California nonprofit audit providers want you to know that new accounting rules are taking effect soon. If your nonprofit accepts contributions of nonfinancial assets like land, services, and supplies, you should be familiar with the updated Financial Accounting Standards Board (FASB) rules.
The Accounting Standards Update (ASU), Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets is instated to increase transparency about gifts in kind. The new rules are briefly explored below.
Addressing inflated values
The accounting rules were updated due to concerns about U.S. wholesale market prices being used to determine the value of donated pharmaceuticals that can’t legally be sold in the U.S. A donor could only contribute such drugs for use outside the country.
Nonprofit auditors inform that using wholesale market prices could inflate the values, causing an increase in a nonprofit’s revenue and expenses. This would make the nonprofit appear larger and more efficient than a smaller nonprofit, or one with lower values for its gifts-in-kind donations.
New procedures and disclosures
The largest change from previous rules is that donations should be reported by type of asset (e.g. building, food, or pharmaceuticals), rather than reported in aggregate. The rules also require gifts-in-kind donations to be reported as a separate line item in the statement of activities.
Further, you must disclose:
- Your nonprofit’s policies for monetizing in-kind donations (such as by selling them), rather than using the donations in your operations,
- Any donor restrictions,
- The techniques and data used to calculate a gift’s value, and
- The principal market or most advantageous market used to calculate the gift’s value.
This last disclosure is necessary if donor restrictions prohibit your nonprofit from selling or using the donation in the principal or most advantageous market. The principal market has the highest volume of activity for the donated asset. The most advantageous market maximizes the amount received if the donation were sold.
The new rules take effect soon
If your nonprofit isn’t already following the rules, prepare to comply with them as soon as possible. The rules take effect for annual reporting periods starting after June 15, 2021. They take effect for interim periods within the fiscal years starting after June 15, 2022. Contact Ernst Wintter & Associates LLP for help complying with their rules at your California nonprofit.