In-kind Contributions – When and How to Record Them

Who doesn’t love getting free stuff? In the nonprofit world, they have a special name for the free stuff they receive: it’s called an in-kind contribution. What is considered an in-kind contribution can vary drastically depending on the situation. Some of the most common in-kind contributions are pro bono legal services, free consulting, donated vehicles and free equipment (computers or office supplies.) Many of these in-kind contributions are a part of everyday life for a nonprofit, so how and when they should be recorded is important.

What is an In-Kind Contribution?

Before we can detail the when and how to record an in-kind contribution it might be helpful to first define what an in-kind contribution is. The definition is simple: an in-kind contribution is any free service or free item a nonprofit receives. However, there are some stipulations for donated services:

• If someone who is a professional performs services related to their profession, which the nonprofit would otherwise have to pay for, then the nonprofit must record an in-kind contribution. But if the service has nothing to do with someone’s profession, they are just volunteering and there is no in-kind recorded. For example, if a lawyer does contract writing for free, that would be considered an in-kind contribution. However, if your accountant does some landscaping for free, there would not be any in-kind recorded. The difference in the two examples is how the service provided relates to their profession.
• A unique circumstance where an in-kind would still be recorded, even if the services are not relating to the service provider’s profession, is if the donated services create a nonfinancial asset. For example, if the services create a trademark or patent.

In-kind gifts that nonprofits commonly miss recording include:

• Donated advertising and radio time
• Donated facilities and utilities (for example – not having to pay for conference space)
• Below-market interest rates
• Discounted purchases – if equipment or services are sold or performed at a discount, recording an in-kind for the difference between the fair value and actual discounted price paid. As long as the discount is due to the organization being a non-profit not just a sale.

The When

For equipment, vehicles or physical items that are given to a nonprofit, the in-kind contribution should be recorded when the item is given. For donated services, an in-kind is recorded when the services are provided.

The How

In most cases, to record donated equipment (vehicles, or physical items) as well as donated services, the entry to record the transaction would be:

               Debit:   An expense account (for example) Office Equipment                      $5,000

               Credit:   A revenue account (most likely) Contribution                                   $5,000

The amount recognized would be determined by the fair market value of the item or services donated. The fair market value can be determined by finding the prices of other similar items that were valued close to the date the item was donated or by obtaining an estimate from the donor (common practice for professional services.) If the donated item is property and equipment to be used by the nonprofit and the value is over their capitalization threshold, the debt would be to fixed assets instead of expense.

One special rule for how donated items get recorded relates to collections. For example, the nonprofit is a museum and someone donates a historical artifact to their South American collection. In this case, the donated item would get recorded based on the museum’s accounting policy for collections. Depending on the accounting policy, either nothing would be recorded if the nonprofit does not record their collections on the books, or the debit would be to the collection asset if collections are recorded on the books.

Current Events for In-kind Contributions

Effective for year-ends beginning after June 15, 2021, FASB (the Financial Accounting Standards Board) issued a new accounting standard relating to in-kinds which significantly expanded the disclosure requirements. However, the process of how and when to record in-kind contributions did not change.

Overall, recording in-kind contributions isn’t too complicated. Once you determine if whoever provided the service was a professional, an in-kind contribution should be recorded for the service. And as long the donated item doesn’t fall under the special exceptions, an in-kind contribution should be recorded for a donated item. Getting free stuff is awesome and you might as well take credit for it when you do!
(GAAP requires in-kinds to be recognized.)

For additional considerations, please reach out to Caroline Russell, CPA, Associate Manager or the Assurance Solutions Team at Mahoney.