Understanding Contributed Services for Nonprofit Organizations
Nonprofit organizations rely on a mix of funding sources to sustain their mission—including monetary donations, grants, and, sometimes, the generous donation of services by professionals and volunteers. While these contributed services provide critical support, it’s essential that nonprofits understand when and how to recognize them on their financial statements.
What Are Contributed Services?
Contributed services, also known as donated services, refer to professional or volunteer labor provided to a nonprofit organization free of charge. These might include but are not limited to:
- A lawyer offering pro bono legal work
- A graphic designer creating a fundraising brochure
- An accountant preparing the organization’s annual tax filings
While these services don’t involve a cash transaction, they represent real value and can (and sometimes must) be reflected in a nonprofit’s financial statements.
When Should Contributed Services Be Recognized?
According to FASB Accounting Standards Codification (ASC) 958-605, contributed services should be recognized only if they meet specific criteria:
1. Create or Enhance a Nonfinancial Asset
If the service results in a tangible improvement, such as constructing a building, it should be recognized. For example, donated architectural work to design a new shelter would qualify.
2. Require Specialized Skills
If the service is provided by individuals who possess specialized skills (e.g., attorneys, CPAs, doctors, or electricians) and the service would otherwise need to be purchased, it must be recognized. For example, if a CPA volunteers to conduct an organization’s audit, that service must be recognized.
General volunteer work, such as event setup or basic administrative help, while valuable, is not recognized in the financial statements if it doesn’t meet the above thresholds. However, nonprofits often describe and value these contributions in their annual reports or footnotes to acknowledge their significance to the organization’s mission.
Financial Statement Disclosure Requirements
As mentioned in a previously published article, when a nonprofit recognizes a contributed nonfinancial asset (an in-kind donation), the organization must present the contribution as a separate line item on the statement of activities. For contributed services, the organization not only needs to identify the amount recognized as revenue and corresponding expense (usually under “Donated Services”) on the statement of activities, but it must also provide details in the footnotes, including how the services were valued, why they met the recognition criteria, and disclose the nature and extent of the contributed services.
Example Disclosure:
“During the year, the organization received donated legal and accounting services valued at $25,000. These services were provided by licensed professionals and were used to support general operations. The value of these services has been recorded as both in-kind revenue and professional services expense in the accompanying financial statements.”
Nonprofits thrive on the goodwill and skills of others. By understanding how and when to recognize contributed services, organizations can better showcase the full picture of their operations and impact. While not every volunteer hour appears on the financials, clear and accurate disclosure of qualifying services goes a long way in strengthening trust and accountability.
Please contact us if you have questions about the information outlined above; our seasoned and experienced nonprofit professionals are here to help. You can also learn more about our nonprofit services by visiting our Nonprofit industry page.
