Not for profit, in-kind contributions
The financial landscape for not for profit (NFP) organisations continuously evolves. In the past, in-kind contributions were rarely seen, but today they are becoming more common in NFP accounting. Kirsten Forrester, CEO, explains,
“We suspect that the shift has a lot to do with NFPs taking a different approach to fundraising… in seeking partnerships with businesses rather than simply seeking cash donations. It helps that the cost to a business to gift goods or services is generally lower than it is to donate cash.”
What is an in-kind contribution?
In-kind contributions are donations of goods or services. Rather than receiving a cash donation, the in-kind contribution is often a service that would otherwise have to be purchased by the NFP or an item that can be put to use within the organisation.
For example, a graphic design firm could provide an in-kind contribution of five hours’ worth of brochure design, or a car dealership might donate a vehicle that can be used by a community meal delivery service.
Typically, an in-kind contribution replaces a financial expense that previously the NFP would have paid for… although sometimes it can be goods or services that the organisation would not otherwise have access to.
How do you account for in-kind contributions?
“The accounting treatment for a cash donation is as straight-forward as it gets…
CR Income and DR Bank.
There’s a rabbit hole we could go down on whether a donation is really a donation, depending on the accompanying conditions… but that’s another story for another day.
But how do you account for a gift of a service? Do you even have to put it on the books, given that no cash has changed hands?
Yes, you certainly do.”
There are some very specific regulations set by the Australian Accounting Standards Board (AASB) in relation to the income of NFPs. These are documented in AASB 1058 Income of Not-for-Profit Entities.
AASB 1058 covers 74 pages so this is not the place for a comprehensive summary of the standard. In order to save reading time we will summarise that AASB 1058 requires an NFP to recognise assets at fair value… which means you need to record the value of the gift in your accounts. Kirsten continues,
“As the recipient, you may need to create an account code for the income side, and it can be as simple as ‘Income In-kind’. The expense side would usually be recorded against the appropriate expense account, for example consultants, maintenance or advertising where it is relevant to the service you’ve received.
The accounting transaction often has no bottom-line impact as the value of both income and expense is the same. Let’s look at this example… I gift you $5,000 of consulting services; the transaction for your records will be ‘Income In-kind’ of $5,000 and ‘Consultants’ expense of $5,000.
However, if you receive a discounted service then your accounts will show a net expense to reflect the discounted fee paid… I agree to provide $5,000 of consulting services for a fee of $2,000; your transaction will record ‘Income In-kind’ of $3,000… which is the discount gift and ‘Consultants’ expense of $5,000… leaving you with a net expense of the agreed fee of $2,000.”
Donations over time
The straightforward accounting process does become a little more complicated to record if the donated service is provided over a period of time.
In this instance you may need to record the value as an asset in the beginning and recognise it in the Profit & Loss over the course of the donation agreement.
Similarly, if you received donated goods, they should be recorded as an asset until you use them. An example of this is in-kind donations you receive in April that will be used as prizes during a promotion in September.
The Arts Law Centre of Australia has a very helpful article that explains recording gifts of goods or services. You can find the article on their website here.
How do you know the value of donated services?
It’s important to have an understanding of the value of your in-kind contributions to make sure you accurately record them in your accounts.
It is usual for the value of the service to be discussed as part of your sponsorship or partnership conversations. However, if the cost was not clearly determined, the ATO says that it is the donor’s responsibility to advise the recipient of the market value of their donation. If you are unsure, we recommend requesting the information directly from your donor.
If you would like assistance with your in-kind contributions accounting, contact our team today.