Services-In-Kind at a Global Organization

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.

International issues

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.


10 Responses to “Services-In-Kind at a Global Organization”

  1. 1 rex k dunn
    August 2, 2011 at 9:29 pm

    I am on the board of a small non-profit that provides transitional housing services. Our executive director currently works as a volunteer while we ramp activities and fund raiising. She is a licensed therapist and we would most definitely need to hire someone to perform this role if she were unavailable. I think it important to recognize the the SIK Contribution and related expenses to show potential funders that we need this service and that we cannot exist without a source of funding to cover these expenses.

    Am I out of line if I recognize the SIK Contribution/Expense despie the fact that we are currently unable to pay this salary?

    • 2 jonathanferguson
      August 2, 2011 at 10:19 pm

      Thanks for comment. Your question is a good one. The way I read the GAAP guidance, your organization must be able to purchase the services so I think GAAP would prevent you from recognizing revenue and expense for this purpose. However I think it would be appropriate to call out (perhaps even in the footnotes to the Financial Statements) the estimated impact of this service donation, stating that it is not booked. The United Way financial statement example above may be a good model. Certainly the information is relevant to readers of the financial statements and necessary for a whole story. I just think GAAP keeps you from recording the revenue and expense if you do not have the means and intent to purchase the service.

  2. August 20, 2011 at 6:22 am

    Good quality article. Thanks for providing this kind of information. Your article proved to be very useful for me. Thanks for your kind consideration to help us improve our services.

  3. 5 Grant
    September 20, 2011 at 6:53 am

    If NFPO can book the service donation as revenue & expense, does the donor receive a donation receipt?
    It seems the donor should claim the income and then donate the same amount. The donator donates the service and the pay more tax even get soem credit.
    I am confused.


    • 6 jonathanferguson
      September 20, 2011 at 6:11 pm

      Thanks for your question and comment. I think it is important to understand that there are distinct differences between accounting guidance and IRS (or other taxing authority) regarding deductibility. Accounting guidance dictates revenue and expense recognition. IRS rules dictate whether a donation is deductable.

      My understanding of US tax law is that donated time is not deductable. Therefore is would be inappropriate for an organization to provide a tax receipt for donated services. However, it is certainly appropriate to thank donors for their contributions, thank you letters are fine, but they should not include the specific tax deductibility language usually on receipts.

  4. January 12, 2012 at 3:06 am

    Hi there, very interesting blog. I have a question about in kind interest. This is for a small religious organization. if the organization received a below market rate loan from one board member, and the board approved the loan, should the board pass a resolution to record the in kind interest? The loan was used to buy the building which houses the organization.

    If the board approved the below market rate loan, does it satify the condition the board would have otherwise got the loan from somewhere else. Also, the religious organisation has funds…. but if it has to pay the interest, it will have to reduce some other expense. The organization is making principal payments every month.

    Thanks in advance

    • 8 Jonathan Ferguson
      January 12, 2012 at 10:32 pm

      This is a great question! Yes, not-for-profits should record income and interest expense on interest free or below market rate loans. I had not thought of this in terms of an “in-kind” contribution before but I see the connection. Actually these loans also run into a time restriction as the resulting revenue would be restricted and then recognized and released from restriction as the interest expense is recorded. The AICPA Technical Practice Aid 6140.05 addresses this topic, but I have to admit that I found the answer in the Wiley Not-for-Profit GAAP guide by Larkin and DiTommaso.

  5. 9 Mario Savard
    December 6, 2012 at 7:14 pm

    You said “In fact in some countries, Canada for example, recording SIK is prohibited by statutory requirements”.

    Do you remember where you find this information?

    If yes, i would like to know more about recording SIK in Canada.

    What i found in ICCA handbook, part III
    Section 4410.16 An organization may choose to recognize contributions of materials and services, but should do so only when a fair value can be reasonably estimated and when the materials and services are used in the normal course of the organization’s operations and would otherwise have been purchased.
    section 4410.17 Organizations may receive substantial contributed materials and services. Often these contributions are not recorded because of record-keeping and valuation difficulties. For example, it may be impractical to record the receipt of contributed services where the organization depends heavily on the use of volunteers to provide services

    Thank you


    • 10 Jonathan Ferguson
      December 12, 2012 at 3:16 am

      Thanks for the comment Mario. My information on this point comes from colleagues based in Canada. I am quick to admit that I do not have a depth of knowledge of Canadian GAAP or regulations. However in past conversations I was told with certainty that booking SIK revenue was not allowed. I am sorry I can’t point you to more specific guidance.

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