In-kind contributions, or gifts-in-kind (GIK), play a critical role in supporting not-for-profit organizations’ program activities and mission goals. Accurately recognizing and valuing these nonfinancial contributions has long been a challenge. Changes to the reporting standards for in-kind contributions highlight the need for not-for-profits to be thorough, transparent and strategic in how they report these assets. Not-for-profit boards and executives should regularly review their internal practices to ensure you remain in compliance with updated reporting standards.
Challenges with In-Kind Contributions
Valuing nonfinancial gifts is often harder than it seems. Unlike cash contributions, the value of in-kind contributions, such as donated goods, services or property, is less straightforward to calculate. Knowing how and when to recognize GIK is difficult, especially if the asset is subject to donor or legal restrictions. Donor restrictions may impact the classification of a nonfinancial asset, while legal restrictions could affect its valuation.
Determining Fair Market Value
There’s been skepticism from some watchdog agencies, donors and regulators over how not-for-profit organizations would determine the value of gifts-in-kind. There may be times when your organization is gifted an item that you would otherwise not buy, so you’re unfamiliar with the markets for those items. Or you may be gifted an item that doesn’t trade in active markets that publish pricing information. Look at markets that you can see, look at observable transactions and make a good faith estimate on the fair market value based on that information.
Understand that your organization will need to regularly check new market data to keep you updated about any unexpected shifts in the market. The markets typical GIK transact in aren’t static, they change continuously.
To prevent donors from making gifts to your organization that run counter to your mission or that have no practical use, consider implementing a strong gift acceptance policy. You can steer would-be donors towards the gifts that would benefit you the most, and they’ll appreciate the guidance.
Establishing GIK Categorizations
Many factors can impact how GIK are reported, including how the asset is classified. If your organization has a strategic partnership with outside organizations to provide necessary GIK to beneficiaries, you may have to determine if your not-for-profit organization is acting as an agent, either for the donor or the partner, or if the GIK received should be considered a contribution.
In some cases, a not-for-profit may make a payment in association with obtaining an asset. You’ll have to determine whether the transaction was a purchase, meaning an exchange of equal values, or if it was, in part, a contribution. The transaction could be considered a contribution if your not-for-profit made a nominal payment for a GIK with a substantially higher value than what you paid.
For example, a company decides to donate a piece of land to your organization in exchange for a $10,000 payment to help cover some of the costs. The land is valued at $100,000, which means you received $90,000 of value without paying, making it a contribution. Paying $90,000 for land worth $100,000 would be considered more of an exchange transaction.
Updated Reporting Standards for In-Kind Contributions
The introduction of ASU No. 2020-07, Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets, brings much-needed clarity to how NFPs should report GIK. These standards, effective for annual periods beginning after June 15, 2021, and interim periods after June 15, 2022, enhance transparency and provide more detailed disclosures around nonfinancial contributions. While the underlying accounting hasn’t changed, the reporting process has.
Separate Line Item for GIK
NFPs are now required to present contributed nonfinancial assets as a separate line item on the statement of activities. This ensures clear visibility into the role GIK plays in the organization’s operations.
Disaggregated Reporting
Not-for-profits must disclose the total amount of GIK received, broken down by category, such as donated goods, services or real property. Each category must also include additional qualitative information, such as whether the asset was monetized or utilized in the reporting period.
If GIK is used within the organization rather than sold, not-for-profits must disclose the programs or activities in which those assets were used. If an organization chooses to monetize GIK, they need to disclose their policy on doing so, typically through a well-structured gift acceptance policy.
Valuation Techniques
Not-for-profits must describe the valuation techniques and inputs used to measure the fair value of each type of GIK at initial recognition, in line with Topic 820 on fair value measurement. Understanding where and how the fair value was determined is crucial. Any donor-imposed restrictions on GIK must be described, clarifying how these restrictions affect the organization’s ability to sell or use the contributed assets.
In-kind contributions are an increasingly vital component of corporate giving programs, and as not-for-profits continue to rely on these gifts to further their missions, the need for accurate, transparent reporting becomes more important than ever. By staying up to date with the latest standards and employing thoughtful valuation techniques, not-for-profits can demonstrate the true impact of their nonfinancial contributions while maintaining trust with donors, regulators and stakeholders.
Anders Not-for-Profit advisors work with organizations like yours to help ensure your not-for-profit remains compliant and focused on fulfilling your mission. To learn more about our services, and the associated cost, request a meeting below.
