The Financial Accounting Standards Board released Statement No. 116 pertaining to Topic 958 (Non-Profit Organizations) to set guidelines for contributions made and received through these entities. Understanding these guidelines is crucial for the organization’s accounting, because these are recognized as income and expenses for the entity. Therefore, contributions received, including unconditional promises to give, are noted as revenue at fair market value in the accounting period that they are received. To its counterpart, contributions made, including unconditional promises, are acknowledged as expenses. Promises to give are only recognized when they are considered unconditional, in other words, when conditions are met.
Statement No. 116 makes distinguishing between contributions necessary. Contributions must be differentiated between permanently restricted net assets, temporarily restricted net assets, and unrestricted net assets. Organizations must also note the expiration of donor-imposed restrictions when they expire.
Like most regulations, there are exceptions to the rules, such as certain services, art, historical treasures, and other similar contributions.
- Service contributions are accepted when the services either enhance a nonfinancial asset or the services require a special skill set that is normally paid for. Services given are recorded at the most realistic price: cost to the donor or fair market value.
- Art, historical treasures, and similar donations may be written as an expense if the organization uses the item for public service such as education, research, or public display which does not obtain admission/financial gain. This statement makes certain disclosures necessary for items not being capitalized and for receipts of services and promises to give.
There’s also a recent update mandating that in-kind donations of marketable securities be documented as cash contributions when the organization plans to convert these to cash. They must also be documented when the earnings rate changes causing conversions. Other donations can be recorded as in-kind donations.