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Financial statements: Don't forget non-cash contributions. (Accounting).

The nonprofit that is fortunate enough to receive cash contributions, or unconditional promises from donors of cash in the future, now knows that generally accepted accounting principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records.

Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting

See: Generally Accepted Accounting Principles


See generally accepted accounting principles (GAAP).
) require these gifts to be included as revenue in the statement of activities, the nonprofit equivalent of an income statement.

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

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 Marketable Securities

Very liquid securities that can be converted into cash quickly at a reasonable price.

Marketable securities are very liquid as they tend to have maturities less than one year, and the rate at which these securities can be bought or sold has
; 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 Financial Accounting Standards Board (FASB)

Board composed of independent members who create and interpret Generally Accepted Accounting Principles (GAAP).

See: Financial Accounting Standards Board


See 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 Noun 1. governing board - a board that manages the affairs of an institution
board - a committee having supervisory powers; "the board has seven members"
. 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 Short for pro bono publico [Latin, For the public good]. The designation given to the free legal work done by an attorney for indigent clients and religious, charitable, and other nonprofit entities.  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 legal services n. the work performed by a lawyer for a client.  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 FASB Statement

A standard set by the Financial Accounting Standards Board regarding a financial accounting and reporting method. Essentially, FASB statements determine the acceptable accounting practices that Certified Public Accountants use in reporting
 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 An appraised value (USA) or mortgage valuation (Australia) pertains to the assessed value of real property in the opinion of a qualified appraiser or valuer. It is usually used as a pre-qualification & risk-based pricing factor related to the issuance of mortgage loans by a , 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 fur·ther·ance  
The act of furthering, advancing, or helping forward: "Pakistan does not aspire to any . . . role in furtherance of the strategies of other powers" Ismail Patel.
 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 other assets

Assets of relatively small value. For financial reporting purposes, firms frequently combine small assets into a single category rather than listing each item separately.
 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 This article is about charitable organizations. For other uses of the word charity, see Charity.
A charitable organization (also known as a charity) is an organization with charitable purposes only.
, 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
For the U.S. Representative from Delaware, see Edward L. Martin

Edward Martin (September 18, 1879–March 19, 1967) was an American lawyer and Republican party politician from Waynesburg, Pennsylvania.
Master of Business Administration

Noun 1. MBA - a master's degree in business
Master in Business, Master in Business Administration
, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , is the partner-in-charge of the accounting and consulting firm Noun 1. consulting firm - a firm of experts providing professional advice to an organization for a fee
consulting company

business firm, firm, house - the members of a business organization that owns or operates one or more establishments; "he worked for a
 of Richard A. Eisner & Company, LLP LLP - Lower Layer Protocol . 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 Baruch College: see New York, City University of.  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 New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of
 State Society of CPAs.
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Author:Floch, Julie L.
Publication:The Non-profit Times
Geographic Code:1USA
Date:Feb 15, 2002
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