Gifts or donations given to your organization are synonymously referred to as contributions or in-kind contributions. In-kind contributions are goods or services other than money that are donated to your organization. This could include items such as furniture, supplies, rent, legal services, or consulting services.
Some of the donations, if not all the donations listed above could be a huge blessing in sustaining and propelling your organization and its mission. So, celebrate when this happens! However, in the midst of the celebration, you will want to have procedures set in place to properly document and understand the terms of each donation. In this blog we will offer procedures that will help you set your financials up well and strengthen your relationships with donors and the community you serve.
Steps to Take When You Are The Recipient of In-kind Goods or Services
In-kind goods and services may appear at any moment throughout the year. In order to accept the gift well and set your financials up for success, have steps set in place! The first thing to do when an in-kind contribution is given, is to document it. Best practice will be to keep a list of all items and services that are donated to your organization. In the duration of this section, we will outline steps that we recommend following in order to track donations.
- Determine if your contributions are restricted or unrestricted – Once documented, a primary step to take is to speak with the donors. There may be restrictions that need to be followed in order to use the donated goods or services. So, make sure you are clear on the terms. Restricted contributions are those given with a particular purpose that can only be used for that purpose or within a specific time frame (i.e. Jan-Dec 2022). Unrestricted contributions are those given without any specific guidance, so the organization may use them as they see appropriate within.
- Obtain an invoice or other support – You will want to ask donors for an invoice or a supporting document that includes the monetary value of the goods or services that were donated. Donations must be recorded at fair market value which is what someone else would pay for the item or service. So, the invoice from the donor should tell the organization how much the donation is worth.
- Keep track of your contributions – Once you have documented and understood the terms of the in-kind contribution, you will want to track how your organization will be using them to outline how the donations are supporting the mission of the organization. Are they going to be used to support an organization program, to support the staff within the organization, or something else? Intentionality from the beginning will set the course for success.
In-Kind Contribution Examples
In this section we will walk through four examples of common in-kind contributions where we will apply the steps outlined above that your organization may want to take if in a similar scenario:
Example #1 – Let’s say your not-for-profit organization has legal questions and requires the services of an attorney. The attorney offers their services free of charge to your organization because they want to help support your mission. Awesome! This service is now considered an in-kind contribution.
- Determine if your contributions are restricted or unrestricted – With this example, there are generally no donor restrictions that accompany an attorney’s services.
- Obtain an invoice – Obtain an invoice or find the fair market value for the service performed multiplied by the number of hours worked by the attorney. The attorney should be able to provide an invoice detailing the cost of the services provided to you, if they would not have been donated.
- Keep track of your contributions – Track who is being benefited. In this scenario it would be the not-for-profit organization as a whole. So no further tracking is necessary.
Example #2 – A not-for-profit organization may receive a discount on their rent. What is commonly seen is that the organization will be charged $1 a month. Due to a significant discount given, this would be considered an in-kind contribution.
- Determine if your contributions are restricted or unrestricted – Since this scenario benefits the not-for-profit as a whole, it is generally given without any donor restrictions.
- Obtain an invoice – First, determine the square footage of the space being rented. Then, find the fair market rate by using a website such as Zillow that will show comparable rates within your area or similar locations. To determine the fair market value of the office space, multiply the square footage by the fair market rate.
- Keep track of your contributions – Track who is being benefited. In this scenario it would be the not-for-profit organization as a whole. So no further tracking is necessary.
Example #3 – Vehicles can be necessary for a not-for-profit to expand their services throughout the community. It’s common that a not-for-profit will receive older vehicles from donors who want to support the work being done. This is great! Since the vehicle has been given free of charge, it would be considered an in-kind contribution.
- Determine if your contributions are restricted or unrestricted – This example can be either restricted or unrestricted. Lets say a vehicle is given to the not-for-profit with a statement that it is for youth transportation to and from after school programs hosted by the not-for-profit. This specification creates a restriction on the contribution. The vehicle can then only be used for this specific purpose.
- Obtain an invoice – For vehicles, a not-for-profit will commonly use online appraisals or websites, such as Kelley Blue Book to determine the fair market value of the vehicle.
- Keep track of your contributions – Tracking would consist of documenting how the vehicle will be utilized by the organization. In this example, the vehicle would be used for youth transportation to and from after school programs hosted by the not-for profit since the donor of the vehicle specified what the in-kind contribution can be used for.
Example #4 – Office equipment can be extremely helpful to a not-for-profit in order to increase efficiencies and serve more people in the community. Many organizations receive office equipment, such as computers, from donors who want to support the work being done by the not-for-profit. This is great! Since the items are commonly given free of charge, they would be considered in-kind contributions.
- Determine if your contributions are restricted or unrestricted – This example can be either restricted or unrestricted. Lets say a company provides computers for an organization. If they simply donate the computers, it would be unrestricted since this contribution benefits the not-for-profit as a whole. However, if the donor communicates that the computers are for the youth to use to complete school work and to play computer games on after school, then the computers would be restricted.
- Obtain an invoice – For computers and other office equipment, a not-for-profit can usually find a similar product online and utilize this price online in order to estimate the fair market value of the computers.
- Keep track of your contributions – Tracking would consist of documenting who is utilizing the computers. If the computers are simply donated to the organization, no tracking is necessary since the benefit goes towards the organization as a whole and they can use the computers in any way the not-for-profit chooses. If the donor communicates that the computers are for the youth to use to complete school work and to play computer games, the computers are restricted to this use only.
Why Your Organization Should Implement These Steps Now
Implementing the steps provided can strengthen potential partnerships with donors. When donors / readers of the financial statements know how their donations are being used, they are far more likely to partner with you in the future. Additionally, the steps outlined above are not only best practice, but a new accounting standard. Accounting Standards Update, Presentation and Disclosures by Not-For-Profit Entities for Contributed Nonfinancial Assets (ASU 2020-07) will now require additional footnote disclosures for donated goods and services. This standard will be taking full effect at your year-end in 2022. Although we are currently in 2021, your organization will be best served if they implement these steps and think about the process now. The new accounting standard requires retrospective application. This means that if your financial statement report includes two years of data; the current year (2022), and the previous year (2021), the new footnote disclosures for in-kind contributions will need to be presented for both years of data.
Friendly Auditors, Here to Serve!
As you navigate and implement in-kind contributions steps for your organization, know that we are here to provide any clarity you may need! If you have questions about your donations, or anything else please contact us. We are always happy to serve!
