Question

Donations in cash are easy to measure. What is the treatment that not-for-profit organizations use for donated goods and services?

Answer 1

Not-for-profit organisations are organisations which do not operate with the intention to earn huge profits for its owners, instead they have certain predetermined charitable or religious or educational or such objectives for the betterment of the society and they strive to work towards attainment of those objectives. Donation is the most important and the biggest source of inflow - it can be in cash or in kind. It is rightly stated that measuring cash donation is easy but when it comes to measuring donations in kind the measurement becomes an issue. For solving this issue, IRS guidelines come to help. They clearly specify the guidelines for ascertaining the fair value of such donations received in kind. Fair value can be understood as price that the good/service would fetch if sold/rendered in outside market. Suppose goods are not new then it would be seen what price the good would cost if similar good in comparable condition is purchased from the outside market. Thus when such fair value is determined, income statement includes the donations at such amounts as estimated. This is acceptable for tax purpose as well because it complies with IRS guidelines.