How (or If) Nonprofits Should Recognize Contributed Services and Materials as Revenue– January 13, 2016

Nonprofits that obtain funding from various resources are often familiar with the criteria for recognizing that revenue as either an exchange transaction or a contribution. However, many nonprofits receive critical resources in the form of contributed services or materials. Accurately reporting these types of resources is not always as clear cut — leaving a nonprofit to wonder how, or if, these transactions should be reflected in the financial statements.

Below is a brief overview of the guidance provided by FASB ASC topic 958-605 (Not-for-Profit Entities, Revenue Recognition) on how nonprofits should proceed when it comes to recognizing revenue for contributed services or materials.

Contributed Services
According to the U.S. Bureau of Labor Statistics, approximately 25% of adult Americans volunteer at least once annually to a nonprofit. But it’s the type of volunteer services provided that will determine if the contributed time should, or should not, be recognized as revenue.

 

To be recognized as revenue, a contributed service must create or enhance a non-financial asset or require a specialized skill that would otherwise need to be purchased, e.g., such as the skills provided by doctors, lawyers, professional craftsman, accountants, etc. The value of the time spent by professionals should be recognized at fair market value only if the individual is actually donating time in his or her specialized area. A doctor building a house or leading a fundraising event would not qualify as providing a contributed service.

ASU 2013-06, Services Received from Personnel of an Affiliate, represents an exception to the rules listed above specifically for services provided by an affiliate of the nonprofit. Beginning with fiscal years commencing after June 15, 2014, most nonprofits must recognize all services (at cost or fair market value if cost would significantly under- or overstate the value) rendered from an affiliate that directly benefits the recipient nonprofit, as long as the nonprofit was not charged for the service.

Contributed Materials
The first question to ask when contributed materials are received is: Does this item possess value that would merit recognition? The codification states that if the contributed material can be used internally by the nonprofit for program services or can be sold by the organization externally, it is likely that the item holds value and should be recognized. If this criteria is not met, it is possible that the item holds uncertain or no value and should not be recognized.

For example, nonprofits that hold fundraising events receive tickets, gift cards and other merchandise from donors to be auctioned or sold at these specific events. These gifts should be recognized at the fair market value at the time the donation is received; revenue should be subsequently adjusted to the actual price paid at the fundraiser.

In addition, non-financial materials contributed directly to a nonprofit should be recognized as a contribution and expensed only if the materials are deemed significant. However, entities that are intermediaries, agents and specified beneficiaries of contributed assets should refer to ASC 958-605-25-21 through 33 for additional guidance. Lastly, specific additional criteria can apply for contributed works of art, historical treasures, and similar items (not intended to be resold at fundraisers) to determine if recognition and capitalization is necessary as noted in ASC 958-360-25.

Accurate application of revenue recognition principles for contributed services and materials is imperative to financial statement presentation of nonprofits. As a general rule, recognize services that create or enhance a non-financial asset, or services provided by an individual with a specialized skill set that would otherwise need to be purchased. Regarding contributed materials, most should be recognized if the item can be used for program support internally or can be sold externally. Consult with your audit team on your specific situation and details to help ensure you are presenting fair and accurate statements.

Contact David Cahill, CPA, MBA, at dcahill@cohencpa.com or a member of your service team to discuss this topic further.