Financial statements: Don't forget non-cash contributions. (Accounting).
What may be less clear is that contributions of other types of assets, or even of a person's time, may also have to be quantified in terms of dollars and cents and included in the financial statements.
Non-cash contributions may actually be received in a variety of different forms. A donor's services, for example, might be applicable to any of a wide range of a nonprofit entity's activities, both program and administrative. The most common non-cash donated assets (frequently referred to as gifts-in-kind) tend to be marketable securities; items from a business donor's inventory, such as food or articles of clothing. The nonprofit may use the items or sell them to others. A donor may contribute a work of art, which the nonprofit may display or sell, based on the donor's stipulations. Or, the contribution may simply be the use of property, such as a building, with legal title never passing to the nonprofit.
The benefit received might even be intangible, such as when a donor contributes (or pays for) an organization's electricity or telephone usage.
Although financial-statement recognition of donations of services and non-cash assets has long been a requirement for nonprofits, Statement of Financial Accounting Standards No. 116, Accounting for Contributions Received and Contributions Made, issued during the mid-1990s by the Financial Accounting Standards Board (FASB), defined more clearly the circumstances for such recognition.
With regard to donated services, the FASB mandated calculating value "if the services received (a) create or enhance non-financial assets; or (b) require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation."
Statement No. 116 also cited "accountants, architects, carpenters, doctors, electricians, lawyers, nurses, plumbers, teachers and other professionals and craftsmen" as examples of those who provide those specialized skills.
Of course, the financial effect of donated services or assets must be material to the financial statements to be of concern to the nonprofit. Also, an important exception to the recognition rule is the often significant time routinely contributed by those skilled persons who are also members of the organization's governing board. A board member who is also a skilled professional may continuously provide the benefit of knowledge and experience to the nonprofit.
But, financial-statement recognition is not necessary in that case in the absence of a project or transaction that would require the board member's involvement and concurrent donation of time beyond that generally expected from a board member.
Valuing a contribution
When a nonprofit receives a contributed service that meets the criteria for recognition, for example, pro bono legal assistance from an attorney, it has a responsibility to record that service as revenue using the "fair" or "market" value of the service. That typically is the amount which the organization would have had to pay in cash, had the lawyer not contributed the time.
At the same time, the nonprofit would recognize the related legal expense that it incurred, in the appropriate program or administrative category, depending on why the legal services were necessary. The impact on the difference in total revenue and expense for the operating year is not changed, although the nonprofit must adequately describe in the financial statements the programs or activities for which the donated services were used.
FASB Statement No. 116 also encourages the entity to disclose the fair value of any contributed services received but not required to be recorded.
The valuation of donated assets is essentially the same as for donated services, and those assets which the nonprofit may use or sell should be recorded at their fair values. Ideally, that would be the quoted market price, or, in the absence of a market price, the asset's replacement cost, its independently appraised value, or its discounted future cash flow.
However, if the organization receives contributions of works of art or historical treasures that are to be added to the organization's collection, then the donation need not be recognized in the financial statements. This treatment requires that the donated pieces are (a) held for public exhibition, education or research in furtherance of public benefit; (b) protected, cared for and preserved; and (c) subject to the policy that requires the proceeds from any future sales to be used to acquire other items for the collection.
The treatment in the financial statements is also similar. If the assets are used in the operating period in which they are received, a corresponding expense will be provided; otherwise, long-lived assets will be placed on the organization's statement of financial position (balance sheet) and subsequently accounted for as any purchased asset would be.
When contributed utilities or the use of, but not title to, a long-lived asset is received, the nonprofit would recognize contribution revenue in the period in which the contribution is received. It is discounted to present value, based on the expected term of the donated benefit, at a reasonable rate of interest. However, the corresponding expense would be recognized in the periods the utilities or long-lived assets were actually used.
Donor tax deductions
An individual donor's gift of cash or other assets to a qualified nonprofit is deductible under federal and state tax laws, subject to various limitations. However, the value of services rendered to a nonprofit is not deductible, although certain unreimbursed expenses, such as for telephone usage, are deductible as a contribution.
Likewise, deductions are allowed for federal purposes for transportation or other travel expenses, including meals and lodging, for services performed away from home on behalf of a charitable organization, as long as there is no significant element of recreation or vacation involved.
Contributions of cash and non-cash assets in amounts of $250 or more must be substantiated by a written acknowledgment from the donor, which includes a description of any non-cash assets received and an estimate of the value of the goods or services, if any, provided by the nonprofit in exchange for the donation.
As a rule, nonprofits have not been enthusiastic about recording donated services and assets. Some critics believe that the cost of gathering information - which may include developing time sheets to capture volunteer time, as well as the effort necessary to determine fair values -- exceeds the informational benefit. Others have been concerned that key ratios and evaluations points might be distorted by the inclusion of subjective data.
Nonetheless, the accounting rule makers reached the conclusion that the true economics of a nonprofit were not discernible unless financial-statement users could determine the extent to which the organization relied on donated time and resources. Through the years, some nonprofits have not recognized donated services in particular and have included comments in their notes to financial statements such as "The value of donated services is not included in these financial statements as it was not practicable to determine the value of such services."
Actually, it is usually quite practicable to determine the value of donated services and assets, it just takes a bit of work and the acceptance of the view that nonprofit financial statements are more valuable when they reflect all of the organization's financial resources, regardless of their source.
D. Edward Martin, MBA, CPA, is the partner-in-charge of the accounting and consulting firm of Richard A. Eisner & Company, LLP. Julie L. Floch, CPA, is a partner and the Director of Not-for-Profit Services at Eisner. Martin is an adjunct professor at Pace University and Baruch College/CUNY. Floch is adjunct faculty at Baruch College and the New School University, is a member of several not-for-profit task forces of the American Institute of CPAs, and chairs the Not-for-Profit Committee of the New York State Society of CPAs.
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|Author:||Floch, Julie L.|
|Publication:||The Non-profit Times|
|Date:||Feb 15, 2002|
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