This article was originally published on Apr 26, 2017, and later updated based on the latest accounting standards.

Nonprofits routinely receive non-cash gifts, called in-kind donations, from donors who support the organization’s mission and programming. Fundraisers make generous use of donated goods and services to cover event costs and fill their portfolio of auctioned items. Development officers graciously receive real property, financial instruments, and other goods that can be converted to cash or used by the organization directly to support its programs and operations. Subject matter experts often lend their time and talents at no charge to spare the organization the cash outlay for such services.

If your nonprofit prepares financial statements according to Generally Accepted Accounting Principles (GAAP), then all in-kind donations must be captured and reported appropriately in the organization’s financial records. This standard applies to organizations that are subject to an annual audit by an independent accountant.

It may also be required by state law or by terms and conditions set by lenders, grantors, and other key constituents. If the organization is not audited and only files a 990, in-kind contributions of property (but not of services) must be reported. However, it can be helpful internally to track service contributions to measure the community’s involvement with the organization.

In-kind donations—also called gifts-in-kind, donated services, or in-kind contributions—are goods and services used to carry out the nonprofit’s mission. They enable nonprofits to accomplish more than their budget and resources would typically allow. For example, in-kind donations for a fundraiser might include the use of event space, catered food, entertainment services, sound and lighting equipment rental, and items to be auctioned. Without these donations, the organization would have to increase its cash outlay dramatically to produce the same event.

Many nonprofits rely on in-kind donations, either by using the contributions for programs and operations or monetizing them. Goods can take many forms, including but not limited to:

• Financial securities that can be traded on the open market and converted to cash
• Free or discounted use of facilities for operations, programs, or events
• Office furniture, shipping supplies, computers, hardware, and software used for operations
• Clothing, sports equipment, vehicles, food, and medical supplies used for programs and services
• Items to be sold in auctions or use of property, such as vacation rentals, for resale

Nonprofit organizations should have a gift acceptance policy that will help the staff know which types of gifts are acceptable and which ones need further evaluation. Every non-cash gift should be evaluated to determine its usefulness to the organization before it is accepted. Otherwise, the organization could end up with something that requires a lot of work for little value.

Contributed services are not as clear-cut as goods because not all services qualify as in-kind donations. GAAP requires the fair value of donated services to be recognized in the financial statements if they meet either criteria:

• They create or enhance a nonfinancial asset.
• They require specialized skills provided by entities or persons possessing those skills and would be purchased if they were not donated.

Donated services that create or enhance a nonfinancial asset do not need to be specialized to be recognized. For a building project, contributed services might include contractors, engineers, painters, etc. The value of all these services should be capitalized as a cost of construction because they create or enhance a nonfinancial asset.

However, if the service provided does not create or enhance a nonfinancial asset, it needs to be a specialized skill to be recognized as an in-kind donation. Specialized services might be used for the operation of the nonprofit (e.g., legal or financial services, consulting, or subject matter experts), or for the nonprofit’s programs and initiatives (e.g., nursing, dentistry, or counseling).

Even board members may fall outside the bounds of in-kind treatment, despite their wealth of skills, expertise, experience, and community connections. Unless they provide services the organization would have otherwise paid for, they are simply committed volunteers. That being said, most nonprofits track their volunteer hours to provide evidence of community support.

Accurate reporting of in-kind donations starts with consistent, organization-wide policies and processes:

• Gift acceptance policy: Define which types of gifts are acceptable, and which need further evaluation. Every non-cash gift should be evaluated to determine its usefulness to the organization before it is accepted. Otherwise, the organization could end up with something that requires a lot of work for little value.
• Contribution categories: To ensure accurate tracking, create a list of categories used for in-kind donation reporting, and require that each donation received be assigned to its appropriate category when accepted.
• Valuation criteria: Create a clear set of valuation criteria for each commonly received category of in-kind donations, including the principal market. For example, you might use wholesale values for bulk donations (e.g., clothing or household goods) but retail values for single-item contributions (e.g., a vehicle or use or property).
• Monetizing policy: Stipulate when in-kind donations are used for organizational purposes and when they are to be monetized. Some categories may never be monetized (e.g., food or personal care supplies).

Reporting in-kind donations starts with recording the fair market value when the donation is received. In most cases, this is relatively straightforward, and your valuation criteria should guide the process. For tangible goods, refer to prices in the principal market. For contributed services, ask for standard rates from service providers. Check the day’s closing valuation for a marketable security. For an item without a ready means of independent valuation (e.g., a work of art), the donor can provide a good-faith estimate. If the value exceeds $5,000, an independent appraisal is required.

Nonprofits must also follow the standards set out in the Accounting Standards Update (ASU 2020-07):

1. Report nonfinancial in-kind donations as a separate line item in the statement of activities.
2. Report in-kind donations in categories.
3. Disclose five key items for each category of in-kind donations.

The categories used in reporting can be broad; if your contributions categories are reasonably specific (e.g., furniture, bedding, cleaning supplies), gather them into one broader category (household goods) for reporting purposes. For each category, your organization must disclose the following information:

1. How the in-kind donation was monetized or utilized during the reporting period. If the donation was used, include a description of the programs or other activities in which the assets were used.
2. The monetizing policy (if any).
3. Any donor-imposed restrictions associated with the contributed nonfinancial assets.
4. The valuation techniques and inputs used to arrive at a fair value measure.
5. The principal market (or most advantageous market) used to arrive at a fair value measure if it is a market in which a donor-imposed restriction prohibits the nonprofit recipient from selling or using the contributed nonfinancial assets.

If your organization creates policies and procedures for accepting gifts-in-kind, much of the reporting work will already be done.

Donor-imposed restrictions may affect the usage of the donated goods, but not their fair market value. For example, a contribution of medical supplies may be donor-restricted for use in a certain program outside the U.S. However, the fair market value of those supplies in the principal market is unchanged. On the other hand, certain timelines or legal restrictions may prohibit the asset from being used or sold in a way that does affect its value. For example, a donated property with protected historical status may have restrictions that limit buyer interest, and thus affect the property’s valuation.

Be wary of missing in-kind contributions such as discounts or bargain purchases, which create inherent contributions. For example, if your nonprofit purchases a $100,000 piece of land for a fraction of its value, the discrepancy must be reported as an in-kind donation.

It can be overwhelming to keep up with the requirements for in-kind gift reporting. However, don’t make the mistake of turning away valuable and helpful contributions—it’s far better to get trusted professional help with the reporting process. Allow your nonprofit to benefit—and to benefit the surrounding communities—from the array and value of in-kind donations. If you have questions about in-kind donations, contact your Aldrich Advisor.