While nonfinancial donations provide immense benefit to nonprofits and their clients, these gifts-in-kind (GIK) also pose a revenue recognition and reporting challenge. FASB Accounting Standards Codification 820, Fair Value Measurement, instructs NFPs to value in-kind donations using inputs from the principal market or, lacking such a market, from the most advantageous market. It seems straightforward enough but, in the real world, finding that value—and even that market—can be quite difficult. These best practices can help you accurately value GIK.
Finding the right market for valuation
Actual sale prices may not accurately reflect value if the organization sells the donated items at a discounted price as part of its mission. They do have a market value in some transactional system, though, and focusing on that base utility will help you find the appropriate valuation. Start by looking for pricing guidelines for sales of similar items, whether they take place domestically or in international markets.
Consider the nature of the market participants in your search for comparable transactions. For example, retail prices for drugs in the U.S. may exceed by many multiples their listed value in the International Medical Products Price Guides, or in state Medicaid/Medicare pricing paradigms. Your organization wouldn’t be purchasing retail pharmaceuticals domestically—or at retail prices—for use as part of a program in Africa, so your valuation of drugs received as GIK to support that program should not reflect U.S. retail market prices.
Valuation via hypothetical markets
Try to establish the prices that other NFPs or governments would pay for the donations you are attempting to value. Often a true marketplace doesn’t exist for certain GIK, especially for items like donated food, clothing, household goods, medical supplies and drugs. This means the principal or most advantageous market is a hypothetical one rather than an existing marketplace.
When there is no real-world market that helps you accurately gauge value for GIK, you can use a hypothetical market to create a transaction that would make sense given a reasonable (albeit imaginary) set of choices and considerations for market participants. In this scenario, settle on a value based on the perspective of a hypothetical market participant, not that of your own organization.
Market adjustments
Retail price is rarely appropriate for valuation of in-kind donations to NFPs. Based on the volume of goods received in donation, GIK should usually be valued at wholesale prices. If there is no wholesale market for the items, it is still reasonable to apply a wholesale discount when determining fair market value.
Often, GIK have a discounted market value based on additional factors that extend beyond their wholesale-scale volume. Early expiration dates, older technology, consumer preferences and other case-specific features of the donated items can necessitate an adjustment from market price for accurate valuation. Be sure to include these considerations in your valuation process.
Donations versus purchases
Nominal sums that an NFP pays to acquire goods, services, vehicles, land or any other “purchase” do not automatically mean the transaction is not a donation. If the acquisition is worth significantly more than the amount the organization pays to acquire it, then the transaction represents a gift. Its value is the amount by which the value of the received asset exceeds the payment made.
NFPs should establish a policy defining transactions as purchases and formulate clear rules for identifying and verifying exceptions to this assumption. Organizations should also create formal processes to document and record exceptions as well as valuation methods used in this case.
Donor-imposed restrictions and valuation
To avoid valuation errors and regulatory tangles, it is important to distinguish between restrictions that affect the fair market value of a gift and those which do not. Donor-imposed restrictions may limit whether, when, where, how or to whom the receiving organization may sell the gift. These limits may not affect the gift’s market value though, even if it can’t be sold.
If a legal or donor-imposed restriction limits a potential buyer’s options (even a theoretical buyer), then the asset’s value is likely affected. Limits that apply only to the NFP and not to a potential buyer or the asset itself do not impact the value of the gift.
Conclusion
Properly valuing in-kind gifts demands careful research and sound judgment. It is an ongoing responsibility as well; markets change constantly and NFPs must regularly evaluate new market data to inform the valuation process. For smaller organizations especially, establishing accurate valuations for nonfinancial donations can strain limited human and financial resources.
The potential legal and reputational ramifications of mistakes, however, make consistent, compliant and accurate valuations a high priority for every nonprofit. Your Mauldin & Jenkins advisor can help you limit risk and maximize the benefits of GIK to your organization.
