In my work, I am often asked if we can book revenue for services performed by donors or volunteers. The short answer is usually no, but we’ll look into the GAAP guidance to see exactly why that is.
(Though we don’t typically talk taxes in this blog, if you are interested in the rules surrounding contributed services by individuals, you should check out IRS Publication 526. Services are not deductible by the individual, but direct expenses associated with serving may be)
The Accounting Standards Codification addresses contributed services in ASC 958-605-25-16 and 17 which is summarized here:
In order for contributed services to meet the requirement for recognition of revenue, they must meet one of two criteria:
- They create or enhance non-financial assets.
- They require specialized skills, someone with those skills performed the service, and the organization would have otherwise purchased the services.
If one of these two criteria is not met then revenue cannot be recognized.
First we’ll look at the first criterion: “They create or enhance non-financial assets.” An example of this is given in ASC 958-605-55-53 to 55-55. An institute is constructing a building. They have already purchased and obtained the necessary architectural plans, materials, permits and so forth. A construction company then constructs the building for no cost to the institute.
In this case, the situation meets the first criteria above in that it is creating a non-financial asset for the institute (it may also meet the second criteria, but we’ll get to that later). Now that the institute has determined they have revenue to recognize, they must assign a value to that revenue. ASC 958-605-30-10 gives additional information for valuation. Contributions that create or enhance non-financial assets can be valued at the either at the fair value of the services received or at the fair value of the asset enhancement resulting from the services.
In this example, the resulting value of the building (less the cost of the architectural plans, materials, permits, and etc purchased) could be used to value the services, or the cost that the construction company would have charged for the services.
Next, we’ll look at the second criterion: The services contributed “require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. Services requiring specialized skills are provided by accountants, architects, carpenters, doctors, electricians, lawyers, nurses, plumbers, teachers and other professionals and craftsman.”
This criterion is pretty restrictive and would be difficult to meet, but it is also the criterion that I most often refer to when fielding questions. Most non-profit organizations receive many hours of volunteer help of all kinds, but more often than not, these volunteers are probably providing services that are not considered specialized professional skills or crafts, and would not otherwise be purchased by the organization.
The ASC gives an example in 958-605-55-57 to 55-59 of a situation that meets this criterion. A university has both paid and unpaid faculty members. All faculty are utilized in the same way and evaluated under the same requirements regardless of compensation. In this case, teaching is a specialized skill, professionals with that skill are providing the service, and the university would otherwise need to pay for the services. The university could then record revenue for these services, and could reference similar staff salaries when valuing the services.
The best real world example of contributed services may be on the financial statements of the United Way (see Note 23). As you’ve probably noticed, the United Way receives a large amount of television advertising during NFL broadcasts, including the Super Bowl. The value of this air time from the NFL and others is significant and the benefit to the United Way is equally significant. However, because of the high cost of the service provided, the United Way would not otherwise purchase the services on their own if they were not donated. Though this is a specialized service to the United Way, it does not fully meet the second criteria and therefore, is not recorded as revenue.
If contributed services are provided to the organization and meet one of the two criteria, then revenue can be recognized. In the case of the first criteria, revenue and the associated asset would be recorded at the fair value of the services provide. In the case of the second criteria, revenue and expense would be recorded, again at the fair value of the services provided.
It is also worthy to note, that because contributions of services do not qualify as deductible by the individual providing the service, organizations should not issue receipts of donation for the services. An organization may wish only to express appreciation for the contribution.
In conclusion, it’s good to keep in mind the accounting standards and refer back to them to answer accounting questions. Often the answer is readily available.