Fair Market Value

Accounting for In-kind donations

Staff Post
By Heather Young

The topic of accounting for in-kind donations came up on one of my LinkedIn groups, and I thought I would share some content.

The person asking the question reported that her not-for-profit agency has an operating budget of about $300,000, but each year secures about $200,000 more in donated goods and services. She’s been struggling for years with how to reflect this appropriately to her donors and funders – particularly given an accountant who doesn’t understand the issues and can’t provide the advice she needs.

That seems like a good place to start. A chartered accountant with not-for-profit expertise is a tremendous resource when it comes to measurement, reporting and disclosure issues such as this. The not-for-profit sector has specific accounting needs, and having the right expertise on board is crucial to getting the best financial advice and reporting.

The reporting – or not – of in-kind donations in your financial statements is a matter of accounting policy. You – with advice from your accountant – need to develop the best policy framework for your organization. Here’s what the Canadian Institute of Chartered Accountants offers as guidance:

“Donations-in-kind also present accounting considerations that require judgment. If the accounting policy is to record donations-in-kind, a contribution of goods or services may be recognized in the financial statements when a fair value can be reasonably estimated and when the donated goods or services would otherwise have been purchased. Fair value would be estimated using market or appraisal values at the date of the donation.”

(From A Guide to Financial Statements of Not-For-Profit Organizations, available online.)

Can you substantiate the fair market value of the donations? That tends to be relatively easy for physical objects, much harder for services/pro bono work/volunteer time. Because of this measurement difficulty, an accountant might steer you away from including in-kind gifts in your financials – or they might agree with reflecting tangible gifts but advise against trying to quantify volunteer time and other services.

The Charities Directorate of the Canada Revenue Agency has specific requirements for determining the fair market value of donated items, detailed here.

If your policy is not to include the value of in-kind donations in your statements, you should be able to find other avenues for conveying the full scope and impact of your organization. For instance, you might discuss with your accountant the appropriateness of a detailed note to your financial statements describing the in-kind support you receive.

You could also look at the different types of financial reports you produce. Your formally prepared audit may not capture in-kind gifts, but you might also present to donors and funders a supplementary statement that adds the value of in-kind items to your formal statements.

An annual report could provide an avenue for describing these resources and what they mean for your organization’s work. Annual reports often contain photos, graphs, charts and other illustrations that add impact to your description.

The area of social accounting tries to get to grips with this issue – an important one for many nonprofits, because cash transactions reflect only a portion of our economic activity. Here are a couple of links to publications that might help by discussing the accounting issues and proposing practical solutions:

On the whole, it’s to your advantage to reflect all the value you can within your organization. However, it’s also important to know the government regulations and generally accepted accounting principles that guide the reporting of this information.

How do I determine fair market value?

If you have received a non-cash gift of property, you need to have it appraised for fair market value (FMV) – for your charity’s books, and so you are able to issue a tax receipt to the donor. According to the Canada Revenue Agency, fair market value is normally the highest price that the property could bring in if the market was open and unrestricted and the buyer and seller are both willing, knowledgeable, informed, prudent, and independent of one another.

It is important to keep in mind the following:

  • The $1,000 threshold – If the FMV is less than $1,000, a member of the registered charity or other competent, knowledgeable individual can determine the property’s value. If the FMV is likely more than $1,000, the CRA recommends third party professional assessment of the property. Remember to include the name and address of the appraiser on the tax receipt.
  • Deemed fair market value – The FMV of the property might be different at the time of donation then when the donor originally acquired it. In some cases the charity would then only be able to issue a tax receipt for the lesser amount. This can also be the case when the donor originally acquired the property as part of a tax shelter. Read this page on the CRA website for more information on when deemed fair market value is applicable.
  • Fair market value for Advantages – For any donation, a charity must deduct the FMV of the advantages the donor receives (if any) to determine if only a portion of the amount of the gift can be receipted. Depending on the ratio of the value of the advantage to the value of the donation, the charity will: a) only be able to receipt for the amount of the donation less the value of the advantage, b) be able to issue a receipt for the full amount of the donation, or c) might not be able to issue a receipt at all. See this FAQ or visit this page on the CRA website for more information on these ratios and on how to handle split receipting.

Remember, it is the onus of the registered charity, and not the donor, to ensure that the FMV recorded on tax receipts is accurate.