By James Reynolds
Most organizations receive some sort of an in-kind donation, whether it is a contribution of goods or services. The types of in-kind donations are endless and include gifts of tangible or intangible assets, such as food, supplies, clothing, leased space, investment securities, and advertising. They can also include services received by lawyers, accountants, doctors, architects, computer programmers, contractors, affiliated organizations, and other volunteers.
The various types of in-kind donations received require careful analysis and consideration for how a not-for-profit organization records these items in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Contributions of Facilities, Utilities, and Other Long-Lived Assets
When an organization receives free or discounted use of a building or utilities from the legal owner of the property, the fair value of the benefits received, in excess of any amounts paid, should be recorded as revenue in the period the contribution is received. The related depreciation expense should be recognized during the period of use. A common consideration when estimating the fair value of the contributed use is whether the organization would otherwise be willing to pay the market price for the same asset if its use was not contributed.
If the donor has also specified the purpose for which the facilities or long-lived assets are to be used, restricted net assets will be released once both the purpose has been met and the time has elapsed.
Donated securities are an effective way for donors to give to an organization that fits into their overall personal tax planning. An organization that receives donated securities should record a contribution at the fair value of the securities on the date received, or pledged if an organization receives verifiable documentation committing certain securities before they are actually received. Any difference between the value of the pledge and the value of the securities subsequently received would be recorded as an additional contribution or a deduction to contribution income.
Most organizations have a policy of selling donated securities shortly after receipt, often within a few days. Organizations should keep in mind that any difference between the proceeds received from the sale of donated securities and the fair value on the date the donated securities were received should be recognized as a realized gain or loss. The cost to sell the securities (i.e. investment fees) should be recognized as an expense.
Many organizations receive some form of volunteer time, whether it is for direct service in its programs, or board involvement. The value of contributed services must be recognized if the services either create or enhance nonfinancial assets or require specialized skills, and are provided by individuals with those skills, and would typically need to be purchased if the services had not been donated. Common types of contributed services include those from architects, teachers, lawyers, accountants, bankers, investment advisors, and property management.
In-kind donations that can be used or are required to be sold must be measured at fair value and follow the established framework under GAAP, which is based on the concept of “exit price.” Valuation of in-kind donations is clearly the most challenging part of recognizing these gifts because it may be difficult to determine the “highest and best use” for the in-kind donation. There is public information that is often available for identical or similar assets in inactive markets. Some useful valuation resources include:
- General Goods - Goodwill Industries’ Valuation Guide
- Real Estate - LoopNet for commercial real estate
- Vehicles – Kelley Blue Book and Edmunds.com
Another key determination with valuing in-kind donations is to identify the “principal market,” which is the market with the greatest volume and level of activity for the asset or liability. Identifying the principal market should be based on the perspective of the organization, since different organizations have different purposes and activities.
Each not-for-profit organization should review their procedures and policies on a regular basis to assure that they are properly valuing all donated goods, services, and facilities.
For more information on in-kind donations or other issues that may affect your organization, please contact Not-For-Profit Practice Leader Adam Reiss.