Financial reporting of in-kind donations for nonprofits

Securing in-kind donations is vital for any nonprofit or charitable organization, but it is just as important to account for them properly. In June 2020, the Financial Accounting Standards Board introduced changes to the General Accepted Accounting Principles (GAAP) for documenting and presenting the value of in-kind donations in financial statements. This article provides an overview of the changes and what you need to know. 

What are in-kind donations? 

In-kind donations are any non-cash contributions made to an organization. These can include time, products, or services. Although nonprofits tend to focus on raising money, in-kind donations serve as a significant source of revenue for most nonprofits. For donors, it is often easier to contribute items they no longer use or contribute services when they have extra capacity. With in-kind donations, businesses and individuals can donate far more than if they were limited to just donating cash. 

Whether donations are cash or in-kind, the Financial Accounting Standards Board wanted to make the reporting of those assets clearer on financial statements. 

What changed with ASU 2020-07? 

Historically, nonprofits were not required to give detailed information on the value and use of in-kind donations in financial reports. This raised concern because lack of detail can make an organization look significantly larger or smaller on paper. It also made it difficult to parse the exact value of in-kind donations and their usefulness to the organization.  

The Accounting Standards Update (ASU) 2020-07, issued in September of 2020, states that nonprofits must change how they present and disclose in-kind contributions.  

The first change is how information is presented on a financial statement. Specifically, in-kind donations can no longer be recorded in the same line item as direct financial donations in the statement of activities. Instead of reporting aggregate contributions as a single line item, the financial statement must show a line item for financial contributions and a separate line item for in-kind contributions. 

The second change is with disclosure requirements. The nonprofit must disclose information on in-kind donations by category that depicts the type of nonfinancial asset. For example, categories might be Equipment, Clothing, Food, or Legal Services. 

For each category of in-kind donations, the nonprofit must disclose: 

• Qualitative information about whether the nonfinancial assets donated were used or liquidated during the reporting period. If used, the nonprofit must describe the program or activities in which they were used. 
• The nonprofit’s policy, if any, on liquidating rather than utilizing the assets. 
• A description of any donor-imposed restrictions associated with the assets. 
• A description of the valuation techniques and inputs used to arrive at a fair value measure, per the requirements in Topic 820, Fair Value Measurement, at initial recognition.  
• The principal or most advantageous market used to arrive at a fair measure of value if it is a market in which a donor-imposed restriction prohibits the nonprofit from selling or using the assets.  

How should financial statements be formatted? 

There are multiple ways to present the required information within financial statements. The Financial Accounting Standards Board provides examples of formatting the required information in their Not-for-Profit Entities (Topic 958) publication. While it’s beyond the scope of this article to show the various formatting examples, one of our expert advisors can help your nonprofit determine which format would best suit your financials.  

What is the path to compliance? 

Many nonprofit organizations already have the raw data needed for the change, particularly if they use professional donor management software. The nonprofit must track down the core data, create a workflow to include it on financials, and properly format the information in financials.   

To ensure that the new guidance is properly followed on the back end, organizations that have not yet made the shift should strongly consider disseminating the requirements to staff, especially in accounting roles. On the front end, nonprofits should review their donation intake and tracking procedures to ensure they capture the required information and at the level of detail needed. 

When should the changes be adopted? 

The ASU 2020-07 requirements should be applied on a retrospective basis and are effective for annual periods beginning after June 15, 2021, and interim periods within annual periods beginning after June 15, 2022. Early adoption is permitted. 

This article provides an overview of the ASU 2020-07 changes and is not a substitute for speaking with one of our expert advisors. Insero’s Nonprofit Solutions Group is made up of Certified Public Accountants who specialize and take pride in knowing the needs and requirements of the nonprofit environment. If you would like to discuss proper financial reporting for nonprofits, please contact us.