Cash contributions are fundamental sources of revenue for your organization; however, do not underestimate the importance and value of receiving gifts-in-kind. Gifts-in-kind refer to all noncash gifts and, as with cash contributions, there are requirements for recording these types of gifts. Gifts-in-kind should be recognized if your organization has discretion in using or distributing them and if your organization is the recipient of the risks and rewards of those gifts (such as the risk of loss if they are lost, damaged or destroyed). In situations where your organization receives the gifts, but does not meet both of these criteria, your organization is acting as an agent and should not recognize the contribution revenue in connection with that gift.
There are typically three types of gifts-in-kind: Tangible and intangible, use of property and personal services. Tangible or intangible property refers to donations of stock, cars, clothing, supplies, etc. Before recording revenue for this type of donation, first consider whether the gift can be used or sold by your organization. If it cannot be used or sold, you treat it as if the transaction never occurred and record nothing. If the tangible or intangible gift can be used or sold, you then need to determine whether the gift is considered a collection item (i.e., a piece of art work) and follow the guidance associated with recording such items. If you determine it is not a collection item, you need to recognize contribution revenue and an asset for the fair market value (FMV) of the property received.
If a contribution is given in the form of the use of property (i.e., free rent), the contribution should be recorded following the rules of recognizing a cash contribution, as well as recording the related expense (i.e., rent expense). If there is a promise to continue to allow use of property in the future, your organization may also need to record a pledge receivable.
If the gift-in-kind comes in the form of personal services, then the nature of those services needs to be determined. If the provider is another organization that is offering services, for example, in the form of a secondment, the contribution revenue should be recognized as well as an expense. If the provider is an individual, then you need to determine whether the services create or enhance a non-financial asset (land, buildings, use of facilities or utilities, materials and supplies, etc). If so, then you would recognize the asset along with the revenue at the time of the contribution. If the services received do not create or enhance an asset, then you need to consider whether the services received require a specialized skill, whether the volunteer possesses those skills and whether your organization would have to otherwise purchase those services. Specialized services are generally services performed by accountants, architects, carpenters, doctors, electricians, lawyers, teachers, and other professionals or craftsmen. If a volunteer possesses the otherwise purchased specialized skill, then you should recognize a contribution along with the associated expense at the time of contribution for the FMV of the service provided. Contributed services should also be recognized if employees of separately-governed affiliated entities regularly perform services (in other than an advisory capacity) for and under the discretion of the donee and the recognition criteria are met. It should be noted that amounts recognized for financial reporting under these criteria are not recognized on your 990 as either revenue or expense.
Overall, the timing of recording in-kind revenue follows the principles of cash contribution accounting. Keeping that in mind, it is important to be aware that gifts-in-kind can hold some of the same characteristics as cash contributions, such as possessing conditions or restrictions on use, and should be discounted if pledged on a long-term basis. Gifts-in-kind can add significant value and revenue to your organization’s financial statements. Consider putting a policy in place at your organization to verify proper recording of in-kind contributions when such donations occur.
If you have additional questions about classifying and recording gifts-in-kind, contact Sarah Widlock at [email protected] or 312.670.7444.