As a not-for-profit, you are more than likely aware that your organization is required to document and report not only cash donations, but in-kind contributions, as well. So, if your not-for-profit organization accepts donations of nonfinancial assets, such as land, services and supplies, you should be aware of the September 2020 Accounting Standards Update.
This update by the Financial Accounting Standards Board (FASB) regarding the Accounting Standards Update (ASU), Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets is intended to increase transparency around such contributions, which are called gifts in kind.
The update now requires nonprofits to change their financial statement presentation and disclosure of contributed nonfinancial assets, or gifts in kind. Here is everything you need to know about this new update to help you keep your records updated and your organization in compliance with federal tax laws.
Transparency Through Reporting
Many not-for-profit organizations rely on in-kind contributions (noncash) to keep the operations of their organization running. Common examples of gifts-in-kind include financial assets, such as investments, and nonfinancial assets, such as fixed assets (land, buildings and equipment), food, supplies and materials.
Additionally, services that are offered pro bono, such as legal or consulting, and the use of rental space are some commonly donated services recognized by not-for-profit organizations.
Reason for The Update
Over the past few years, not-for-profit stakeholders have regularly expressed concern that they lacked enough useful information about the amount of gifts-in-kind received and used in their organization’s programs.
One example cited is in reference to U.S. wholesale market prices being used to determine the value of donated pharmaceuticals that cannot legally be sold in the United States. A donor, for example, could donate pharmaceuticals only to be used outside of the country.
This worried stakeholders because the values could be inflated and would increase an organization’s revenue and program expenses, which in turn would make the non-profit appear larger and more efficient than a smaller organization or one with lower values for its gifts-in-kind donations.
New Procedures and Requirements
Now, under this new standard, a not-for-profit must report nonfinancial in-kind contributions as a separate line item in its statement of activities, which is set apart from donations of cash or other financial assets.
The not-for-profit is now required to further report such contributions by category of asset (for example, land, food or pharmaceuticals) in the footnotes of the statement.
Additionally, for every category of gifts-in-kind that is identified, a not-for-profit organization is now required to disclose:
- Any restrictions that the donor requires associated with the gifts-in-kind.
- Information about the donations being monetized (by selling them, for example) or if the donations are being used in the organization’s operations. If they are being used, the not-for-profit must provide details about how the assets are being used.
- The not-for-profit organization’s policy of monetizing rather than using the gifts-in-kind.
- The valuation techniques and data used by the organization to calculate a gift’s value
- 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 and the most advantageous market generally maximizes the amount that would be received if the contribution were sold.
Compliance
Complying and reporting these in-kind contributions is an important step in transparency and documentation for your not-for-profit. Most importantly, recording and reporting all in-kind donations will help your organization understand its impact on the program.
Also, if in-kind donations make up a large part of your nonprofit’s programs, then not recognizing them will result in under-reporting the true impact. So reporting is better for everyone, especially your organization.
If you aren’t already following the new standard gifts-in-kind rules, prepare to comply with them very soon. They took effect for annual reporting periods starting after June 15, 2021, and for interim periods within fiscal years starting after June 15, 2022.
Trust Lloyd & Hodge With Your Tax and Accounting Needs
Running a nonprofit isn’t a walk in the park, especially when it’s time to figure out your taxes. There are numerous ways to reduce your tax liability, but learning the ‘secrets’ to tax savings can be near impossible if you aren’t familiar with the ins and outs of the US tax system.
Lloyd & Hodge know how stressful accounting and taxes are for many nonprofits, small businesses and sole proprietors. We know you’d rather focus on growing your business, and we understand that taxes are something most people would rather not think about.
With proper planning, you can manage your effective tax rate and reduce your costs. Tax planning and restructuring services from Lloyd and Hodge are designed to protect your business’s financial future while maintaining compliance with all laws and regulations.
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