Many not-for-profit organizations rely on donations. Tapping into the generosity of their stakeholders has always been an operational necessity. And in recent years, the giving environment has become more complex with changing legislation and tax policies. With fewer taxpayers itemizing each year, the rate of cash donations has slowed. It’s become even harder for not-for-profit organizations to raise money.
Nonfinancial assets are an ideal way to maintain funding levels without taking a huge hit to overall donations. Gifts of property, stock, equipment, services, and in-kind donations are some of the more common examples of nonfinancial assets that not-for-profits receive.
The difficulty with nonfinancial assets has been how to record them in a way that makes sense to stakeholders and meets GAAP regulations. These gifts add value and dimension to donor relationships, but they shouldn’t be treated the same as cash on the financial statements. Not, at least, according to FASB and its recent proposal to amend GAAP for not-for-profit organizations.
Current FASB Reporting Guidelines
Under current GAAP rules, not-for-profit revenue is not required to be separated between cash and non-cash. Organizations are free to segment types of revenue but are not required to do so. Additionally, contributions of nonfinancial assets are only required to be reported on the financial statements if they create or enhance a nonfinancial asset OR require specialized skills, are provided by experts who have those skills, and would be purchased if not donated (for example, legal fees).
The last substantial change to reporting requirements came in 2017, ASU 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, effective for fiscal years beginning after December 15, 2017. That standard lessened the detail that organizations were required to report, whereas this proposed amendment increases reporting and disclosures.
Overview of Changes
FASB approached changes to how nonfinancial assets are reported with the goal of improving the transparency of financial statements. If enacted, their intent is to further improve and enhance Board of Directors’ and stakeholders’ understanding of not-for-profit financial statements and to better assess how all contributions are being used.
Under FASB’s proposed amendments, not-for-profit organizations would be required to differentiate any contribution that isn’t cash:
- As a separate line item on the statement of activities, and
- Separated by category.
Further, FASB’s proposal states that categories of nonfinancial assets should include qualitative data if the contribution is intended to be monetized in the current period or future reporting periods. If the donor did intend for the nonfinancial asset to be monetized, the financial statements should indicate which program(s) or activity(ies) apply.
Additional disclosures for nonfinancial assets must include:
- Donor restrictions, if any and
- Valuation techniques that were used, including the principal market value, if it’s significant, according to Fair Value Measurement, Accounting Standards Codification (ASC) Topic 820.
What’s Staying the Same
Despite the proposed changes, not-for-profit leaders and financial executives can count on a few things to remain the same. For example, most organizations are already used to deciding on a market to use to value specific kinds of nonfinancial assets, and they are also already used to performing valuation adjustments as needed.
Navigating the complexities of donor restrictions also isn’t new; what may change for some organizations is that those restrictions will soon have to be described directly in the financial statements.
As part of the proposal process, the FASB committee decided to keep one aspect of financial statement presentation the same: Nonfinancial assets utilized are not required to be separated in expenses on the statement of activities.
FASB’s proposed amendments also would not change recognition and measurement requirements in ASC Subtopic 958-605, Application of the Limited Discretion Indicator and Accounting for Cost-Sharing Provisions, for nonfinancial assets.
Timeframe and Public Comments
FASB’s proposed amendments to nonfinancial asset reporting are accepting comments until April 10, 2020. Comments are being accepted on the following questions:
- Are the amendments in this proposed Update operable? If not, which proposed amendment or amendments pose operability issues and why?
- Should the scope of the presentation and disclosure requirements apply to all contributed nonfinancial assets? If not, what types of nonfinancial contributions should be excluded from the scope and why? Should the scope of the presentation and disclosure requirements be extended to business entities? If yes, why?
- Should the disclosure requirements in paragraph 958-605-50-1A(c) be required for each category of contributed nonfinancial assets? If not, please explain why.
- Would retrospective application of the proposed amendments be operable and would that application provide decision-useful information? If not, please explain why and what you would recommend.
- How much time would be needed to adopt the proposed amendments? Should early adoption be permitted?
- Is education or implementation guidance needed on the valuation of contributed nonfinancial assets? If yes, what type of guidance or additional education should be developed?
There is currently no timeframe for an effective date. According to FASB’s Exposure Draft published in February 2020, the amendments would be applied retrospectively to the first set of financial statements following the effective date. FASB will determine the effective date after it receives public comments.
How to Comment on FASB’s Proposed Changes
Individuals can submit comments in one of three ways:
- Use the electronic feedback form on the FASB website,
- Email comments to mailto:email@example.com, or
- Send a letter to: Technical Director, File Reference No. 2020-100. FASB, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116
- Send your feedback to firstname.lastname@example.org to be considered in a response.
Remember that comments are due April 10, 2020.
These changes are not expected to cost not-for-profit organizations a significant amount of money to implement nor will they require a change in accounting. What’s more, some organizations already follow most of the new regulations.
What Not-for-Profit Organizations Can Do Now
Even though there isn’t a timeframe for the new reporting requirements, not-for-profit organizations can take some proactive steps now to make implementation easier later. One, begin separating contributions of nonfinancial assets, including:
- Fixed assets (such as land, buildings, and equipment),
- Use of fixed assets or utilities,
- Materials and supplies,
- Intangible assets, and
Two, begin tracking how nonfinancial assets are utilized in programs and whether there are any donor restrictions. And three, develop a template for recording this information in the financial statements. We will continue to keep clients updated as FASB releases the final amendments.