Some supporters give your nonprofit money, others give goods and still others give intangibles, such as use of a facility for a fundraiser. A donation’s a donation, right? Not quite. Under certain circumstances, gifts in kind and donations of services must be recorded and recognized at year end as revenue, expenses or assets. Here’s what you need to do when your nonprofit receives one of these gifts.
Does It Have Value?
Gifts in kind generally involve the receipt of a piece of tangible property or property rights. They can take many forms, including:
- Free or discounted use of facilities,
- Collections, such as artwork to display or sell, and
- Office furniture or supplies.
To determine whether you need to record the amount of these gifts in your financial statements, ask the following question: Does this item have value to our nonprofit? In other words, can you use it to carry out your mission or sell it to help fund operations? If so, it should be recorded at fair value as revenue in the period it’s received. If the gift is a pledge, it’s recordable in the period the pledge is made.
What Would It Cost to Purchase?
You’ll also need to decide what value to assign to the gift in kind. Consider: What would the item cost your nonprofit if it were to purchase that item outright from an unrelated third party? It’s fairly easy to assign a fair value to property, such as furniture, equipment or inventory — you can look up the going price for a similar item in the marketplace. But when the gift is something that doesn’t have a readily determinable market value, fair value is more difficult to assign.
Without an independent appraisal to substantiate the gift’s value, you may need to rely on a good faith estimate from its donor. Be sure to obtain all corroborating evidence that the donor can give you, and then evaluate whether the amount was reasonably assessed. For gifts valued at more than $5,000, donors are required to obtain an independent appraisal for tax purposes. And this provides documentation for your records, as well.
How are Services Different?
Donated services are handled a little differently. Accounting guidelines specify two criteria for determining when donated services should be recognized and how to determine their fair value.
First, consider whether the service creates or enhances a nonfinancial asset. These types of donations should be capitalized at fair value on the date they’re given. In such situations, the services don’t need to be specialized for them to be recognized. For example, the value of a contractor’s time (a specialized service) to renovate your offices would be capitalized as part of the building, as would the value of a volunteer’s time to pack up items for safekeeping during the renovation (a nonspecialized skill).
Second, consider whether the service requires specialized skills, is provided by persons with those skills and would have been purchased if it hadn’t been donated. These services are accounted for by recording contribution income at the fair value of the service provided. You also must record such donations as a related expense, in the same amount, for the professional service provided.
Note that specialized skills usually refer to those provided by professionals such as attorneys, accountants, architects, carpenters and electricians. Normally, this would exclude general volunteer time because volunteers typically don’t use specialized skills to perform their assigned tasks. Nonetheless, your nonprofit may want to disclose the total number of volunteer hours it received during the year in its financial statement footnotes to help emphasize the commitment made by the community to your nonprofit.
All Gifts are Welcome
Your nonprofit likely welcomes all donations — whatever form they might take. Just remember that, from an accounting standpoint, gifts in kind and donations of services and facilities should be treated differently from financial donations. If you’re unsure about whether you need to record and value a gift, contact your financial advisor.
BPM for Nonprofits
BPM is one of the largest California-based accounting and consulting firms, ranking in the top 50 in the country. It has served the San Francisco Bay Area's emerging and mid-cap businesses, as well as high-net-worth individuals, since 1986. Our Nonprofit services group, one of BPM’s most established practice groups, consists of over sixty professionals across our tax, assurance and consulting practices. One of our founding goals was to make a difference in the manner nonprofits were served by our profession. Each member of our group brings differing expertise from our tax, audit, consulting and accounting departments - together we provide a comprehensive understanding of the functions needed to operate a nonprofit organization. For more information, contact Daniel Figueredo at (415) 288-6284, Nathan Farris at (925) 296-1014 or Shannon Silverman at (408) 961-6308.