Although cash contributions are easy to accept and record on your books, an increasingly important question is, “Do you know how to manage donations of non-cash goods and services?” If your organization is set up to accept in-kind donations, you must be able to determine their value and correctly record them on your financials.
Types of In-Kind Donations
Instead of cash, gifts-in-kind are donations of goods or services. Donated goods can be tangible personal property (like vehicles, clothing, artwork, items to be sold at a fundraising auction, etc.) or other uniquely defined gifts (like securities, use of facilities, advertising space, manual labor, and more). Contributed services are recognized as revenue on nonprofit financial statements when at least one of the following is true:
- The service creates or enhances a nonfinancial asset
- The service requires specialized skills that would have been purchased had they not been donated
Accounting for Cash Contributions
Accounting for in-kind donations is not straightforward. However, it’s important for you to record in-kind donations on your financials because they can represent a real and substantial portion of your revenue. Your supporters deserve to know how those donations support your mission.
In general, you should record in-kind donations at fair market value. Unfortunately, it can be difficult to determine fair market value if there is no immediate market for the goods you were given. To give you an idea of some appropriate methods for determining fair market value, let’s look at some examples.
FAIR MARKET VALUE OF DONATION
|Publicly traded securities||Closing stock market sales price(s) on the day they were donated|
New clothing the organization will provide to the homeless
|Purchase price of the items|
|Used items the nonprofit will later sell as inventory||Estimated fair market value using eBay, an auction website, published valuation guides, or something similar, later adjusted to the actual selling price|
|Used, high-value items||Appraised value|
|Free use of facilities||The going rate for the facilities rental at the time of use|
|Discounted (bargain) purchases||The going rate for the purchase less the amount paid by the nonprofit|
|Volunteer work at a soup kitchen||No amount to be recorded because the donated services not of specialized skills|
|Food to be served at a soup kitchen||Published study on food prices in America with bulk discounts taken into consideration|
|Licensed counselor providing free services to combat veterans||Because this is a specialized skill the nonprofit would have paid for out of pocket, they should record the going rate for the licensed psychologists’ time|
Once you have determined fair market value and the donation becomes available, you can record contribution revenue. Of course, there are some exceptions.
In general, you should record contributions when they are pledged in writing and are deemed to be unconditional. Pledges are originally measured at fair market value and then adjusted if that fair value changes when you receive the donation. Let’s look at an example:
A donor pledges to donate 100 shares of Company X stock currently valued at $1 per share. At the time of the pledge, you should record:
DR: Contribution receivable $100
CR: Contribution revenue $100
When the donor contributes those shares two months later, Company X stock has dropped to 90 cents per share. At this point, assuming adjustments to market value have not already been made, you would record:
DR: Contribution revenue $10
DR: Investment assets $90
CR: Contribution receivable $100
Some nonprofits serve as intermediaries between donors and other charitable organizations. In this case, because the nonprofit does not have discretion over how the donations can be used, agency transactions are not recorded as contribution revenue. The organization should record an asset and a liability when they receive resources in an agency capacity, then reverse that entry when they deliver these resources to the beneficiary.
When a donor makes a contribution and directs the funds to another beneficiary, nonprofits should typically only record revenue when they have variance power over the donation, or the unilateral right to redirect the use of that asset.
Accounting Best Practices
To make your life easier, establish a system for accepting and recording in-kind donations. Although drafting your procedures up front may take some time, having clear instructions your staff can follow will take the guess work out of this process. Here are some best practices you can adopt for your own organization:
- Have a gift acceptance policy.
Your organization may not want to accept gifts that it cannot use or value, or that it finds onerous to manage or sell.
Have a policy to only accept certain assets or services.
- Update your accounting policies.
Let your accounting department know how to record each type of donation.
- Use contribution forms.
Collect information about the donor and their donations like a description of the items, estimated fair market value, date of donation, condition of items, number of hours worked, and going rate of pay.
- Track your gifts.
Tracking gifts allows you to draft gift acknowledgement forms, properly record pledges, and evaluate the impact of in-kind donations over time.
If you would like to discuss your entity’s contributions with one of our CPAs, contact us today. Our nonprofit experts would love to go over your entity’s in-kind donations to ensure you are recording them appropriately.