In September 2020 the Financial Accounting Standards Board (FASB), the chief rule making body that determines what Generally Accepted Accounting Principles are in the United States issued ASU 2020-17 to increase the level of financial statement disclosure in-kind donations nonprofits receive. And though ASC 2020-07 was not created exclusively to cover donations of free advertising nonprofit organizations receive from television and radio stations that air their public service announcements, it definitely does affects them. Therefore, as a CPA who works with not-for-profit organizations across the country, I wanted to share some thoughts about these new requirements and how to implement them with CFOs and CPAs who will be responsible for complying with them.
In 2019, Nielsen Media estimated that U.S. broadcasting stations donated over $2.5 billion in free advertising time to nonprofit organizations, providing recipients with a highly effective way to publicize their missions. From my experience, a typical national PSA campaign can easily generate $3 million to $5 million in contributed service revenue in a single year, with larger campaigns generating amounts in excess of $25 million. In doing this, PSAs can present some interesting and material measurement, valuation, and reporting questions.
In issuing ASU 2020-07, the Financial Accounting Standards Board was trying to provide users of financial statements with a higher level of transparency for in-kind contributions, which are donations received in a form other than cash. The FASB felt this was necessary because organizations were increasingly relying on in-kind revenue to conduct mission-related activities, while financial statement reporting had fallen behind in providing users with sufficient information to assess its impact on nonprofit operations.
Though ASU 2020-07 is titled “Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets,” it encompasses both contributed assets (such as land, buildings, use of fixed assets, pharmaceuticals, food, supplies, and intangible assets) and contributed services (such as advertising time donated by television and radio stations).
While ASU 2020-07 did not change the fair market measurement methodology called for in FASB Topic 820 or the revenue recognition guidance in ASU 958-605, it did change how information must be presented and disclosed. In doing so, it was hoped that organizations not currently in full-compliance with existing standards would now reassess their efforts to achieve compliance.
I hope you find this short guide helpful for your organization and clients. If you would like to learn more about how Connect360 can help you to comply with ASU 2020-07, please feel free to contact me. My phone number is 212-624-9181 and email is email@example.com.
Objectives and Scope:
- Increase transparency for gift-in-kind contributions received by nonprofits.
- Enhance financial statement disclosure of how contributions are valued and used.
- Provide key stakeholders with increased information on how gift-in-kind revenue affects an organization’s financial sustainability and ability to continue to perform critical missions.
- Encompasses both contributed nonfinancial assets and contributed services, such as free advertising time derived from public service announcement advertising campaigns. Existing guidance on revenue recognition for contributed services under ASU 820-10 and fair market value measurement under ASU 958-605 remains unchanged.
Implementation Issues Related to PSAs:
- Broadcast stations rarely provide nonprofits with airing and valuation information related to PSAs. Therefore, alternative sources of active market price information must be found. Fortunately, proprietary, contemporaneous data is available from specialized sources.
- Calculating fair market value requires the ability to identify the thousands of airings that make up a typical campaign, including on what stations aired a PSA, time of day it aired, length of time each spot aired for, and price similar paid spots sold for in the same market. Compiling this can be a complex task. However, valuation specialists such as Connect360 have the systems and access to the data needed to do this.
- Marketing departments at many nonprofits use a public relations metric called “earned media” to value PSA activities. Accountants need to carefully evaluate earned media valuations, because they are often not calculated in compliance with Topic 820-10.
- Gifts-in-kind can impact key metrics upon which stakeholders rely to evaluate NFP liquidity and reserve ratios. In addition, PSAs impact metrics issued by rating agencies such as Guide Star, Charity Navigator and the Better Business Bureau. In most cases, PSAs increase the percentage of revenue an organization spends on mission-related expenses, helping it to score better in ratings donors use to evaluate and compare nonprofit performance.
- Joint costs can at times come into play here, when awareness PSA is also used for fundraising.
Presentation and Disclosure Requirements:
- Gift-in-kind revenue needs to be presented in a separate line from cash donations in the Statement of Activities. In addition, enhanced footnote disclosure is required to show how such revenue was valued and used to further a not-for-profit’s mission.
- Footnote presentation now needs to disaggregate gift-in-kind donations into categories, with each category separately discussed. Qualitative information needs to be provided regarding how each category was valued and used for program and other activities. If a gift-in-kind was monetarized, this also needs to be disclosed along with the organization’s policy for converting gift-in-kind donations to cash (essentially selling the donated assets).
- Donor restrictions, which are rare in the case of PSAs, need to be disclosed.
- Valuation techniques and inputs used to arrive at fair market values, in accordance with Topic 820-10’s most advantageous market guidance must also be disclosed.
- Revenue recognition continues to be governed by ASU 958-605.
- ASU 2020-07 is effective for annual periods beginning after June 15, 2021 and interim periods with annual reporting beginning after June 15, 2022.
- Early adoption is permitted.
- Retrospective application is required. As such, it would be wise to gather data needed to value a PSA’s activity in the year prior to implementation because it is more difficult to obtain valuation data months after broadcast activity occurs.
Here is a link to a Steve Edelman article on PSA accounting and valuation published in the CPA Journal. https://www.cpajournal.com/2016/04/27/issue-april-2016/
Connect 360 Multimedia is America’s leading distributor of public service announcements for nonprofit organizations, associations and government agencies. Founded in 2013, Connect360 distributes more PSA campaigns for more nonprofit organizations than any other company.
Connect360 measures and values PSA campaigns in full-compliance with Topic 820. It does this by identifying each time a PSA receives an airing and valuing each PSA airing using proprietary, nonpublic, contemporaneous broadcast-industry price information.
As a full-service communications company, Connect360 helps not-for-profit organizations to create awareness campaigns that combine traditional broadcast tactics and innovative digital strategies.
About Steven Edelman:
Steven Edelman is a CPA with over 20 years of experience working with not-for-profit organizations. He is a founding partner of Connect360 Multimedia and heads the company’s Broadcast Valuation Group, which prepares accounting compliant PSA valuations. He serves as a member of the New York State Society’s Not-for-Profit Committee and a member of the AICPA’s Not-for-Profit Section. He is the author of numerous articles on unique accounting issues associated with PSAs.
Over the past seven years, Steven has been involved in valuing over 350 television and radio PSA campaigns. In 2019, these campaigns had a total valuation of over $550 million. His phone number is 212-624-9181 and email firstname.lastname@example.org.