Gifts-in-kind. That is a snappy little phrase. As a nonprofit organization, you run into these words when considering your revenues and income sources. And, as a charitable organization, you smile and welcome any gifts-in-kind (GIK).
Exactly what are gifts-in-kind? They are generous donations that are not cash, money, moolah. They are value added to your proceeds that go to support your mission.
Even though these donations are not cash, they supplement your cash assets. Non-monetary gifts help because they often provide goods and services for which your organization would have to pay.
When your organization receives GIK, it reports the contributions in accordance with the Financial Accounting Standards Board (FASB) rules for GIK. There is a fair value structure for determining the worth of the gifts.
Proper reporting of GIK is an important aspect of financial responsibilities of your organization. It is wise to adhere to the policies aligned with generally accepted accounting principles.
Gifts-in-kind wears many faces. They can be clothing, food, stationery supplies, toys, and services. These non-cash donations are an important component of your organization’s revenue. These non-cash contributions help you move forward to reach your goals.
GIK is one way many supporters prefer to give to your cause. It is up to your organization to assign a fair value to these gifts. It is wise not to over-value these non-financial assets. It is beneficial to directly relate the value of the GIK to the organization’s mission.
Determining Fair Value for Gifts-in-Kind
In 2006, the FASB issued its fair value measurement standard (FASB Statement 157, and later FASB Accounting Standards Codification [ASC] # 820, Fair Value Measurement). These standards recognize the fair value of contributions.
Valuing gifts is different from straightforward cash donations. Consider the variety of gifts-in-kind: office supplies, food, used clothing and household goods, medical equipment, and even pharmaceuticals. The standard is an effort to measure fair value.
Accurate valuation and revenue recognition of gifts-in-kind are tricky to determine. Often, your organization uses these gifts for program implementation and events, and does not sell them in the marketplace.
Challenges and issues involving the value of GIK assets
The fair market value of GIK are estimates. This can pose a problem. Many watchdog groups and regulators keep a keen eye on your organization and its GIK. Some people scrutinize the recording of the value of GIK. These assets result in revenues and expenses that are added to the financial statements of your organization, yet these do not come from cash receipts and cash payments. These computations demonstrate how much your organization depends on these assets to attain its mission.
With proper recognition, GIK can greatly broaden the value and contribution to your goals. When GIK are such that they save your organization from expending money on supplies, goods, services, items for your community, and other things you would have to pay cash for, this frees your cash reserves to be used for other objectives.
Some donors place restrictions on their contributions. Sometimes, there are legal restrictions. Donor limitations affect the classification of net assets but do not impact the measurements of fair value.
Occasionally, your organization may make a payment in order to obtain an asset. Your need to determine if this transaction is a purchase (exchange of equal values) or if is a partial contribution or a supposed payment for something with greater value.
For example, a local car dealership provides your organization a minivan with a fair value of $30,000 for transporting disabled children on trips, but the dealership requires that your organization provides $10,000 in exchange for the vehicle. The transaction is a contribution because the nominal fee paid is less than the value of the vehicle. Your organization would realize a $20,000 contribution.
Sometimes, your organization deals with items it would not ordinarily buy. Naming their market value and estimating the worth is challenging. The organization may be unfamiliar with the fair market value. In these cases, your organization should make an estimate of the fair value based on research.
Your organization needs to continue researching the market value of goods and services, and keep up-to-date on fluctuations and increases in values.
The information your organization relies on for valuing GIK donations must be honest and trustworthy.
Things to keep in mind when valuing your GIK
Make sure your information and data you use for the valuation are reliable. Gather your data from a verifiable impartial source.
You want the value to reflect the true wholesale market prices. A value provided from the donating source is not objective. For example, if Boom Boom Brothers Auto Repairs donates a repaired used automobile to your organization that is has listed for $18,000 on the Boom Boom website, a value to your organization from Boom Boom would not be a reliable valuation. In a situation like this, complete documentation would need to be supplied to substantiate the $18,000.
Another example is a family whose children have outgrown their car seat, crib, tricycles and miscellaneous toys. These can be valued at a sum far below the going market price: the value should include deductions for wear and tear, damage, missing parts, etc.
Be cautious when reporting large amounts of GIK worth on your financial statements. Be wary of a GIK total that is more than 80 percent of your total revenues and expenses.
Valuation
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Warning:
Accounting Geek-Speak
ahead!!!
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Let's delve more into valuation of fair value for your GIK with four valuation areas that the FASB ASC 820 addresses.
1. Market participants
Your organization may hand out GIK free of charge or for a slight fee to your beneficiaries that can use goods or services to which they usually do not have access. These beneficiaries are not market participants. Also, the fees you charge are not top prices for using the goods or services. Participants in these transactions are individuals who would purchase the products at the market price. Some of the potential participants could be other not-for-profit organizations, government agencies, or other businesses.
2. Principal or best source of market
Your principal market is the market with the most volume and high-level of activity for the product. Use data from this market group to determine the market value. This market brings the maximum amount of cash for the asset.
GIK that involve toys, clothing, furniture and similar donations may be in the most advantageous market where your organization can sell assets for more value. On these goods, there are some entity restrictions that prohibit your organization from selling the asset. In those cases, your organization does not need to be able to sell the particular asset or transfer liability on the measurement date to be able to measure fair value on the market price.
One interpretation of FASB ASC 820-10-35-6B states that the reporting entity does not need to be able to sell the particular asset or transfer the liability on the measurement date to be able to measure the fair value on the basis of the market price.
Some limitations provide a larger deduction to the donor if the items are to be used rather than sold. This situation, and donor-imposed restrictions limiting the geographical area in which your organization can distribute GIK, creates restrictions specific to the entity. These characteristics are not typical of the asset being transferred to market participants, such restrictions would not be considered in pricing the asset.
3. Tips on valuation methods
After you identify your appropriate marketplace, you need to pick out the source for your exit prices in that market. Accounting standards give you broad and general guidance. It is challenging to determine the value of donated assets.
You need to look carefully at your donated items and analyze their typical use. A good idea is for your organization to set a policy and procedure for receiving, storing, and valuing your GIK donations. You can assess and record the details of each contribution. Refer to the GAAP guidelines.
This is a subjective effort, and thus recording the assessment process is vital. Occasionally, you will need to update and adjust your valuations. The difference between a source price (list price from a seller) and an exit price (sale value) fluctuates over time.
Example taken from the AICPA Audit and Accounting Guide Not-for-Profit Entities recommendations:
If your organization receives a wholesale quantity GIK, but you can only locate retail values to consider in the valuation, you usually would apply the wholesale valuation. Also, if the GIK has expiration dates that are earlier than those of products sold in the marketplace, or if technology has made the donation obsolete or less-desirable than products sold in the marketplace, you should apply a discount.
For some GIK valuations, there is a range of valuations available and these can alter the worth of the items. Some organizations do not have the resources and finances to obtain these market values. Your organization needs to consider the cost of obtaining the valuation information.
4. Relying on hypothetical markets
In many cases,organizations refer to markets and transactions that are based on conjecture. For some GIK, this is the most effective method of determining value. You can figure the value of the goods and services based on the most-likely market. In other words, if your organization does not have the ability to sell in any market, FASB ASC 820-10-35-6C states:
Even when there is no observable market to provide pricing information about the sale of an asset or the transfer of a liability at the measurement date, a fair value measurement shall assume that a transaction takes place at that date, considered from the perspective of a market participant that holds the asset or owes the liability. That assumed transaction establishes a basis for estimating the price to sell the asset or to transfer the liability.
Valuing Goods When There is No “Buyer”
Donated gifts-in-kind are valued at the time of the donation on the date of donation. Fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.
If a supporter contributes a large number of the same item, fair market value is the price at which comparable numbers of the item are being sold.
Goods and services from GIK may not always have a buyer or someone to receive the goods. In this case, the organization establishes a generic value or a base utility.
Considering the base value includes the “future economic benefit or service potential” (ASC 958-605-25-5). This information should be factored into the value.
Your nonprofit organization is the ultimate responsibility for determining the fair value you report on your financial statement. The organization should establish a gifts-in-kind policy for valuations. Management should be prepared to support its valuations.
If you have questions about valuing your gifts-in-kind and reporting them in your financial documents, keep in touch with our blog. We have ideas to share and solutions to management and organizational queries. If you have questions about any other not-for-profit industry topics, contact our not-for-profit team leader at trent@tbfosteraccounting.com.
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