This two-part series will provide information about in-kind gifts, including the definition and recognition of such gifts and in the second article, the documentation best practices and impact on tax reporting.
Gifts to not-for-profit (NFP) organizations come in many forms. Contributions of non-monetary assets or services are often referred to as “in-kind” gifts and can be a valuable source of revenue for any not-for-profit. A NFP should develop procedures for accurately reporting in-kind gifts in order to reflect the scope of its efforts and ensure comparability within its own and other organizations’ reporting. We have prepared this summary to inform you about when to recognize these gifts, documentation that should be maintained by the NFP, and the impact these gifts have on the not-for-profit’s tax reporting.
Tangible and Intangible Items
In-kind gifts of tangible goods can include inventory, property and equipment, supplies, items to be sold for fundraising purposes, and other items. Gifts can also be intangible – including the donation of services (not considered personal services) – and include items such as advertising or internet services. These items should be recorded at the time of gift at fair market value. Only such items that can be used internally or sold should be recognized as a contribution. Items that will not be used before the end of the fiscal period should be recorded as inventory. Items that are received and used in the same period should be recognized as expense and contribution. If donated materials are sold at a fundraising event, such as an auction, no gain or loss should be recorded on the ultimate sale. Instead, the gain or loss is reported as an adjustment to the original contribution.
Many NFP organizations also receive donated personal services. These can be from volunteer workforces or professional services that provide assistance with activities such as fund-raising activities, program activities or general and administrative functions. Contributed personal services are required to be recognized as a contribution if they either:
- create or enhance a nonfinancial asset or
- require specialized skills that are provided by those possessing those skills and would be purchased if not donated.
Services that do not meet one of these two criteria are prohibited from be recognized as a contribution. Often times, the staff or volunteers used to carry out the NFP’s mission do not meet the criteria and should not be recognized as a contribution. There are some grant agreements that include a matching component whereby the grantee may be able to use volunteer time to meet the matching requirement of a grant. However, it is still prohibited from recognizing the time as a contribution for financial reporting purposes.
In-kind gifts can include the use of facilities. Like donated goods, the contribution should be valued at the fair market value. If a NFP receives the use of office space or other facilities more extravagant than what the NFP would typically procure, the NFP is still required to value the space at the market value. Should a NFP receive an unconditional promise to receive the use of facilities for a period of time, the gift should be valued at the market rate and recognized at the net realizable value. The value of the gift should be discounted to today’s dollar. This would then require the gift to be reported as time restricted, as the use will occur in future periods. As the use of the space occurs, the market value used should be released to unrestricted net assets and rent expense recorded as the receivable declines. Rent expense is required to be reported on a straight-line basis.
The same method is used for in-kind gifts for the use of facilities at below-market rates. The contribution is valued based on fair market value (the market value of the facility less the amount the NFP is committed to pay) discounted to today’s dollar. The gift is released as used, and rent is recorded. Long-term promises to give of the use of facilities are subject to the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 840 lease standard when it becomes effective for the NFP.
Long-lived assets can also be donated as in-kind gifts. These include items such as real estate or other fixed assets. These gifts should be valued at market rate at the time of gift and should include all costs incurred by the NFP to place the asset in service – including freight and installation. If a donor contributes a long-lived asset with a requirement as to the term it must be used, the contribution should be reported as restricted and released over the period of the donor’s requirement. Those donated without a donor-imposed time restriction under Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, must not impose a time restriction and must release the contribution when it is placed in service.
Determining Fair Value for In-Kind Gifts
In-kind gifts must be reported at fair value. Accounting standards define fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”. There are various sources for valuing an in-kind gift, including published catalogs, vendors, independent appraisals, and other sources. Estimates, averages, or computational approximations, such as average price per pound, can be used to value goods assuming the following:
- the method can reduce the cost of measuring the fair value,
- the use of the method is appropriate and consistently applied,
- and the results are not materially different from the results of a detailed measure of the fair value of the donated goods.
Difficulty in determining fair market value is not an acceptable reason not to recognize an in-kind gift.
Reporting for In-Kind Gifts
In-kind gift contributions should be reported by restriction in the same manner as other contributions. If the donor has restricted the use of the asset, it is reported as restricted support. In addition, in-kind gift expenses are reported by function. The donated items should be reported within the function for which they were used. For example, donated food for an after-school program should be reported as program expense by the NFP.
Now that you have learned about the types of in-kind gifts and the recording requirements of such gifts, look for the second article in the series which will discuss in-kind gift documentation best practices and the impact of in-kind gifts on tax reporting.
If you have any questions about recognition, documentation or tax reporting of in-kind gifts for your organization, feel free to contact Chris Mickelson (email@example.com) or talk to your local Blue & Co. advisor.