Services-in-kind (SIK) are donated services to an organization, and can take many forms. Common forms of SIK include volunteer time, donated advertizing, donated space (free rent), and donated transportation or freight.
US GAAP (958-605-25-16)
US GAAP provides specific and fairly restrictive, guidance when it comes to recognizing donated services as revenue and expense. For volunteered time there are two criteria which must be met in order to recognize revenue and expense:
First, the volunteered services must require specialized knowledge or skills and the volunteer must have these specialized skills. For example, if an organization needed legal work done and received pro bono services from a lawyer, this criterion would be met. But if a lawyer volunteers to answer phones or paint an office, the criterion is not met. This criterion is also not fulfilled if the specialized skills do not match the requirements of the needed work; such as if an electrician did bookkeeping or (heaven forbid) an accountant did electrical work.
The second criterion which must also be met is that if the service were not donated, the organization would have purchased the service. So in the example above, if the donated legal services were so needed that the organization would have purchased them anyway then this criterion is met.
For donated volunteer services both criteria must be met in order to book the SIK.
There are other types of SIK beyond volunteers’ time. For items such as donated advertizing and free rent, the “specialized knowledge/skills” test is not applicable. However, it is important to note that the second test is still applicable. To book any SIK the organization must be able to say it would have purchased the service if it were not donated. Implied in this statement is the idea the organization could afford to purchase the service. Let’s look at an example. Here is a link to the United Way’s 2009 financial statements (click on the pdf for the 2009 consolidated financial statements, page 47, footnote 20). The United Way benefits from millions of dollars worth of donated advertizing from the National Football League. However, in their footnotes the United Way notes they could not afford to purchase this advertizing if it were not donated. As a result, they have rightly chosen not to book the revenue and expense.
This can lead to some unexpected results. Consider for a moment two identical not-for-profits with identical fundraising strategies and budgets. (We’ll call them “A” and “B”). Now imagine that one of these charities (Charity “A”) receives donated advertizing which it would not have otherwise purchased (and therefore does not record as revenue). Charity A clearly benefits from the donated advertizing and can reach more donors than Charity B. As a result, it would seem revenue is conceptually understated as this benefit to the organization is never recorded on the statement of changes in net assets. But this has an impact on ratios as well. If Charity A had recognized revenue the offsetting debit would go to fundraising expense. As a result the overhead ratios between these two charities would be different. However, under US GAAP, Charity A benefits from more fundraising yet has identical fundraising costs and overhead as its peer.
SIK becomes more complicated in an international context. While US GAAP guidance is very specific, to my knowledge IFRS does not specifically address SIK (please leave me a comment if you disagree). As a result there is room for a wider range of practice. Many offices simply do not book SIK at all. In fact in some countries, Canada for example, recording SIK is prohibited by statutory requirements. Absent these restrictions, I think it is reasonable for an organization reporting under IFRS to reference to US GAAP under IAS 8 (see my previous post discusing this point). However, I realize this is a very U.S. centric view. I also realize there are limitations with the US GAAP approach (consider the Charity A example above). For these reasons, I think there is also room to argue that absent specific guidance under IFRS a charity could book SIK without considering whether or not it would have purchased the service anyway. This diversity of practice clouds comparability and global reporting, and makes it difficult for international organizations to set a global SIK policy.