It’s that time again; nonprofit leaders must adapt to the latest accounting standards change. Accounting Standards Update (ASU) 2020-07, Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets was issued in September 2020 as a way of improving transparency with these gifts.
ASU 2020-07 is something of a misnomer as the update does not reflect a change to accounting, per se. The amendments in this update do not change existing recognition and initial measurement requirements specified in Subtopic 958-605. Instead, the update simply revises the way nonprofit organizations report and present in-kind contributions on financial statements.
The revised rules increase transparency as well as consistency, providing donors and other interested parties with more clarity about what organizations are including in the financial statements. The term “nonfinancial assets” as it is used in the update covers the following types of contributions: fixed assets; use of fixed assets or utilities; materials and supplies; intangible assets; services; and unconditional promises of those assets.
Current guidance calls for specific recognition and measurement of non-financial contributions that meet certain definitions but does not include specific presentation requirements for any of these gifts other than contributed services. As a result, in-kind contributions typically get lumped in with financial donations, making it difficult to determine their nature and how they are used.
Under the updated regulation, a nonprofit organization must provide more detailed disclosures for all contributed nonfinancial assets. The amendments include the following requirements:
In comparison to many ASUs, this one is relatively headache-free. To comply with ASU 2020-07, leaders will need a clear understanding of the new rules and a commitment to training staff adequately on updated procedures, as well as ongoing monitoring to ensure that all employees are following the new policy for these types of gifts. However, compliance is not likely to create an undue burden since organizations already track this type of data.
Virtually all nonprofits maintain records to facilitate thank-you messages to donors and have effective systems to track donor gifts, whether it’s financial donations or in-kind contributions. Compliance with ASU 2020-07 is just a matter of making sure this information is tracked, organized, and presented properly.
As contributed nonfinancial assets require specific disclosures, nonprofits should ensure that the reporting system and processes in place are adequate to provide this information. The standard itself includes implementation guidance and examples of correctly presented disclosures to assist leaders in properly adhering to the revised regulation.
The update should be applied retrospectively to all periods presented in the organization’s financial statements for annual reporting periods commencing after June 15, 2021. Early adoption is permitted.
Although compliance should not prove excessively burdensome, any change in accounting and reporting procedures increases the risk of mistakes that could create liabilities in a routine audit. For assistance implementing the new standard correctly in your nonprofit’s accounting and financial statements, contact RKL LLP today.