AERDO Interagency GIK Standards,
January 1999

Guidance for Understanding Standards

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Standard #3 - Valuation Recording Practices

Background: The financial recording and reporting of GIK could be the most important and most confusing issue to many non-profits’ GIK programs. Currently organizations use various methods of recording and reporting GIK. As noted in Standard #1, only GIK that can be used to further the tax-exempt purpose of an organization should be accepted. Hopefully, all organizations are more concerned with using GIK to increase the impact of their programs rather than with the benefits produced by the valuation and recording of GIK. However, it is important for all organizations to appropriately record and report their GIK activity.

Very little guidance is provided by accounting or regulatory literature concerning the financial recording and reporting of GIK. For example, the Internal Revenue Service directions for completing Form 990 gives the guidance that only contributions received in a form other than cash should be reported, using the market value as of the date of the contribution.* The American Institute of Certified Public Accountants provides the most guidance. In their publication, Audit and Accounting Guide: Audits of Certain Non-profit Organizations, the AICPA provides the guidance that non-monetary items generally are recorded at fair value when received, provided the organization has a clearly measurable and objective basis for determining the value. However, if donated items pass through the organization to its charitable beneficiaries and the organization serves only as an agent for the donor, the donated items are usually not recorded. The statement also adds that the basis of valuation of GIK should be disclosed in the financial statements.**

It should be noted that the federal tax regulations do provide guidance for valuation of GIK from the donor's perspective. However, there is a difference between federal tax law and generally accepted accounting policies. This document is concerned with generally accepted accounting policies.

The current accounting literature indicates that "non-monetary transactions" are to be recorded at the fair value of the assets involved (Accounting Principles Board Opinion No. 29 [APB 29], "accounting for non-monetary transactions," paragraph 18). Paragraph 25 of APB 29 defines fair value as being determined "by referring to estimated realizable values in cash transactions of the same or similar assets, quoted market prices, independent appraisals, . . . and other available evidence."

The current accounting literature defines "fair market value" as the maximum price which would be agreed upon by a seller willing to sell, who does not have to sell, and a buyer willing to buy, but who does not have to buy, where both have reasonable knowledge of the facts.

This assumes the transaction would be an "arms-length" transaction. Again, fair market value could be the retail value, wholesale value, or other value, depending upon who the buyer and seller are. It should be noted that even though a current buyer may not presently be available for an item, the fair value of the item would not be zero.

a. Fair Value: GIK donations are to be valued based upon "estimated realizable values in cash transactions of the same or similar assets, quoted market price, independent appraisals, . . . and other available evidence" (APB 29). Given the quantities donated, normally this would approximate wholesale price (not retail price paid by an individual consumer). The non-profit is primarily concerned with the usability of GIK products within their own programs. However, both usability and marketability are joint considerations in determining fair value.

b. Product Encumbrances: GIK donations that are impaired or encumbered by restrictions or considerations that limit their usability and/or marketability must be valued less than GIK that are not impaired. The reduction in value must reflect the seriousness of the impairment, encumbrance, or other restriction. If the reduction of value is for a GIK already in inventory, the expense must be offset against revenue.

c. If there is no reasonable or sufficient basis to determine the value of a GIK donation, no value should be recorded as revenue.

• Is the fair value based upon retail price, wholesale price, replacement price, or on some other basis? Our recommended standard is that "fair value" will normally be closer to wholesale rather than retail price, depending on the circumstances and quantities involved in each donation. In almost all instances for donations of any sizeable quantity, retail price should not be the basis upon which a valuation is recorded.
  
• The non-profit has a responsibility to determine the basis for the donor’s valuation (retail, wholesale, tax basis, other), and to determine if the valuation is reasonable. If the valuation is not reasonable, or if valuation cannot be obtained from the donor, the non-profit must use an objective manner for determining an appropriate value. The fair value of a GIK donation actually recorded by the recipient non-profit may differ materially from the valuation assigned by the original donor. If no reasonable or sufficient basis to determine the value of a donation can be used, no value should be recorded.
  
• One objective manner for determining an appropriate value for a GIK donation if the value provided the donor is not reasonable or value cannot be obtained from the donor is a Like-Kind Analysis. Like-kind analysis refers to the determination of a value for a given volume of a product donation based upon externally verifiable values for a similar volume and quality of product. A like-kind analysis can be conducted on the basis of reasonable values for the same or similar products, given volume, quality, and condition of the donation. Such analysis can be based on past donation histories, sales in the current market, or average unit values based on analysis of prices for similar products or product mixes.
  
• The value that a donor claims for income tax purposes is not necessarily related to the value recorded by a non-profit. Federal income tax regulations determine the amount that may be used for income tax deduction purposes. However, Generally Accepted Accounting Principles (GAAP) are used to determine fair value for audited financial statements. There may be a material difference between these two amounts.
  
• Both utility for use (usability) and marketability should be considered in determining fair value. For-profit organizations are primarily interested in how much a product can be sold for. However, non-profit organizations are concerned with how well the product can be used in the non-profit’s programs to further its tax-exempt purpose. If a non-profit can appropriately use a product in its programs, the lack of marketability of a given donated product should not eliminate the reasonable value recorded as revenue by the non-profit.
  
• For example, vegetable seeds may be packaged for retail sale during a specific period of the year, after which they must be returned to the producer. However, the seeds still maintain a high germination rate and can be appropriately used in a non-profit’s programs. If the seeds were donated during the period in which they may be sold at retail, the fair valuation would be based on the wholesale price of the seeds. After the period for retail sales has passed, there may no longer be a viable market for the seeds. However, since the seeds still have utility for use in the non-profit’s programs, the seeds should be valued at less than the wholesale value. How much less than the wholesale value would depend upon the length of time that passes before the seeds are used and/or the germination rate of the seeds when they are designated for final use. The longer the time period, or the lower the germination rate, the lower the fair value of the product.
  
• For organizations that record GIK donations at the date of receipt and records an inventory value (see Standard #5 Recognition of Revenue and Expense), the reduction in value of inventory items must be written off as an offset to GIK revenue, and not as program expenses. Normally, the write-down of value would be considered a general and administrative expense. However, if an error was made in recording the original value, the adjustment should be recorded against GIK revenue.

Footnotes:

* 1991 Returns for Organizations Exempt from Income Tax, Department of the Treasury, Internal Revenue Service, page 3.

** Audit and Accounting Guide: Audits of Certain Non-profit Organizations, American Institute of Certified Public Accountants, pages 23-25.

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