Non-Profit
GAAP for Nonprofits: When & How to Report Donated Services
In-kind services are common in the nonprofit industry, as is failure to report them.
Nonprofits typically operate on tight budgets. As a result, they might hire unpaid interns to fill gaps in their staff, enlist a CPA at a discounted rate to manage their taxes, or accept pro bono services from an engineer to design a new facility.
There’s nothing wrong with accepting these non-cash donations. In fact, many small and large organizations depend on them. What matters is that organizations include all reportable donations on financial statements in accordance with Generally Accepted Accounting Principles (GAAP). Failure to follow GAAP can attract unwanted attention from regulators and result in lost donations and grant money.
So why do some organizations fail to report? For many, it’s confusion: Not all in-kind services must be reported, and some organizations don’t know where to draw the line. Also, properly reporting in-kind services means assigning a dollar amount to intangible services, which can be challenging.
Let’s clear up the confusion, so you can ensure that your financial statements are accurate, complete and in compliance with GAAP.
What Donated Services Must be Reported?
Many nonprofits receive at least some non-cash contributions, ranging from advertising time on the local radio station to free use of an event space for a fundraising dinner.
Not all in-kind services must be reported. However, your organization must report gifted services that meet one or more of the following criteria:
- They enhance or create a nonfinancial asset (land, equipment, inventory, etc.) or
- They involve specialized skills.
Services that “enhance or create a nonfinancial asset” could include anything from an engineer designing a new building at a discounted rate to a volunteer assembling inventory at no charge. It doesn’t matter whether any specialized skills are needed. As long as the services create or enhance tangible assets, they must be reported.
Read more about the new reporting requirements for nonfinancial assets and other gifts-in-kind here.
What about services that don’t enhance or create a nonfinancial asset? As long as the service requires a specialized skill, it still must be reported under GAAP. A “specialized skill”, for accounting purposes, includes professional services that typically require certification: lawyers, plumbers, architects, physicians, etc.
However, not all specialized skills require certification. Let’s say you hire a marketing intern to write blogs about your industry and post content on social media. While this work doesn’t require a certification, like law or engineering, it does require a higher level of proficiency than one would expect from the general public. It’s still considered a specialized skill and must be reported.
Note that “specialized skill” refers to the service, not the person. If an accountant helps your organization file its taxes pro bono, report it on your financial statement. If that same accountant helps hand out meals at a food bank, then they are not using their “specialized skills” and you don’t need to report their services.
How to Quantify In-Kind Services
Some organizations don’t report their in-kind services because they claim that these services aren’t easily quantified.
That’s not acceptable for GAAP. To stay compliant, an organization must quantify and report a value for any reportable in-kind services.
How do you quantify an intangible donation? The same way professionals everywhere price services: by examining the market and calculating an appropriate rate.
If you are measuring the services of a skilled professional, benchmark them against comparable professionals at the time the services were rendered. If they provided their services at a discounted rate, simply subtract the discounted rate from the standard rate and report the figure as a donation.
If the services resulted in the creation or enhancement of a nonfinancial asset, you must report the value of the asset (or the increase in value) and report the value of the services rendered as part of the expense.
You will have an easier time complying with standards when your organization takes a systemic approach to measuring the value of in-kind services and other donations. Rather than taking a case-by-case basis, develop a clear set of rules and use them for all measurements. There may be exceptions, but with strong guidelines, you can set a precedent for measurements and ensure that your statements are transparent and consistent.
How to Report
Once you have measured the value of in-kind services, you must report them on your financial statements under the Statement of Activities.
Report services based on the date when the contribution was made known to your organization—not when the service was actually received. You must also report an offsetting expense in the proper category on the Statement of Functional Expenses.
In addition, you should include a description of the nature and extent of the services, as well as the activities or programs for which they were used. If the services were provided by an affiliate of your organization, you must also submit the disclosures required by FASB ASC 850-10.
Compliance is Just the Beginning
The best way to ensure that you’re adhering to GAAP? Partner with a trusted industry expert.
Since 1974, Dugan + Lopatka has served thousands of Chicagoland businesses and tax-exempt organizations. As nonprofit specialists, we help you maintain compliance, create proactive strategies, and build a smarter organization.
From auditing and advisory to tax preparation and more, we are here to help you achieve your goals. That’s Accounting for What Matters.
Contact our team today or learn more on our NFP industry page.