Publication Date: Summer 2011
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In-kind donations are a welcome source of support for many nonprofit organizations, but they can present some accounting challenges. The inconsistency between GAAP and tax recognition requirements, difficulty in capturing the information needed to accurately record the transactions, and the uncertainty in determining the value of the contributions all make this a problematic area for many organizations.

Donated Goods

On the surface, the simplest type of noncash contribution to account for is the donation of goods. This type of transaction requires recognition (if material) for both GAAP financial statements and tax reporting and should be recognized at fair value. Determining fair value is not necessarily simple, particularly when the goods are used or are unique. Fair value can be determined using a market approach, income approach or cost approach.

For contributed goods, the market approach is generally the most relevant. For example, the value of a contribution of new office supplies could be determined by looking at the cost of the items from a large office supply retailer. Used goods may have an active market on eBay or other online shopping sites.

Very unique items may require an appraisal to determine fair value. When the value of noncash contributions exceeds $500, the donor must file IRS Form 8283 and may be required to obtain an independent appraisal.

Any noncash contribution has both a revenue and expense side. Certain items may be retained in inventory before being utilized. The expense should be recorded for what it is, such as supplies expense, rather than within a catch-all “in-kind donations” expense line item. Like expenses incurred through cash transactions, these expenses need to be allocated on a functional basis.

Donated Auction Items

GAAP requires that items received for fundraising purposes be recorded at fair value at the time of the contribution, but any difference between the amount actually received from the ultimate purchases should be recognized as adjustments to the contribution amount. For practical purposes, most organizations do not record the contribution when the goods are received, but wait until the ultimate “sales” transaction takes place at auction.

The expense side of this type of transaction is “direct benefit to donors.” Accordingly, this can either be reported as a deduction from event revenues on the statement of activities, or within the expense section as a fundraising expense. Reporting as a deduction from event revenues will have less of an impact on an organization’s support services ratio.

Establishing a system to capture in-kind contributions can also be an obstacle to proper revenue and expense recognition. Given that there is no cash transaction involved, it is easy to overlook these transactions. When noncash contributions are not material, they need not be recorded. If they are significant, the information needs to be gathered and the revenue and expense must be recorded.

To make it simpler to capture information and calculate fair value, organizations that receive similar recurring donations can set up a form with current values for commonly-contributed items. For example, an organization that collects clothing and household goods for needy families could establish approximate values for clothing items and use this estimate on a form to allow for easy calculation. The Salvation Army maintains a listing of common items with a range of values on its website.

Donated Services

Donated services are not included within revenue or expenses on an organization’s Form 990 and can only be recorded for GAAP when the contributions meets one of two conditions:

  1. The services create or enhance nonfinancial assets, or
  2. The services require specialized skills, are provided by someone who actually possesses those skills, and would have to be purchased if not donated.

The use of the phrase “nonfinancial assets” is there to exclude volunteer time devoted to fundraising activities. For most organizations, this is advantageous anyway, since recording volunteer time for fundraising would result in a corresponding fundraising expense. Nonfinancial assets would include construction on real property, development of internally-developed software, and other activities that could be capitalized.

GAAP defines specialized services as those that “require expertise that is not possessed by most members of the general public or that require an individual to be licensed to practice the profession or craft.” A common example is contributed legal services, but other types of professional services could be recognized as well. The key is that all three criteria for specialized services be met.

An attorney may have the specialized skills to rewrite an organization’s bylaws, but the organization may not have been prepared to pay for such a revision. If the attorney volunteers to answer calls on a crisis hotline, the attorney is probably not using the specialized skills for which attorneys are recognized.

GAAP’s prohibition on recognizing contributed services that don’t require specialized skills is a problem for organizations that depend heavily on the use of volunteers to carry out their missions.

Consider two similar organizations providing tutoring services to children. Organization A hires tutors to provide the services. In 2010, Organization A provided 24,000 hours of tutoring with the tutors paid at $25 per hour. Organization B recruits volunteers and trains them to provide the services. In 2010, Organization B provided 30,000 hours of tutoring through volunteers. Organization B paid two staff members to train the volunteers and coordinate services. Assuming a similar cost of administrative personnel and a reduction in cost for fundraising due to a lower need for cash contributions, Organization B is likely to look less “efficient” using the program support ratio. This example can be seen in the table below.

Hired Organization A Volunteer Organization B
Program Costs
# of hours
Hours per week
Number of weeks
Number of tutors
Cost of Services
Fair value of services (unrecognized)

GAAP encourages organizations to disclose the value of services provided by “unspecialized” volunteers within the footnotes to the financial statements. The difference in treatment reduces comparability between organizations that hire staff and those that rely on volunteers, so organizations using volunteers should make the effort to disclose the estimated value and consider highlighting this activity within their annuals reports.

Donated Facilities

GAAP requires the use of donated facilities (rent) to be recorded. The IRS prohibits this. Rent should be recorded at fair value, which can be estimated using published sources of commercial real estate market data. Donated facilities may also include donated services (such as janitorial, room setup, etc.). These related services would most likely not qualify for recognition under GAAP unless, of course, they required specialized skills.

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