In Kind Donations Accounting for Nonprofits

In-kind donations sit in their own corner of nonprofit accounting for a reason. They show up as revenue, they hit the statement of activities on their own line, they require fair value documentation that doesn’t exist for cash gifts, and the standards governing how they’re presented changed materially in 2020. Nonprofits that treat in-kind contributions the way they treat cash, or the way they used to treat them five years ago, may find issues surfacing in their next audit.

What Counts as an In-Kind Contribution

In-kind donations are contributions of nonfinancial assets, including goods, the use of facilities or utilities and certain services. The category covers fixed assets like equipment and vehicles, materials and supplies, intangible assets, professional services and unconditional promises of any of those. Donated securities aren’t in scope because they’re monetized like cash, while cryptocurrencies, somewhat counterintuitively, are treated as nonfinancial assets under current GAAP.

Whether the donation gets recognized as revenue depends on the type. Donated goods that meet the definition of nonfinancial assets are recognized at fair value on the date of receipt. Contributed services are recognized only if they meet a narrower test: they have to create or enhance a nonfinancial asset, OR they have to require specialized skills, be provided by individuals who possess those skills and be services the organization would have purchased if they hadn’t been donated. A board member with accounting credentials who helps prepare the tax return meets the test, while a volunteer who staffs the front desk doesn’t, even if the labor has real value to the mission. Many nonprofits still track these nonrecognizable volunteer hours internally to measure community engagement, demonstrate program impact or support grant reporting, but those hours can’t be recognized as contribution revenue or expense under GAAP and should be excluded from the year-end financial statements.

ASU 2020-07 Changed How In-Kind Donations Get Reported

FASB ASU 2020-07, effective for annual periods beginning after June 15, 2021, amended ASC 958-605 to address how nonprofits present and disclose contributed nonfinancial assets. The recognition and measurement rules didn’t change. The presentation and disclosure rules did, and they tightened significantly.

The standard requires contributed nonfinancial assets to appear as a separate line item on the statement of activities, distinct from contributions of cash and other financial assets. If not presented on the face of the statement of functional expenses, contributed nonfinancial assets have to be disaggregated by category and function in the footnote disclosures, with qualitative information about whether each category was monetized or utilized during the reporting period. For each category, the footnotes also need to disclose any donor-imposed restrictions on the asset and the valuation techniques and inputs used to arrive at fair value. If the organization is prohibited from selling or using the asset in its most active market, the disclosure also has to identify the principal or most advantageous market that was used instead. The standard required retrospective application, meaning organizations adopting it had to restate comparative financial statements for consistency.

How Fair Value Gets Determined

Fair value for in-kind donations follows ASC 820, which defines it as the price a market participant would pay in an orderly transaction at the measurement date. For most donated goods, that means looking at the market where the asset is most commonly sold and finding comparable transactions. Donor-stated values aren’t sufficient on their own. A donor letter declaring an item is worth a particular amount doesn’t satisfy the requirement to determine fair value through observable inputs or appropriate valuation techniques.

For routine donated goods, online marketplace data, retail pricing for comparable new items or supplier price lists are usually adequate. For higher-value items, qualified appraisals are typically required, particularly when donors will be claiming tax deductions that trigger IRS substantiation thresholds. The fair value documentation matters on both sides of the transaction: the nonprofit needs it to support the financial statement number and the donor needs it for the deduction. IRS Publication 526 covers the donor-side rules in detail.

The Expense Side of the Entry

In-kind donations don’t just generate revenue. The recognition entry has two sides, and the offsetting expense lands in the functional category that reflects how the asset was used. Donated supplies distributed through a program are program expense. Donated equipment used in operations becomes a capitalized asset and depreciates over its useful life rather than hitting expense immediately. Donated professional services that meet the recognition test get expensed in the category where the work was performed.

This dual entry means in-kind contributions don’t change the bottom line in the period of receipt. They do change the gross revenue and gross expense figures, which matters for ratios funders and watchdog organizations used to evaluate nonprofits, and they show up in functional expense reporting in ways that affect program-to-overhead presentation. GAAP for nonprofits requires both sides of the entry to be handled correctly, not just the revenue recognition.

Where Most Nonprofits Trip Up

The recurring issues fall into a small set of categories. Recording donated services that don’t meet the ASC 958-605 specialized-skills test inflates revenue with amounts that shouldn’t be there. Skipping the ASU 2020-07 disclosures, or treating them as boilerplate, draws auditor attention because the standard is recent enough that auditors are specifically looking for it. Accepting donor-stated fair values without independent verification creates exposure on both the financial statement and the donor’s deduction. Recognizing in-kind contributions as revenue without booking the corresponding expense produces a misstated statement of activities.

The fix on all of them is to process discipline at receipt. A documented intake procedure that captures the donor, the asset description, the basis for fair value and the intended use creates the audit trail the accounting requires. The same procedure feeds the contribution recognition analysis that determines whether the gift is conditional or unconditional, whether it carries donor restrictions and which functional category will absorb the expense.

Build the System Before the Next Audit

In-kind donations stop being an audit problem when the accounting process is built around the regulatory framework instead of bolted on at year-end. ASC 958-605 governs recognition and measurement. ASU 2020-07 governs presentation and disclosure. ASC 820 governs fair value. The nonprofits that walk through this section of the audit cleanly are the ones with intake documentation and disclosure schedules ready before fieldwork starts.

James Moore’s nonprofit team works with finance leaders on in-kind donation accounting, ASU 2020-07 disclosure compliance and contribution revenue recognition. Contact us to review your in-kind donation process before your next audit.

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