Contributions can come in several forms, including both cash and noncash assets. Examples of noncash assets include property, equipment, and furniture and fixtures. If an organization donates a noncash asset they must take into account the book value and fair value of the asset in order to properly record the transaction.
A unique characteristic of donated noncash assets is that the assets are sitting on the balance sheet of the donor at net book value (“NBV”). NBV is calculated by subtracting the accumulated depreciation up to the time of donation from the original capitalized amount of the asset. When an organization decides to contribute such an asset, management needs to research and estimate the fair value of the asset. The fair value estimate can be determined using several approaches, including the market approach, the income approach, or the cost approach. Fair value should reflect the price that would be received selling the asset in an orderly transaction between market participants. The difference between the fair value and the NBV results in a gain or loss on the income statement. If the fair value is greater than the NBV, a gain would be reported. In contrast, if the fair value is less than the NBV, a loss would be reported.
The organization that is the recipient of donated noncash assets accounts for the asset at fair value as contribution income. Depreciation would be recorded over the estimated remaining useful life of the asset. Additionally, a company that either is the donor or donee must disclose in their financial statements the nature of the transaction, the basis of accounting for the assets transferred, and any gains or losses on the transfers.
If you need any assistance in accounting for donated assets, estimating fair value, or calculating the respective gain or loss, please do not hesitate to call us at 858-558-9200.