GIK fair value, part II

Earlier this year I gave a quick update about the FASB’s latest Fair Value work for the approaching IASB/FASB convergence.  I want to circle back on this topic with a few things I’ve learned this last year about interpreting and applying the fair value standard ASC 820 (formerly FAS 157) to gift-in-kind (GIK).

Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” 

So what does this mean for GIK which typically isn’t sold but instead is distributed to beneficiaries in need?  Most of the questions I’ve heard relate to how three issues affect the value of GIK revenue:  (1) its origin or destination, (2) donor restrictions, and (3) asset attributes (i.e. product expiration date).

Origin or destination:  Generally, neither the origin of the GIK nor its intended programmatic destination would affect its fair value.  Fair value would be affected by changes in the market prices where the GIK would normally be sold (i.e. the principal market).  The principal market is the market in which the reporting entity would sell the asset with the greatest volume and level of activity for the asset.  The fact that the entity will actually be sending it to beneficiaries in a developed or developing country has no effect on the principal market the goods would normally be sold in, the market which would be used for valuing the goods.  Beneficiaries generally, by definition, are not market participants.  Market participants are entities who would transact for the goods and are able to buy the products from the reporting entity.  Because GIK is by nature excess goods donated to non-profits for distribution to beneficiaries, it may be difficult to identify a market where the goods are sold.  It may be necessary to consider a hypothetical scenario to identify market participants.

Donor restrictions:  The question to consider here is whether the donor restrictions are entity attributes or asset attributes.  Two examples of entity attributes include 170(e)3 restrictions or temporary donor restrictions for time or purpose.  An example of a donor restriction which becomes an asset attribute is a restriction on the use of land for which the underlying deed has been altered to include development restrictions.  Entity restrictions don’t affect the underlying asset and therefore, because market participants wouldn’t consider it, they should not affect the fair value.  Alternatively, restrictions which affect the underlying asset would generally have an effect on the fair value because these are restrictions which market participants would consider when buying the asset.

Asset attributes:  Assets may have attributes which are considered “standard” in the marketplace.  When the GIK received differs from these market “standards”, an adjustment to its value may be necessary.  Several examples of issues to consider include 1) Product expiration dates – if the product received is short-dated compared to products available to most market participants, generally a discount be applied.  2) Quantities of products received – if the product is received in a wholesale quantity but retail values are readily available, generally a wholesale discount should be applied, and 3) Quality of products received – if the product received is lower quality than products typically sold in the marketplace, a discount should be applied.

For more information, you may want to read the AERDO standards or this GIK “Accounting for Accountants” presentation from the 2009 GIK summit.


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