By Tyler Kleinschmidt Not-for-profit entities rely heavily on volunteers and a variety of contributed goods and services to fulfill their mission. The Financial Accounting Standards Board (“FASB”), which sets the rules regarding accounting and financial reporting, outlines criteria that govern whether or not a contributed service should be recognized in the financial statements. However, there is still debate as to whether these guidelines allow for the most accurate reflection of the activities within the financial reporting framework.
The first criteria for recognition states that if the services create or enhance a nonfinancial asset the contributed services would be recognized in the financial statements.
The second criteria for recognition is that the service contributed must be one that requires a specialized skill. This in itself is subjective based on what an Organization considers a specialized skill. The FASB suggests that services requiring specialized skills are provided by individuals with a certain level of expertise (teachers, attorney’s, lawyers, etc) and the services would have to be purchased if not donated. Even though this narrows the range, issues arise due to the volume of contributed services that can fall outside these standards. An organization could receive a significant quantity of volunteer services that are disclosed but not recognized because the organization does not deem the skills specialized.
For example, an Organization may determine that they need someone to assist with the monthly close of their financial statements, including reconciliation of bank and investment statements, updating fixed assets and other specific activities. A volunteer offers to assist with this function and the Organization determines these are contributed services because they require a certain level of expertise by someone with an accounting or bookkeeping background. Secondly, they would most likely have to pay an outside consultant to perform these services if not donated. The Organization would determine the value of services and record the donated revenue and offsetting professional expense.
However, if an Organization needed someone to assist with opening the mail, preparing deposit slips and sorting incoming invoices, this would not take a level of expertise and the Organization could have volunteers fill that role. This happens often with smaller organizations that are trying to maintain proper segregation of duties within the accounting function, so they use volunteers to do the basic portions of the accounting function that don’t require a higher level of expertise. These services are not recorded in their financial statements, but often tracked by the Organization to have a general knowledge of volunteer hours.
Many organizations often seek advice from a CPA on how donated services should be recognized within their financial statements. One of the key elements we describe in reviewing this topic with clients is consistency. We encourage an Organization to annually review their recognition of contributed services policy at the Finance Committee level. Their internal procedures should be documented within meeting minutes along with the explanation supporting their policy.
If your Organization receives contributed services, I encourage you to evaluate your internal policies and ensure you are in accordance with current accounting standards. For further assistance with this area, feel free to contact Natalie Hopkins, Audit Manager at 317-569-4181 ext. 244, nhopkins@alerdingcpagroup or visit our website at www.alerdingcpagroup.com. Alerding CPA Group is an Indianapolis-based public accounting firm. Visit our website: www.alerdingcpagroup.com.