Some supporters give your non-profit money, others give goods or intangibles, such as the use of a facility for a fundraiser. A donation is a donation, right? Not quite. Under certain circumstances, in-kind gifts 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 non-profit receives one of these gifts.
In-kind gifts generally involve the receipt of a piece of tangible property or property rights. They can take many forms, including:
To determine whether you need to record these in-kind gifts in your financial statements, ask the following question: Does this item have value to our non-profit? 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.
You’ll also need to determine what the fair value is for the in-kind gift. You will need to consider what the item would cost your non-profit, if it were purchased 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 determine.
Without an independent appraisal to substantiate the in-kind gift’s value, you may need to rely on a good faith estimate from the donor. Be sure to obtain all corroborating evidence 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. This also provides documentation for your records.
Donated services are handled a little differently. Accounting guidelines specify two criteria for determining when donated services should be recognized in the financial statements and how to determine their fair value.
First, consider whether the donated service creates or enhances a nonfinancial asset. These types of donations should be recorded 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, if you’re renovating a building, the value of a contractor’s donated 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 donated 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 service provided. Note that specialized skills usually refer to those provided by professionals such as attorneys, accountants, architects, carpenters and electricians.
To help emphasize the commitment made by the community to your non-profit you may want to disclose the total number of volunteer hours it received during the year in promotional materials and on the organization’s website.
Your non-profit likely welcomes all donations — whatever form they might take. Just remember that, from an accounting standpoint, in-kind gifts 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 Doeren Mayhew non-profit CPAs and advisors.
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