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Rulemaker Aims for More Transparency in Charity Gift Accounting

Nov. 6, 2019, 8:41 PM

Charities would have to offer more details about physical gifts they receive from donors and how they measure them under a proposal U.S. accounting rulemakers plan to release by year end.

The Financial Accounting Standards Board on Nov. 6 unanimously agreed to draft a plan to force more transparency around the reporting of non-financial gifts—everything from cans of soup to cancer drugs. Their action follows a failed attempt by California lawmakers to diverge from national accounting rules in order to curb fraud involving charitable donations of drugs and medical devices.

FASB’s planned change would require charities to record a separate line item in revenue labeled “gifts in kind” and to break down donated gifts by type in their financial statement footnotes.

“I think it will make a difference to users as to whether or not those gifts in kind that are coming in the door are canned goods versus pharmaceuticals,” said FASB member Christine Botosan.

Charities also would have to disclose whether donors put any restrictions on the gifts as well as the methods used to value the donations.

Pharmaceutical Gift Valuation

FASB’s action comes on the heels of intense scrutiny of charity financial reporting in California.

The state Assembly and Senate in September overwhelmingly passed legislation (AB-1181) that would have required any charity soliciting donations in the state to ignore longstanding U.S. accounting rules on valuing gifts in kind.

U.S. accounting rules require not-for-profit groups to record physical donations at fair value, using “principal market” when determining the fair value amount. But the California law would have forced charities that receive gifts of pharmaceuticals earmarked for overseas donation to value the drugs based on the price where they will be distributed, not on the price they would fetch in the U.S.

The reason: Drugs in the U.S. cost much more than overseas. Lawmakers alleged that some charitable organizations took advantage of accounting rules to engage in elaborate pharmaceutical transactions that made their finances look more robust than they really were. Healthy revenue—fueled largely by oversized pharmaceutical valuations—duped donors into thinking the groups were good stewards of their money, lawmakers charged, when they were really out to make money for themselves.

Gov. Gavin Newsom (D) vetoed the bill in October, but not before causing angst in the accounting profession about how charities would comply and whether other states would try to meddle in independent accounting standard-setting.

The veto gave FASB breathing room to take a look at its accounting rules and decide if it needed to make any improvements without fundamentally overhauling accounting practice.

To contact the reporter on this story: Nicola M. White in Washington at nwhite@bloombergtax.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Patrick Ambrosio at pambrosio@bloombergtax.com