Gifts come with many benefits for not-for-profit organizations. They can help a not-for-profit extend the reach of its programs or enhance its mission with resources the organization could not have otherwise been able to afford. Gifts-in-kind (GIK) include contributions of tangible and intangible property. The downside to gift-in-kind contributions is they can also be difficult to value.
FASB ASC 820 (Fair Value Measurements) applies to GIKs just as it does to all other assets and investments. Because GIKs are often given and distributed at free or reduced rates, they may not always have a clear-cut valuation method.
Mistakes in determining the value of a GIK can carry consequences. If not-for-profits do not appropriately value their gift contributions, they could be in a situation with an inflated efficiency ratio or material misstatements on their financial statements.
Below we have highlighted three areas where mistakes commonly occur with GIK valuation. We recommend not-for-profit organizations review these topics and their effect on the valuation process for their organization’s particular situation.
The most appropriate value for a GIK is its fair value, not the price (high or low) that is more advantageous for the not-for-profit. (A low value, for example, could boost the not-for-profit’s efficiency rating). Not-for-profits need to use in their financial reporting the price that would be received to sell the GIK in an orderly transaction to a market participant.
Determining the fair value can be difficult when a GIK appears to have low to no value. Consider the following example.
A not-for-profit provides free clothing and personal items to disadvantaged kids. A donor gives 50 pairs of gently used shoes to the not-for-profit for this mission. Although the sticker price may be low for the shoes, the shoes have a base utility use that is marketable to a willing buyer. The not-for-profit should factor the base utility value of the shoes into its GIK valuation. ASC Subtopic 958-605, Future Economic Benefit or Service Potential, further defines how to determine an asset’s base utility value.
Not-for-profits also shouldn’t rely on the value a donor places on a GIK when determining fair value. Donor tax value may be influenced by IRC 170(e)(3), which allows the donor to record a contribution worth up to twice the actual value of the donated asset. Donor tax values are not the equivalent to fair value.
In order to determine the market price for a GIK, not-for-profits must first identify the GIK’s principal market. ASC 820 defines an asset’s principal market as “the market with the greatest volume and level of activity for the asset or liability.” This may be complicated for GIKs because the principal market may not be the market in which the GIK is distributed. Take the following scenario for example.
A not-for-profit provides free medical services in South Africa. A U.S. donor gives the not-for-profit $5,000 of medical supplies for the not-for-profit to use as part of its mission. There are no other asset restrictions to consider.
The fact that the not-for-profit uses the medical supplies in South Africa has no bearing on the not-for-profit’s principal market considerations because the South Africans who receive the supplies are not purchasing them at fair value. According to ASC 820, market participants must be able to purchase or exchange the GIK for fair value. In this example, the not-for-profit would consider the U.S. the principal market for the medical supplies.
Legal restrictions on how to use the GIK also affect its principal market determination and the pricing inputs. Not-for-profits should evaluate which markets their GIKs could legally participate in and consider those markets’ pricing inputs to determine the fair value of their GIK contributions.
Bargain Purchases and Inherent Contributions
Sometimes not-for-profits purchase items for substantially less than the item’s fair value. Though a purchase is involved, the exchange includes an inherent contribution according to financial reporting regulations. An example of an inherent contribution would be if a not-for-profit paid $2,000 for a car with a fair value of $40,000. The not-for-profit did not come close to paying for the actual value of the car, so it would recognize a $38,000 contribution as part of the transaction. If the not-for-profit paid $36,000 for the same car, then the exchange would qualify as a purchase because the value paid is close to the car’s fair value. No inherent contribution would be recognized.
We recommend not-for-profits have a rebuttable presumption policy that classifies any transactions that include an exchange of money as reciprocal transactions or purchases. Not-for-profits should document any exceptions to the transaction presumptions and closely examine inherent contributions to ensure the contributions are appropriately valued.
Consult an Expert
The best way to avoid a material misstatement or other mistakes involving the valuation of GIKs is to consult a valuation expert. Experienced professionals can help your organization navigate ASC 820 and ensure your GIKs are reported at their appropriate fair value. For more information on the valuation of GIKs, please contact us.
David Brown, Jr. is a Director at CBIZ and a member of the Not-for-Profit & Education Practice. He is based in the Minneapolis office and can be reached at 612.376.1205 or firstname.lastname@example.org.