 958) – Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets.
Contributed nonfinancial assets means gifts-in-kind. The ASU does not apply to donated services or donated financial assets such as stocks and bonds.
ASU 2020-07 will only change the presentation of GIK on the statement of activity and require additional disclosures in the notes. It will not require any change to the valuation of donated pharmaceuticals (accountants call that recognition).
You can get your own copy of ASU 2020-07 here.
(Cross-posted from my other blog, Nonprofit Update, since this issue is of interest to auditors of charities.)
Statement of activity
The total of GIK will need to be presented as a separate line within the revenue & contribution section of the statement of activity, separate from donated cash and any donated financial assets.
Note disclosures
There are a number of new note disclosures which will be required for gifts-in-kind:
- The total amount of GIK will have to be disaggregated into separate categories which describe the type of contributed nonfinancial asset. This means the notes ought to disclose separate types of GIK, such as pharmaceuticals, automobiles, clothing, food, or real estate.
- Description of whether GIK was sold or used in operations. If used, provide a description of in which programs or other activities the items were used.
- Describe any policy of monetizing GIK rather than using them in operations.
- Describe any donor-imposed restrictions on the GIK.
- Describe the valuation techniques used to determine fair value of the GIK. Specify the inputs used.
- If there are geographic restrictions imposed by donors, describe the principal market or most advantageous market that was used to determine fair value.
If you are a CPA, check out ASC 958-605-50-1A for the exact wording.
Effective date
ASU 2020-07 will first be required for financial statements with years ending June 30, 2022. (For CPAs the technical description is financial statement with periods starting after June 15, 2021.)
That means we will start seeing the first financial statements with new disclosures in the fall or winter of 2022. Since most charities receiving large volumes of GIK have December 31 year ends, the ASU will be effective for their 12/31/22 year end. We will start seeing large volumes of financial reports with the new disclosures in summer and fall of 2023.
For context, FASB has lately been giving private companies about two years to implement new accounting rules, which leads to pushing out the effective date to the June 2022 timing.
Substantial analysis of the new disclosures can start in late 2023. It will be sometime in the summer or fall of 2024 before there is two year’s worth of comparative information.
Observations
The disclosures will cover all GIK but will particularly highlight donated pharmaceuticals, especially those which have a geographic restriction that the meds are not to be sold or used in the United States.
Ponder those disclosures for a while and you can see that they are only partially responsive to the concerns of various state regulators, state legislators, the FTC, and the IRS.
You will notice that the presentation and disclosure requirements in ASU 2020-07 do not touch valuation issues at all; there are no changes to how GIK is valued.
Comments in the Basis for Conclusion section indicates the Board did not want to touch valuation issue because there could have been (perhaps that should have said certainly would be) unintended consequences from opening up for reconsideration anything even closely related to the fair value methodology in GAAP. See paragraph BC5 for specific comment.
My impression observing from a distance is this is a first step in addressing valuation of GIK. Additional disclosures will highlight the numbers and methodologies involved. The disclosures provide the information for analysis and the time involved also buys time for the industry to hold off additional regulatory efforts.
Results in analyzing a few year’s worth of disclosures will allow FASB to consider whether changes are needed to valuation. This kicks the whole valuation issue down the road three or four years (fall ’23 or fall ’24). That could push substantial consideration of any changes to valuation out about five years from the point that the California legislature passed and the governor vetoed (10/19) new requirements for charities filing with the state.
If there are any follow-on changes to valuation, the modified financial statements would be visible another 5 or 6 years later (calculated as 1-2 years for analysis of new disclosures; 1 year to develop rule assuming it is placed on fast-track; 2 years to effective date; 1 year to issue, read, & analyze financials).
String together my assumptions for timing, and assuming there are ever any changes actually made to correct for overvaluation, we might possibly, maybe, see financials with reasonable valuations somewhere in summer/fall of 2028 or summer/fall of 2029.