For many nonprofit organizations, non-cash gifts are an important source of support for their mission, providing goods and sometimes services that they would otherwise have to purchase. The accounting treatment of such gifts which can be used or sold, calls for them to be valued at “fair value” at the date of the gift. There are important considerations for both accounting and tax purposes that the organization needs to be aware of and document when accepting in-kind contributions.
Financial Accounting Standards Board (FASB) ASC 958 requires contributions to be measured at the fair value at the date of the gift, using the principles for measuring fair value established in ASC 820. In-kind contributions can have donor-imposed restrictions and also might be considered an exchange transaction under the recently adopted revenue recognition standards, most such contributions, however probably will be related to fundraising or operational activities to be used as part of the program activities. Let’s take a look at two distinct kinds of non-cash gifts.
Gifts of tangible personal property such as furniture, computers, automobiles, supplies, clothing, and similar items are generally recognized as a contribution at their fair value provided the organization can either sell these items or use them in their operations. Clothing contributed to a women’s shelter, for example, might be given to clients of the shelter or might be sold at a thrift store to raise funds for the shelter. The thrift store in this case would meet the two requirements laid out in the guidance: (1) they have discretion in using or distributing the gifts as they see fit; and (2) they have the risks and rewards of ownership. Organizations that act as an agent or intermediary, however, would not recognize the same kind of goods as a contribution.
The measurement of fair value is dependent upon the nature of the property contributed and what the organization will use it for. Clothing to be sold at a thrift store, for example, might be valued at the estimated selling price. Medical supplies donated to a health clinic might be valued at the wholesale value at the date of the gift because they are intended for use in the organization, not to be offered for sale. Fair value can also be affected by legal restrictions which are attached to the gift. For example, a land conservation easement that limits the use of a donation of land should be considered in determining the appropriate fair value. A gift of stock in a closely held company will be more difficult to value than shares of AT&T.
When items are contributed to be sold at fundraising events, they are recorded at fair value when received as a contribution. For example, a patron of the arts donates a painting appraised at $500 for a gala auction. The $500 is recorded as a contribution. At the auction, the painting sells for $1,000. An additional contribution of $500 is recorded since that is partially an exchange transaction and partially a contribution. If the painting sold for $200, contribution revenue would be decreased by $300.
The IRS will require preparation of Form 8283 for gifts valued between $500 and $5,000. If the gift is $5,000 or more, there is also a requirement to have the Form signed by an appraiser.
Contributed services are recognized if they create or enhance a nonfinancial asset or if they require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased, not provided by donation. FASB 958 provided guidance related to the recognition of such services and the measurement of their fair value.
For services that enhance the value of a nonfinancial asset, the fair value may be measured by referring to the fair value of the services received or of the asset enhancement which results from the services. For example, a carpenter builds special display shelves for a library. The value of the materials he provided and his time at his usual rate would be used to measure the fair value. This value should be recognized whether or not the organization would have been able to afford to purchase them at fair value.
An internet service provided may donate the service to a nonprofit without charge. The value in that case would be the normal charge paid by the organization if they had contracted for those services. Volunteer services provided by a doctor at a clinic would be valued at the normal rate that would be received if the clinic were required to hire another doctor to perform those services.
An engineer who volunteered her services to assist in the development of a plan for new construction for a nonprofit would fit in both categories, value would be added to a nonfinancial asset and the services would require specialized skills.
If the services do not meet that criteria they should not be recognized.
Since many funding sources require the organization to match or provide a certain portion of allowable expenses for a grant, it is critical to evaluate, value appropriately, and record in-kind contributions. It is a complex area and since nonprofit organizations cover such a wide range of activities and missions, the nature and type of in-kind gifts is also very complex. In-kind donations may also include an exchange element that needs to be analyzed in accordance with the revenue recognition standards.
If your organization does not already have written policies and documentation about acceptance and recognition of in-kind contributions, think about making that a project for this year. Our Not-for-Profit group would be glad to provide additional guidance.