Posted on Wednesday, January 11, 2017
It is common for nonprofit organization to receive donated goods and services (in-kind) from businesses and individuals to support the organization’s cause. Not all in-kind contributions should be recorded by nonprofit organizations in their financials under generally accepted accounting principles.
Gifts in-kind include contributions of noncash items such as inventory, property, equipment, supplies, food, and other similar tangible items. If the items can be used or sold, the items should be recorded at fair value as of the date of the donation. If the items cannot be used internally by the organization or sold, the items should not be recorded by the organization.
Fund Raising Items
Nonprofits often hold auctions as part of an annual dinner fund raiser. The items included in the auction (tickets, gift certificates, merchandise, etc.) are most often donated. These items should be recorded by the organization at fair value as of the date of the donation. Any difference between the fair value of the item and the actual amount of cash received when sold in the auction, should be recorded as an adjustment to the original contribution amount.
Nonprofits may be able to utilize donated space for their office or to hold a fund raiser. The fair market value of the space should be recorded as a contribution by the nonprofit.
Donated services that create or enhance a nonfinancial asset should be recorded at fair value of the services provided or the fair value of the resulting asset or enhancement, whichever is easier to determine. For example, the contribution recorded for a group of accountants to build a shed for a nonprofit would be recorded at the fair value of the shed, not the hourly rate of the accountants. Since the accountants are not performing accounting services, their normal billing rate is not a reasonable basis for the fair market value of their services to build the shed.
Other donated services should only be recorded if ALL of the following are met.
The service requires specialized skills (provided by accountants, lawyers, architects, doctors, nurses, teachers, carpenters, electricians, plumbers or other professionals).
The service is provided by individuals who possesses those skills.
The service would typically need to be purchased if not contributed.
Therefore, time for volunteers to answer phones or prepare mailings should not be recorded as they do not require a specialized skill. An architect providing design services for a new building should be recorded as it does require a specialized skill possessed by the architect.
Some nonprofits receive a significant amount of in-kind contributions and could not provide their services without them. By recording the value of these contributions, the true cost of running the organization is reflected on the nonprofit’s books. Even if an in-kind contribution does not meet the requirements to be recorded by the organization, the organization should keep track of all contributions received outside of their financial statements.
As with cash contributions, nonprofits should provide written contribution substantiation to the donor noting the date of the contribution, a description of the item(s) donated, and whether the organization provided any goods or services in return for the contribution. The written documentation provided by the organization should not include a value of the item(s) donated, only a description. For more information on contribution substantiation, see our previous blog, Contribution Substantiation.
Posted by: Carrie Minnich, CPA
Posted in Mission Minded Nonprofits
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