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New Regs Require Recognizing Contributed Services

By Marty Daks - September 24, 2013

Nonprofits that receive management and other services without charge from affiliated organizations will soon have to recognize the value of the activities, due to a Financial Accounting Standards Board (FASB) update.

The pronouncement, Services Received from Personnel of an Affiliate, was issued in an effort to establish uniform reporting procedures, according to FASB, which noted in the pronouncement that “the amendments will reduce diversity in practice and provide transparency about the extent of the program services, supporting activities and asset creation or enhancement costs incurred by the recipient not for profit entity.”

The amendment plugs a loophole that had existed under Topic 958, Not-for-Profit Entities, Section 605, Revenue Recognition. The existing guidance required nonprofits to recognize contributed services when they create or enhance nonfinancial assets or when they require specialized skills that the recipient nonprofit would otherwise need to purchase. The update, however, clarifies that a recipient nonprofit must recognize all contributed services it receives from an affiliate.

The update to the accounting standard will be effective for fiscal years that begin after June 15, 2014, and for interim and annual periods after that. Organizations that don’t assign a value for contributed services rendered by affiliates will have to establish systems and procedures to identify and value the contributed services, which may consist of management, accounting, finance, janitorial, occupancy-related and other activities, according to Christine L. Klimek, FASB’s senior manager, media relations.

The specific way organizations go about segregating the data and valuing the services is left up to them, although FASB does provide some guidance. For example, if the affiliate assigns a cost to the contributed services, the recipient should generally use that as a measurement, unless it’s significantly higher or lower than market value. In that case, according to FASB, the recipient nonprofit can either use the actual payroll, fringe benefit and other costs that the affiliate recognizes for the personnel providing the services, or it can recognize the services at fair market value.

There are no specific monetary or other thresholds that must be met before recognition is required, according to Klimek, although a FASB task force has noted that in general, accounting guidance does not need to be applied to “immaterial” items.

The standard-setting group did not say which entity should be responsible for identifying and valuing the contributed services, but it did note that when the recipient organization does the calculations, it can alleviate the “burden” on the affiliate that’s providing the services.

The enhanced reporting that’s expected to result from the update should benefit donors, creditors, investors and other capital market participants, according to Klimek, which added that the benefits should outweigh any increased costs of compliance.

The information is important for donors and others to obtain “a complete picture of resources received and how they were used,” according to Klimek. Besides increasing transparency regarding program services, supporting activities and other costs incurred by a recipient nonprofit, the update will “enhance comparability and result in consistent application of U.S. GAAP and related disclosures by utilizing information that usually should be readily available,” according to the ruling. The International Accounting Standards Board has not addressed this issue, according to Klimek.


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