What is Donated Capital and How to Account for it under US GAAP Rules

Donated capital comes in the form of nonreciprocal transfer of assets to a company. This form of capital is rare with for-profit organizations. However, not-for-profit (NFP) organizations can receive assets and capital donated by individuals and governments.

ASC 958-605-25-2 and ASC 845-10-30 combined guide on the accounting treatment of donated capital.

What is Donated Capital?

Donated capital can result in the form of asset transfer or services rendered to an organization.

The FASB guidelines provide definitions and recognition of donated capital.

  • A contribution is basically an unconditional transfer of cash or other assets in a nonreciprocal transfer to an entity. It can be in the form of cancellation of liability as well.
  • A promise to give (capital) is a written or oral agreement to contribute cash or other assets to another entity. There must be sufficient evidence to verify the promise was made to deliver the capital.
  • A conditional transfer or contribution comes in the form of a promise to contribute if certain conditions are met. The same holds for the contributor to take back the capital if the stated conditions do not meet.

The ASU 2018-8 provides a step-by-step approach to recognize the contributed capital.

  1. If the resource provider received a commensurate value in return for the contributed asset, then it is an exchange transaction.
  2. If the transaction is non-reciprocal, then it will be accounted for as a donated contribution.
  3. The receiver then determines whether the donor imposed any condition with the asset transfer. If yes, then the capital must be recognized only when the condition is satisfied.
  4. Next, the receiver will determine whether the contributor imposed any restriction on the use or transfer of the asset. If yes, then the receiver must record the donated capital with restrictions imposed.
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Contributed Services

An organization can receive donated capital in the form of contributed services as well.

If the received services:

  • Created or increased non-financial assets of the company.
  • Required special skills and the service provider(s) possessed those skills such that these skills would be otherwise purchased by the organization.

The organization receiving these services will record donated capital for the period in which services are rendered. The organization should record the revenue for the cost of services received in the same period as well.

Measurement at Fair Value

The receiver organization must record the donated capital at fair market value. Market quoted prices should be used wherever available for the assets received by the organization.

In the absence of fair market values; estimations, independent appraisals, or valuation techniques should be used to record the value of donated assets.

Services contributed should also be recorded at fair market values. The estimations may include an evaluation of nonfinancial assets received or enhanced value of an underlying asset or the present value of future cash flows of the benefit received.

Distinguishing Donated Capital from Other Transactions

The FASB guides on the recognition of donated assets. To distinguish these donated assets from other assets, the transaction must fulfill these criteria points:

  • Contributions are nonreciprocal transactions.
  • Contributions are transferred to or from entities acting as other than owners.
  • Contributions are made and received voluntarily.

If a transaction meets these three points, it will be recognized as donated capital.

Distinguishing Donated Capital from Exchange Transactions

It is difficult to distinguish donated capital transactions from exchange transactions. The FASB states that the receiver must make a suitable judgment on the recognition of such transactions.

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The receiver should determine whether the resource provider received a commensurate asset in return for the donated capital. For instance, a donor may donate cash for a research and development program to a research institute with certain conditions.

For example, if the provider sets a condition to receive the patents or copyrights of the research conducted by the institute in a reciprocal way for the donated capital, it will be recognized as an exchange transaction.

Accounting for Donated Capital

Donated capital should be recognized and measured according to the US GAAP rules for the definition of assets or liabilities of an organization.

Donated capital can be in the form of cash or other assets. Other assets include land, building, securities, intangible assets, services rendered, supplies, and an unconditional promise to give these assets to an organization.

ASC 958-605-25-2 guides that such nonreciprocal transfer of assets should be recognized as revenue in the period it is received. These donated assets should be adequately disclosed in the financial statements.

Donated capital is also recorded in the income statement for the period in which an asset is received. At the closing, the asset remains part of the retained earnings of the organization.

Since the historical costs (or book values) of donated assets will be zero for the receiver, they are not an appropriate measure of recording donated capital.

According to ASC 845-10-30-1, such long-lived donated assets should be recorded at fair market values at the time of donation. In addition, like other assets, these donated assets should be amortized over the useful economic life of the assets.

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For conditional donated capital, the organization must not record assets or revenue until the condition is satisfied. However, the organization can disclose the promise to give and the conditional requirement in the financial statements.

Working Example

Let us consider a few simple examples of donated capital in different scenarios.

Suppose a board member of the ABC company donates land worth $ 2 million to the company. The donation is unconditional and meets the recognition criteria of being the nonreciprocal transfer of capital.

ABC Company will record the journal entry as:

AccountDebitCredit
Land (Asset)$ 2,000,000 
Revenue- Donations $ 2,000,000

Suppose another board member arranges labor hours for the company worth $ 50,000. Again, the donation meets the criteria of donated services rendered.

ABC Company will record the entry as:

AccountDebitCredit
Salaries$ 50,000 
Revenue- Donations $ 50,000

Similarly, suppose there is a donation of conditional payment for the annual rent worth $ 500,000 of a building in use by ABC company. In that case, the board member offers to pay the rent if the building is used primarily for the residence of company employees.

ABC fulfills the condition by allotting the mentioned building for its employee residence. ABC will record the entry as:

AccountDebitCredit
Rent Account$ 500,000 
Revenue- Donations $ 500,000
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