Nonprofits receive in-kind contributions that can range from professional services to inventory and advertising. Some nonprofits also receive the right to use and/or lease land and buildings for free or at a discounted rate. Most in-kind contributions are recognized at fair value when received; however, in-kind contributions of land and buildings have special considerations.
The contributed facilities should be recognized at fair value and discounted to net present value if the free/discounted period of use exceeds one year. Here we will be discussing the recognition of long-term free or discounted rent for the use of land and/or building.
The contribution for the right to use or lease land and buildings for periods exceeding one year for free or at a discounted rate is recognized in the period the contribution is received and the expenses are recognized during the period(s) the asset is used. For example, if a nonprofit has a five year in-kind lease for a building the entire contribution for the five year lease discounted to net present value is recognized in the period the agreement is received. The expense is subsequently recognized in each of the five rental years. If a nonprofit received the use of the facilities below fair market rates, then the fair market rate less the contractual amount to be paid is the in-kind portion received. For example, if a nonprofit is leasing a building for five years and the rent required to be paid is $5,000 a year while the fair market rate for the building is $30,000 a year, the in-kind portion received is $25,000. The total in-kind lease payments are to be discounted to net present value. The discount rate to be applied can be the applicable federal rate, selecting mid-term or long-term depending on the length of the lease. The in-kind rent discounted to net present value is the amount of contribution revenue recorded and is temporarily restricted due to a time restriction.
When the contribution is recorded, a land or facility use asset for future use is also to be recorded. Each year the current year’s use of the asset is released from restriction on the statement of activities and reduces the facility use asset on the statement of financial position and the change in the discount is recorded as additional contribution revenue annually.
If you have any questions about accounting for long-term non-cash contributions, please contact PBMares.