Contributed services are recognized as revenue for a private not-for-profit when the service

Helping you navigate revenue recognition

Revenue Recognition for Contributions

When a not-for-profit entity receives a contribution, it should recognize revenue when the contribution is received, and measure the amount of revenue at the fair value of the contribution. If there are restrictions imposed by the donor, this impacts how the contribution is classified, as either a change in:

• Unrestricted net assets

• Temporarily restricted net assets

• Permanently restricted net assets

A restriction by a donor can impact the timing of revenue recognition, since it can only be revenue if the contribution is an unconditional transfer to the not-for-profit. Only after a conditional transfer becomes unconditional can it be recognized as revenue. If the circumstances of the transfer are unclear, assume that it is conditional until such time as the issue is resolved and properly documented.

Revenue Recognition for Promises to Give

When a contributor makes a promise to give in a future period, there is a time restriction associated with the contribution that will elapse through the passage of time. If these items are unconditional, you may recognize revenue at their net realizable value if the payment will be made within one year, or at the present value of estimated future cash flows if the payments will be on later dates. These donations are listed as temporarily restricted net assets. Do not recognize a promise to give as revenue until all associated conditions imposed by the donor have been met.

Revenue Recognition for Contributions Held

A contribution may be held by an intermediary, such as a trustee. If the beneficiary has an unconditional right to the cash flows associated with the contribution, then it can recognize revenue as soon as its right is established, and measures the amount at the present value of the expected cash flows. If the intermediary is interrelated with the beneficiary, then the recordation method by the beneficiary is similar to the equity method of accounting that is used for investments.

Revenue Recognition for Volunteer Services

There are situations where an entity can recognize the value of volunteer services. This is the case when the services create or improve upon a non-financial asset, such as a roof replacement. If so, recognize revenue in the amount of the value of the hours contributed or via the change in fair value of the altered asset.

Other services may only be recognized as revenue if all of the following criteria are met:

• Special skills are required

• The work is done by volunteers who have these skills

• The services would otherwise have to be purchased

Not-for-profit organizations are committed to fulfillment of a mission.  The mission itself may attract a lot of popular support, but ask anyone in a leadership position at a not-for-profit what the organization's largest operational challenge is and a common answer you'll get is funding.  Finances are particularly challenging for small or start-up organizations, but they are also problematic for larger, well-established not-for-profits that must also manage often unpredictable contribution or revenue streams.  As a result, not-for-profits frequently operate with limited staff resources, some relying upon donated services by volunteers or interns to fill the gap.

Although critical to some organizations' operations, donated services can be problematic from an accounting standpoint.  Donated services must be accounted for under generally accepted accounting principles (GAAP), but when should the services donated to the organization be recognized in financial statements, and how should they be valued? Failure to reflect properly the contribution of donated services as revenue along with the related expenses distorts a not-for-profit's financial statements and may adversely affect the organization's ability to attract donors and receive grant money.

Specialized Skills

• Specialized training and technical tools used with high proficiency generally not possessed by the general public.
• Often identifiable by a license or certification, such as attorneys, accountants, physicians, nurses, plumbers, architects and other professionals.
• Specialized training provided by the organization does not qualify as a specialized skill.

Accounting Guidance for Donated Services

A prominent not-for-profit organization in Washington, DC, was faced with a dilemma.  Should the services of unpaid interns who perform program activities for the organization be recorded as revenue and expense in the financial statements?  Financial accounting standards require that the fair value of donated services be recognized in the financial statements if the services either create or enhance a nonfinancial asset, or require specialized skills provided by entities or persons possessing those skills, and the organization would need otherwise to purchase those services if not donated.  In the case of the not-for-profit above, the interns were collecting data, researching and writing industry articles and position papers on complex issues as well as providing website maintenance, conference coordination and general administrative duties. The interns were not licensed or certified (see "Specialized Skills"), but because the interns were deemed to possess specialized knowledge and technical skills at a higher level of proficiency than those in the general public, the interns were providing specialized skills and the institution recorded the value of their services on its financial statements.

Fair Labor Standards Act Compliance

Internships are generally regarded as employment and regulated for the private sector by the U.S. Department of Labor's (DOL) Wage and Hour Division. The DOL's employment guidance and exclusion test do not apply to nonprofit organizations. Without additional guidance from DOL, not-for-profits concerned about compliance should consult a labor attorney.

Recognition in Financial Statements

Donated services that meet the requirements for recognition in the financial statements should be reflected on the Statement of Activities as donated services revenue and the related expense.   Additionally, disclosure of the activities or programs for which those donated services were used, along with the nature and extent of contributed services received for the period and the amount recognized as revenue, should be included in the notes to the financial statements.

Assigning Value to Donated Services

When recording such services, the organization must have a system in place to value the donated services consistently and properly.  Services should be recognized at the customary rate for the volunteer services performed, regardless of whether the entity had the ability to pay for those services.  For example, the donated services provided by an overqualified volunteer should not be valued according to the volunteer's higher earning power. 

Implications for Donations and Grants

A transparent financial statement that accurately reflects all revenue and expenses can largely influence public perception.  When corporate and individual donors are considering a contribution they typically want to know where the revenue is going and how it's being used.  In an era of greater accountability, there is also significant pressure to demonstrate strong financial controls.  An organization earns the public's trust and a good reputation in the nonprofit community when it combines high program impact with good financial management, perhaps attracting a greater number of donors.  In the case of grants, the organization's metrics can largely influence whether it qualifies for funding, as some grants have rigid requirements for indirect costs.

Each not-for-profit is unique and must evaluate donated services for its particular circumstances, considering the many factors.  For assistance with donated services or other accounting and governance matters, contact an accountant professional who specializes in working with not-for-profit organizations.

Janene Mitchell is a senior manager in the Not-For-Profit practice at CohnReznick.

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