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Nonprofit Challenges: Accounting for Gifts-in-Kind

VolunteersMany not-for-profits receive gifts-in-kind—noncash donations—to supplement their programming needs. When used properly, gifts-in-kind can greatly extend the cash resources of not-for-profits, as they often consist of goods and services the organization would otherwise have to purchase.

Not-for-profits that receive contributions of in-kind goods and services should report them in compliance with the Financial Accounting Standards Board’s (FASB) fair value measurement standard (ASC Topic 820).

Easy enough, right?

Not necessarily.

This blog post covers significant challenges that not-for-profits face when applying the accounting standards and related guidance for gifts-in-kind.

What does “fair value” mean when it comes to in-kind contributions?

Not-for-profits apply the FASB’s fair value measurement standard to in-kind contributions, where fair value is defined 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.” However, a not-for-profit receives the goods as a contribution, not as a market participant. Thus, the not-for-profit has a hypothetical consideration: What market would it use if it were to sell the goods? Would the goods be sold in an exit market as a retailer, wholesaler or manufacturer, or in some other market? Tangible goods, such as supplies, often go through multiple markets.

Because of the volume of goods not-for-profits usually receive, many consider the wholesale exit market the most appropriate hypothetical market, and Accord Network Gifts-in-Kind Standards support this conclusion. If a not-for-profit determines the wholesale exit market is the principal market for its contributions but is only able to access valuation inputs from retail transactions, an adjustment is necessary to discount the retail value back to wholesale exit market prices.

What if no hypothetical buyer exists?

Certain goods may not have a readily determinable buyer, but typically, they have a base utility that is marketable to someone. Not-for-profits should consider that base utility when determining market values for gifts-in-kind.

When evaluating the base utility of gifts-in-kind, it is also important to assess “future economic benefit or service potential” (ASC 958-605-25-5) and make appropriate valuation adjustments. Adjusting an asset’s fair value for its brief shelf life is an example of applying future economic benefit considerations.

Management should understand the issues that would materially affect the fair value of gifts-in-kind and document its independent judgment on material issues, including risk assessments and fact-based support. Independent auditors will assess management’s gifts-in-kind valuation methodology, but the burden of support for all fair value determinations lies with management.

How might legal restrictions on the goods impact fair value?

Legal restrictions fall into one of two buckets – those that affect the entity, or those that affect the asset. Legal restrictions that affect the entity, such as an IRS limitation prohibiting the sale of the goods, do not impact the underlying assets’ fair value because a hypothetical buyer would not consider them in a purchase decision. On the other hand, legal restrictions that limit the sale of gifts-in-kind to certain markets may affect the assets’ fair value. For example, a land conservation easement that limits the use of a piece of land would be considered by a hypothetical buyer and may affect its value. Not-for-profits should consider legal restrictions that affect the asset when making fair value determinations.

In summary, although not-for-profits may lack market experience for the gifts-in-kind they receive, they can look at the characteristics of their donors, goods received and hypothetical marketplaces to determine appropriate fair values. Donors and auditors also may provide valuable information to consider, but a not-for-profit is ultimately responsible for fair values reported in its financial statements.

Additional resources on valuing gifts-in-kind include this Journal of Accountancy article on how to avoid the pitfalls in gifts-in-kind valuation, the Not-for-Profit Section’s sample gift acceptance policy and other gift-related resources, the Not-for Profit Entities – Audit and Accounting Guide and InterAction PVO Standards.

Frank Jakosz, CPA, Partner-in-Charge- Not-for-Profit and Higher Education Practices, Sikich LLP. Frank has more than 40 years of public accounting experience and expertise serving not-for-profit organizations. He serves on the AICPA’s Not-for-Profit Advisory Council.

Volunteers courtesy of Shutterstock.

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