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SACRAMENTO - California Attorney General Xavier Becerra today urged the Financial Accounting Standards Board (FASB) to get serious and issue unambiguous guidance for the financial valuation of donated nonfinancial assets, otherwise known as gift-in-kind donations. FASB’s proposed amendment to its accounting standards, Topic 958, fails to address the unsavory practice by some charities of overvaluing gift-in-kind donations. The proposed amendment would deny the donating public the transparency we expect from any charity. Today's comment letter warns that FASB’s proposal virtually invites charities soliciting donations to engage in less-than-honorable practices.
“More charities than we would like to believe overvalue gift-in-kind donations to puff up their performance. It’s time for FASB to step up and close this hole in accounting standards that allows charities to deceive the donating public,” said Attorney General Becerra. “When hardworking Californians contribute to a charity, they expect the charity will faithfully represent its work and give an accurate accounting of its performance. Why, then, would FASB allow an accounting charade to continue at the expense of generous Americans who want to contribute? FASB is supposed to ensure integrity in accounting practices. It’s time for FASB to do its job.”
FASB, an independent board responsible for setting recognized national financial accounting standards, introduced Topic 958 to address the reporting of nonfinancial assets including pharmaceuticals. Pharmaceutical companies often donate pharmaceutical products to nonprofits on the condition that the products cannot be distributed within the United States. Despite that restriction, FASB allows nonprofits to claim the products’ U.S. prices, which are far higher than in other parts of the world, to determine the value of the pharmaceutical donations sent to other countries.
Overvaluation of gifts-in-kind leads to an inflated total revenue for the charity, making the charity appear more successful and efficient than it may really be. Exaggerated revenue can also serve as a means for a charity to hide excessive costs in fundraising, salaries and overhead — these payouts appear smaller when compared to total revenue inflated by the overvalued gifts-in-kind. Inflated reports may also undeservedly increase the charity’s ranking by charity watchdogs, potentially attracting more donors seeking worthy charities. In 2019, the Attorney General sponsored a bill, AB 1181, that would have addressed these practices in California.
Additionally, FASB's proposal fails to give sufficient guidance on reporting and honoring restrictions placed on a donation by the donor. Currently, FASB treats donor restrictions as only restricting the charity receiving the original donation. In California, all nonprofits using the donation are required to honor the donor’s restrictions, whether they receive that money from the donor or from the charitable organization which originally received it. If Topic 958 is intended to provide clarity and transparency on the disclosure of nonfinancial assets, then nonprofits should be required to disclose accurate and consistent valuations and more detailed information on donor restrictions, such as where the nonfinancial assets were used and how the donations furthered the nonprofit's mission.
A copy of the letter can be found here.