Contributions can be made to a nonprofit in either cash or property. Non-cash contributions can be tangible or intangible. Tangible property could be vehicle donations, household items, land and buildings, etc. Intangible property could be stocks, bonds, copyrights, leased space, etc. Like cash, these items are recorded as contribution revenue when received. The amount and classification of the contributions are based on the item received.
Generally revenue is recorded at the time the contribution or pledge is received. Revenue should be measured at fair value. Let’s look at an example where a vehicle was donated. At the time of the donation, the market value was determined to be $4,800. The organization would record the donation in the general ledger as:
Fixed Assets – vehicles $4,800
Contribution Income $4,800
The vehicle would then be depreciated along with the rest of the fixed assets.
What if the organization did not have a use for the vehicle and instead decided to sell it for cash? The transaction at the time of donation would still be recognized at fair market value:
Donations Held for Sale $4,800
Contribution Income $4,800
Then at the time of the sale, the contribution income would be adjusted up or down for the difference in selling price. Let’s say the vehicle sold for $4,300:
Cash $4,300
Contribution Income $ 500
Donations Held for Sale $4,800
Donated securities are treated like the vehicle contribution. The organization should have a documented policy on how securities will be treated. If the policy is to sell the securities as soon as they are received, then there may not be a difference in the value recorded and the sales proceed. Any differences will be recorded as an increase or decrease in contribution income.
Donor stipulations may prohibit the securities from being sold. If the donor restrictions are for a specific purpose or time period, then the contribution must be recorded as temporarily restricted. Once the time period has expired or the stipulations have been met, the asset can be released from restriction.
Another common contribution nonprofit organizations receive is use of leased space. How the contributed space is recorded in the general ledger depends on the terms of the lease. If it is annual lease based on the building owner’s discretion each year whether or not to continue the lease, then the entry would be a monthly expense:
Rent Expense (determined at fair rental rates) XXX
Contribution Income XXX
Let’s look at an entry where the space has been leased to the nonprofit for 10 years rent free. Comparative market date indicates the space would normally lease for $5,000 a month. The total contribution is calculated as $5,000 a month for 120 months and equals $600,000. The entire value of the contribution is recognized at the time of the gift:
10 Year Building Use Donation $600,000
Contribution Income – Temp Restricted $600,000
Each month the rent expense would be recorded as follows:
Rent Expense $5,000
10 Year Building Use Donation $5,000
And at the end of the year, the time restriction met for the restricted asset would be released
Satisfaction of Time Restrictions $60,000
Net Assets Released from Restrictions $60,000
If your nonprofit organization does not have a policy on noncash contributions now is the time to create one. It is not always advantages to the organization to accept the gift being offered. Examples include gifts that may contain a liability to the organization, gifts that appear to be in conflict with the organizations stated mission, and gifts that require a use of cash for renovations. The policy should be documented and include a checklist of considerations. Each gift has to be considered as to its specific characteristics. Well documented policies and accounting standards will help the organization comply with nonprofit GAAP as well as support consistency of application.
Please contact us to discuss your organizations Audit and Accounting needs.