In a preview of his presentation at the July 12-13 PICPA Not-for-Profit & Government Accounting Conference, Rick Cole, partner with BKD CPAs & Advisors, discusses the new Accounting Standards Update related to gifts-in-kind nonfinancial assets. Among other issues, he touches on how contributed nonfinancial assets are presented on financial statements and the timing of when the new ASU will go into effect.

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By: Bill Hayes, Pennsylvania CPA Journal Managing Editor

Podcast Transcript

In a preview of this presentation at the July 12-13, PICPA Not-for-Profit & Government Accounting Conference, our guest today – Rick Cole, partner with BKD CPAs & Advisors – joins us to discuss the new ASU related to gifts-in-kind nonfinancial assets, including how contributed nonfinancial assets are presented on financial statements, and when the rules brought about by the new ASU will go into effect.

For a bit of context here, why did the FASB (Financial Accounting Standards Board) come out with this new standard on gifts in kind?

[Cole] That's a great question. I like getting into the whys. Having worked at the FASB for six years, I really learned to appreciate the drivers behind the issuance of the standards. This was a standard the project started when I was still working there, and I worked on it for about six months or so, right before I left the FASB to join BKD. The fact that we had heard that some regulators around the country had some concerns with the fair value that was being recorded by nonprofits whenever they received certain types of gifts-in-kind. The issue was that there were some types of gifts-in-kinds that may have had some restrictions, that they might not be able to be used in certain locations around the world.

As such, there was some concern that possibly the fair value should have been adjusted because of these donor restrictions. So, the FASB ended up taking on this project where they just started looking at the contributions of nonfinancial assets. When I say contributions of nonfinancial assets, a nonfinancial asset is something that is other than cash or something that could be readily converted to cash. So, these gifts-in-kinds of nonfinancial assets would be things like pharmaceuticals, medical supplies, clothing, food, and things like that. Not cash, not marketable securities.

The FASB undertook a project to try to decide if something should be done about the accounting and then the presentation and disclosure. Ultimately, what they decided was that they did not want to get into changing the fair value for these types of gifts that were received, because you don't want to have a different gap for different industries. You want a gap to be the same across all industries, where at all possible. Instead, what they decided to do, was to focus on presentation and disclosure and making sure that there was appropriate transparency in financial reporting for these types of gifts, these non-financial asset gifts that were received by nonprofits. By getting into appropriate transparency with the presentation as well as adding to the disclosures, they thought that would improve the usefulness by financial statement users. It's really interesting when you think as to the why. Then once we get into understanding what the new requirements are, I think most people will see that the transparency has definitely been escalated.

How are contributed nonfinancial assets presented on a statement of activities today, if at all?

[Cole] “If at all” is actually a good part of it. Certain things are not meeting the definition of something to be recorded, so those wouldn't be presented at all. But those that do meet the definition to be presented, there's diversity in practice. One could argue conceptually that the requirement today would be because it's a discrete category, it should have its own presentation, if it's material. However, I think that many people, if it's not ultra-material, will combine these gifts with other types of contributions. Often, organizations will combine on one line item contributions of cash as well as contributions that are due to be received in the future of cash, as well as contributions of these nonfinancial assets. They might not have any desegregation at all in the financial statements. Other nonprofits do disaggregate and might show it separately. But there's often not an enormous amount of disclosures surrounding that. Again, it depends on the materiality. There is diversity and, as we get into the changes, it creates more consistency and it definitely enhances the disclosures.

What are the presentation requirements on the statement of activities once the new standard is implemented?

[Cole] It's a simple requirement. Basically, the nonfinancial assets have to be presented as a separate line item in the statement of activities. It's just the revenue that we're talking about, not the expense. On the statement of activities, you don't need to present the expense, only the revenues. You can go about this in two ways: in your revenue section, where you have your contributions, you could have a second line right below that or right above it, depending on where you want to place it. You have flexibility of where you present it, but most people would put it right above or below your other contributions received of cash. You can just have a separate row, and that could be contributions of nonfinancial assets. You could also instead have a column instead of a row.

If you can imagine a statement of activities, normally along the left side, you're going to have all of these line items, whether it'd be contributions and grants, whether it'd be investment income, so you can have it like that. But you could also have a column. Normally, you might just have three columns, one for without donor restrictions, one for with donor restrictions, and one for the total of those two different restricted or unrestricted categories. You could have a column and within that column you can break out as a separate column your gifts of nonfinancial assets.

What's interesting is if you do that, you should also show the expenses as well. Because if you think about a statement of activities, you've got revenues and expenses. You're going to have a revenue without any expenses. Again, there's no requirement to show the nonfinancial assets that were expense. There is no requirement. But if you're going to do a column, I do think it is probably better practice to also show the expense because otherwise that column is going to be a little awkward, where are you going to just have that revenue go all the way down to the bottom line without the gift being relieved when it got used up. So those are the two choices you have, you do it in a column or you can do it in a row.

Under the accounting standards update, what are the required disclosures for each category of contributed nonfinancial assets?

[Cole] I think this is really something that's been enhanced. Obviously, we just spoke about the statement of activities presentation. So, now it's kind of there and everyone can see it. I should have pointed out, obviously this stuff really only matters if it's material. If it's something that's immaterial, then it's probably something you don't need to worry about. So, focus on materiality, and, of course, speak to your auditors if they agree with your materiality threshold. But the disclosure requirements would be to disclose desegregation by the category of nonfinancial asset, including whether it was used or monetized. I'm going to explain this. Then, if it's used, where it was used, which programs, and, also, what are your policies on monetization of these types of gifts?

I always want to break that down a little bit. When you disclose the segregation by category, one example might be food as a category. One might be clothing. I would say that if you get clothing, you don't need to break it down between shirts and pants or men's and women's. If you get food, you don't need to break it down between the vegetables and meat. I would say a broad category. There's no definition within the codification as to what that means. I like to explain that it's not meant to be a giant laundry list, but just broad categories. The concept of whether it was used or monetized, often donors might give gifts and the intent is for the nonprofit to sell it and then use the proceeds for something. Or they might get gifts or donations and the intent is for them to use those items during their programmatic activities.

Whether or not the not-for-profit monetizes it, or if it used it within programs, that's another required disclosure. Then, of course, if you are monetizing, what is your policy on monetizing? That's another important disclosure. There's a requirement to also disclose a description of any donor restriction associated with a nonfinancial asset. This is something to, again, address some of the regulatory concerns that were raised, where you might get a gift and you're valuing it using a pricing that might be in the United States, but you might have a restriction that says that you can't use it in the United States. But that's a donor restriction, not a legal restriction, so that won't go into the pricing. By having a disclosure requirement that describes any donor restrictions, it makes the financial statement user aware of what the limitations were on the use of that gift.

Then, when you think about what the next requirement is, and that's to provide a description of the valuation techniques and inputs use to arrive at the fair value measure for a contributed nonfinancial assets, that again allows the financial statement user to understand, what did you, as a nonprofit, consider when you were coming up with the fair value. What you considered would be obviously looking at the principle market or the most advantageous market, which are technical terms. That's what you should be looking at. Sometimes, restrictions from donors may prevent you from using those assets in those markets so you kind of have that conflict there. Well, the donor says you can't use it here, but that's the market that you are using for pricing. So having the disclosures, those two disclosures, let the financial statement user understand those two concepts, so at least they have the information that they can understand while they're analyzing a set of financial statements.

Then, the last requirement is to disclose the principal market or the most advantageous market used to arrive at a fair value. Again, when you have that disclosure and then you see what the donor restrictions are, and then you look at the valuation techniques, having all that information, again, just keeps adding clarity to the financial statement user as they're trying to understand why did you come up with this valuation that you did? They can at least understand any limitations on that.

Those are all the disclosure requirements and the presentation requirements, and you can see there's a lot more there. I don't think anything is a heavy lift to do, but it just gets information into the financial statements so the financial statement user will have that. I think that this really goes a decent way against, or toward, addressing some of the concerns that the regulators were raising. At least it will make users aware of things that were concerns that the regulators raised.

As far as timing on this ASU, when will it go into effect and is there an early adoption period permitted?

[Cole] Yes. Often there is early adoption and there is here, and you are permitted to early adopt. It's effective for years beginning after June 15th, 2021. June 15, 2021, has just passed so that means that for fiscal years beginning July 1, which will be fiscal years ending on June 30, 2022. So June 30, '22 year end will be the first group of people that are required to implement this. You can early-adopt, so those that are closing books for, let's say, this past March or December even, they could adopt it early if they choose to.