By Sarah Wine, CPA
Depending on your organization, in-kind donations may be a primary portion of your revenue and mission, or they may play a minor role in the totality of your revenue. Food banks or thrift stores rely heavily on donated food or goods, whereas performing arts organizations or museums may only receive in-kind donations of auction items or wine for fundraising events. Regardless of where your organization lies on this spectrum it is important that you know when and how to value and record in-kind donations.
Criteria for recording an in-kind donation under Generally Accepted Accounting Principles (GAAP):
Contributed services must be either:
- Provided by someone with specialized skill such as an attorney, accountant, plumber, nurse or other professional or craftsperson. Example, a nurse donating his or her time at an after-hours clinic for the low-income community. Or,
- The services must create or enhance a nonfinancial asset. Example, a group of volunteers helping to build a home for a low-income family.
Contributed assets are noncash assets that are donated to an organization such as property, food or supplies.
When and how to value in-kind donations. Both contributed services and contributed assets should be valued at fair value on the date of the receipt. Accounting Standards Codification (AC) ASC 958-605-30-11 indicates that the entity should consider the quality and quantity of the assets received. If a food bank or shelter received apples that were edible, but not the same quality that would be sold at the store to consumers, then the value recorded for the apples would be at a value less than the market rate per pound for apples. Additionally, if a school received a pallet of paper towels the fair value would also be less per roll than the per roll rate at the local grocery store.
When an in-kind donation isn’t a donation to the organization. If the items provided to the organization by the donor are specified for another entity, then the transaction is considered an agency transaction because the organization receiving the donation does not have variance power (the ability to choose the ultimate beneficiary). As a result, the organization first receiving the donation would record an asset and corresponding liability and would then reduce the asset and liability once the donation is transferred to the ultimate beneficiary. No contribution would be recognized.
Another instance when an organization would not record a contribution is if the organization received an asset that it would not have normally purchased. For example if a local photographer agreed to take photos of an organization’s annual gala that the organization would not have subsequent use for, or would not have traditionally purchased, it is likely that the organization would not record an in-kind donation for that contributed service.
Another example is if a board member, in the normal course of their advisory duties as a board member, were to provide advice to the organization. Many organizations have attorneys on their boards who provide legal advice as the organization considers different transactions. Advice provided in this capacity would not be considered an in-kind donation. However, if the board member/attorney represented the organization in a legal matter, then that time would be recorded as an in-kind donation based on the hours contributed at the attorney’s standard rates.
Examples of common in-kind donations.
- Items used in program activities such as backpacks with school supplies for students returning to school: These backpacks would be valued using the value the donor paid for the supplies to make the backpacks.
- Auction items: Many organizations have an annual event, such as an auction, to help raise contributions to cover the costs of services. As a result, the organization will procure items for the auction such as wine, tickets to an event and other goods and services. These items should be recorded as auction inventory and a contribution based on the fair value of the items donated upon receipt. Once the auction has occurred the organization would record cash, reduce the value of the auction inventory and then either increase or decrease the original contribution depending on if the items were auctioned for more or less than the fair value of the donated item.
- Donated securities: Donors may choose to donate investments with significant unrealized gains in order to take advantage of potential tax benefits. In this situation, a donor may make a $100k pledge. Then, upon transferring the stock to the organization, the organization would recognize the market value of the stock as an investment asset and either increase or decrease the original contribution depending on the value of the stock on the date of transfer minus the original pledge. Upon sale of the stock, the organization would record realized gains or losses based o the value of the stock at the time of sale.
- Construction project manager or discounted construction services: In addition to cash donations, an organization may seek donated professional time or discounts on labor or materials related to a capital project. These two types of donations would be recorded as follows:
- The donated project manager time would typically be valued using the hours donated and the project manager’s hourly rate based on what is typically charged for similar projects in the local market.
- The discounted labor or materials are valued at the difference between the going rate that the vendor charges to typical not-for-profits (NFPs) and the rate that was actually charged to the organization. It is important to remember that if the vendor always provides an 80% discount to NFPs, and that was the rate given to the organization, then no in-kind donation would be recorded for the discount. However, if that discount was in excess of the normal 80% or if the vendor did not normally provide a discount to NFPs, then an in-kind donation would be recorded.
- Use of a physical asset for free or at a discount: A receivable should be recorded by the organization in the period the organization receives the commitment by the donor. This commitment would be valued using the fair rental value of the entire term of the lease (or in the case of a discount, the difference between the fair rental value and the amount to be paid by the organization); the contribution would then be discounted for time if the rental period is in excess of twelve months. Then, as the lease transpires, the organization would record in-kind expense and reduce the receivable over the period the asset is used. ASC 958-605-55-24 also notes that the organization may call the asset something other than a contribution receivable, such as a donated facility use asset.
- Donation of artwork or items to be held on display: These items are valued and recognized under ASC 958-605-25 “Accounting for Collections” and depend on the organization’s capitalization policy for collection items. ASC 958-605-25-18 specifies that if the organization receives a work-of-art, historical treasure or similar asset that is not part of a collection, it should be recorded as an asset and a contribution at fair value on the date of contribution. However, ASC 958-605-25-19 also specifies that if the organization has a policy against capitalizing collections, the organization would not record a contribution for donated collection items, and therefore the value is not reflected in the financial statements.
- Contributed personnel from affiliates: This type of transaction is covered under ASC 958-605-25-17 and most commonly occurs with hospitals and hospital foundations. In these instances, the foundations are established in order to solicit contributions to support a hospital’s uncompensated care or to purchase specialized equipment. The operations of the foundation are often performed in whole or in part by hospital personnel. In these situations, the foundation is required to recognize all services received from personnel of the hospital, regardless of whether they are for specialized services or not. The services provided are valued at the cost recognized by the hospital. Therefore, the cost would be the employee’s salary multiplied by the percentage of that employee’s time spent working on the foundation’s operations.
There are significant differences between how in-kind contributions are treated for GAAP purposes versus tax reporting and acknowledgment. This article only addresses the GAAP treatment of in-kind contributions. This article should not be construed as tax advice. This article should not be construed as tax advice. Before making any decision that may affect you or your organization, consult a qualified tax advisor or contact Clark Nuber.
© 2016 Clark Nuber PS All Rights Reserved