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The latest on guidance, qualifications, and how to record

By Jean Callan

What qualifies as an in-kind contribution?

Many nonprofit organizations rely on non-financial gifts of goods and services as vehicles to achieve the organization’s mission or goals. These goods and services are considered in-kind contributions.

According to Generally Accepted Accounting Principles (“GAAP”), donated goods and services are recognized in financial statements if the services:

  • create or enhance non-financial assets, or
  • require specialized skills, are provided by individuals possessing those skills, and the entity would need to purchase if not provided by donation.

Examples of property or goods typically donated to a nonprofit and considered in-kind are items such as food, clothing, office supplies, office furniture, and medical supplies. In-kind also includes donated items to be used in a fundraiser or auction and, in some cases, intangible property such as patents, copyrights, and securities.

Services that are considered in-kind donations include legal services, accounting services, IT services, transportation, and consulting. Also, free office space, media, or airtime, like a public service announcement, and free administrative services may be considered in-kind donations.

There are also circumstances where in-kind donations create an asset, such as when volunteers contribute their time and effort to build a home for low-income families or perform renovations.

What does not qualify?

Not all donated goods and services qualify as in-kind donations. Services that typically wouldn’t be purchased by the organization wouldn’t qualify as an in-kind donation. A donated item earmarked to another organization wouldn’t be eligible either. Also, volunteer hours are not necessarily in-kind unless the volunteer provides a specialized skill like a lawyer, accountant, or computer specialist, for example. Also, volunteers who help manage the public at a fundraising event or read aloud in a classroom wouldn’t qualify as in-kind services, even if the person performing the volunteer hours has a specialized skill. Still, the activity is unrelated to their specific talent.

How should they be recorded?

Under GAAP, all contributions received should be recorded as revenue upon receipt, including in-kind donations. In-kind contributions should be recognized in the period the goods or services are received, at fair value. The Financial Accounting Standards Board (“FASB”) defines 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.” The value of the donation depends on the type of donation.

It is important to establish in-kind revenue and expense accounts in your chart of accounts to keep in-kind transactions organized and transparent. You may also want to consider adding multiple in-kind revenue and expense accounts if you have numerous types of in-kind donations. For example, when recording an in-kind donation for donated office space with a fair value of $40,000, you should record the following:

  • Debit rent expense $40,000
  • Credit in-kind contribution – rent $40,000

New pronouncement related to in-kind donations:

FASB has issued Accounting Standards Update (“ASU”) 2020-07, Presentation and Disclosures by Not-for-Profit Entities for Contributed Non-financial Assets. This ASU gives additional guidance on disclosure requirements of these types of contributions and adds transparency.

Specifically, the new guidance requires entities to present in-kind donations separately on the statement of activities. Disclosures in the footnotes related to in-kind contributions will be enhanced as follows:

  • Disclosure of contributed non-financial assets (in-kind) donations by category, for example, in-kind donation – supplies, in-kind donation – rent, in-kind donation – professional services.
  • Disclosure of how the in-kind contributions were used. For example, if the in-kind donations were used for program services, disclosures should identify the activities or programs that used this non-financial asset.
  • Disclosure on the valuation technique used to arrive at fair value of the in-kind donation, for example, disclosing the methodology used to determine the fair value of donated rent.

The requirements under ASU 2020-07 should be applied on a retrospective basis, and the effective date is for annual periods beginning after June 15, 2021.

Contact your Whittlesey Advisor with any questions.

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