How To Account For Non-Cash Contributions

How To Account For Non-Cash Contributions

There can be two different types of non-cash contributions: contributed services and contributed nonfinancial assets. Let’s dive into contributed services first.

A not-for-profit organization can receive contributed services from a nonaffiliated third-party donor or from affiliated party. An example of a nonaffiliated donor would be the services of a CPA who prepares income tax return for the not-for-profit organization. In this case this service would qualify as a contributed service because 1) it requires a specialized skill to perform and 2) if services were not donated, the organization would have to purchase the services. Contributed services from nonaffiliated party is recognized at the fair market value (FMV). The recognition criterion lies within the test described in #1 and #2 or another qualification which includes creating or enhancing a nonfinancial asset (so for example creation of by-laws).

Contributed services that are used to create or enhance a nonfinancial asset would also be recognized at fair market value and would require disclosure. For example, a local nonprofit develops a plan and program to update and remodel children’s playground on its premises. Local construction companies donate their architectural services to create the plan for playground as well as labor to install it. In this case both architectural and labor services would be recognized as an in-kind service donation by the not-for-profit organization and would be recorded at the fair market value and disclosed within the notes to the financial statements.

I would like to note that in the case of creating or enhancing a nonfinancial asset the specialized skill test is not required, so the labor can be unspecialized in the construction example. As long as the service is used to create or enhance the nonfinancial asset – the contribution in-kind service revenue can be recognized according to ASC 958-605-25-16.

In-kind services received from personnel of an affiliate

Now I’d like to discuss another situation in which an in-kind service contribution can be recognized. For example, a corporation (a for-profit entity) has also established a foundation (a not-for-profit entity) to provide scholarships to local art students. The CFO of the corporation might prepare the financial statements for the foundation as the foundation doesn’t have its own staff. In this case, the services provided by the CFO to the foundation would be considered in-kind contributions. Typically, these types of services are recorded at cost, however, if using cost method would significantly overstate or understate the value of the services received, the recipient may elect to record these services based on the fair value of the services according to ASC 958-720-30-3. The option to utilize fair value instead of cost was provided for cases when a highly paid individual (like a CFO of a large corporation) provides routine services to the foundation (like bookkeeping services) – in this scenario the value of the services would be overstated if it was based on cost (the executive’s salary). An entry to records donated services on the foundation side would be:

Dr.	Compensation and benefit expenses	$XXX,XXX
Cr.	Donated services received from affiliate	$XXX,XXX

I would like to point out that if the affiliate has direct control of the foundation according to ASC 958-220-45-21 this would be considered an equity transfer, as such the “Donated services received from affiliate” would be an increase to net assets account.

Now that we have discussed contributed in-kind services, let’s dive into contributed nonfinancial assets next.

Contributed nonfinancial assets

Contributed nonfinancial assets include tangible property such as furniture, equipment, clothing, pharmaceuticals, supplies, free or reduced rent. These typically are measured at fair market value and presented as a separate line item on the statement of activities (separately from contributions of cash and other financial assets). Presentation of these types of contribution is governed by ASU 2020-07. Each of the nonfinancial assets should be segregated into its own category. For example, a nonprofit received several cars during the year, some supplies, food and office equipment – all these would need to be broken out into its own category for disclosure purposes (each organization will have different categories based on their donated nonfinancial assets).

Was this category monetized or utilized? If it was utilized, you’d have to disclose what program was this car utilized for (a description of the program or activity in which the nonfinancial asset was used). If a not-for-profit organization has an organizational policy describing which nonfinancial assets are typically monetized as opposed to utilized – this policy would need to be disclosed within the financial statements. In addition to that, if there were any donor-imposed restrictions on the nonfinancial assets – those would also need to be disclosed (the purpose for which the nonfinancial asset is intended).

Additionally, a description of the valuation techniques and inputs used to arrive at fair value measure would also need to be disclosed within the notes to the financial statements. Very often it is very difficult to value some of these nonfinancial assets due to the fact that nonprofits are typically not market participants, so it would be difficult to assign the value to the services. That is why it is very important to properly document and disclose the methods used for measuring the fair value of the services

And finally, the principal market or most advantageous market used to arrive at a fair value if it is a market in which the recipient not-for-profit organization is prohibited by a donor-imposed restriction from selling or using the contributed nonfinancial assets. (Otherwise, principal market information is not required to be disclosed, but may be relevant to the valuation).

From FASB Master Glossary: Most Advantageous Market – The market that maximizes the amount that would be received to sell the asset or minimizes the amount that would be paid to transfer the liability, after taking into account transaction costs and transportation costs.

In conclusion, accounting for noncash contributions can get very complex and some deep analysis is required. If you need help with accounting for noncash contributions or with setting up proper processes and procedures for your organization, feel free to schedule a free consultation with me and I will walk you through the process and with providing guidance and necessary tools for your organization.