Search within this section
Select a section below and enter your search term, or to search all click Not-for-profit entities
Favorited Content
7.5 Services provided by employees of affiliates or volunteers
Publication date: 30 Apr 2022
us NFP guide
Labor is essential for carrying out any nonprofit or business activity. Many NFPs accomplish their missions using a mix of paid staff and unpaid volunteers. Sometimes a portion of an NFP’s services or functions might be performed by employees of an affiliated entity, with no expectation on the part of the affiliate that it will be reimbursed for the labor costs. To appropriately capture the expenses associated with carrying out an NFP’s mission, financial statements must appropriately recognize the value and contribution of services provided by individuals or affiliates at no charge to the NFP.
Recognition and measurement principles for volunteer labor are grounded in the contribution accounting model. Recognition and measurement of services provided by affiliates (defined as entities that are controlled by, under common control with, or a parent of the reporting NFP) are intercompany transactions, not resources arising from parties external to the organization. Those services, discussed in NP 7.5.2, are a form of equity transfer and outside the scope of the contribution guidance.
Figure NP 7-1 provides an overview of the decisions associated with recognition of services provided by volunteers or employees of affiliates.
Figure NP 7-1
Decision framework for recognition of uncompensated labor
Decision framework for recognition of uncompensated labor
7.5.1 Services provided by volunteers
Many individuals perform services on behalf of a charity or spend time doing charitable work. However, only those that meet certain criteria are recognized by the recipient NFP for financial reporting purposes. In developing the recognition criteria, the FASB stated that its intent was to limit recognition to only those services that will provide information to users that is clearly relevant, clearly measurable, and obtainable at a cost that does not exceed the benefits of the information provided. Specifically, ASC 958-605-25-16 requires donated services to be recognized if they either:
- create or enhance nonfinancial assets (like construction services), discussed at NP 7.5.1.2 or
- require specialized skills that would usually need to be purchased if they were not donated (like legal counsel, accounting services, or medical services), discussed at NP 7.5.1.1.
Excerpt from ASC 958-605-25-16
Contributions of services shall be recognized if the services meet any of the following criteria:
- They create or enhance nonfinancial assets.
- They require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. Services requiring specialized skills are provided by accountants, architects, carpenters, doctors, electricians, lawyers, nurses, plumbers, teachers, and other professionals and craftsmen.
See examples 7 through 11 in ASC 958-605-55-52 through ASC 958-605-55-65 for illustrations of how the criteria are applied to different types of contributed services. Example NP 7-7 illustrates the differences in how the criteria are applied.
EXAMPLE NP 7-7
Applying the criteria for recognizing volunteer services
Applying the criteria for recognizing volunteer services
Fred, an attorney, is a strong supporter of a faith-based NFP organization in his community. Fred volunteers his time in several ways.
- Fred serves on the NFP’s board of trustees. In that role, he provides perspectives on general business matters, such as opportunities and risks and potential ethical, moral, and legal concerns.
- When the NFP was engaged in a legal dispute over its property boundaries, Fred provided pro bono legal representation in handling the matter.
- Fred is a knowledgeable do-it-yourselfer who often performs minor repairs and maintenance tasks for the NFP, such as fixing leaking faucets or replacing light fixtures.
- When the NFP embarked on a project to enlarge its fellowship hall, Fred was part of the volunteer labor force that assisted the contractor with building the addition.
Which of Fred’s activities would be recognized as contributed services in the NFP’s financial statements?
Analysis
- Fred’s service on the board of trustees would not qualify for recognition in the financial statements, because that role does not require his specialized skills as a lawyer. Example 9 in ASC 958-605-55-60 discusses considerations related to recognizing services of board members.
- Fred’s legal services in the boundary dispute would be included in the financial statements, as the NFP would otherwise have had to engage an attorney if one had not been available (i.e., it required Fred’s specialized skills).
- Fred’s time spent performing repairs and maintenance would not be recognized, even though those services would need to be purchased if Fred did not perform them. As an amateur handyman, Fred does not possess the specialized skills of a licensed electrician or plumber. In addition, routine repairs and maintenance do not enhance the NFP’s facilities, they merely maintain their existing service potential.
- Fred’s services as part of the volunteer labor force that assisted in the construction of the new fellowship hall would be recognized because they enhance a nonfinancial asset (the fellowship hall) even though the services do not involve a specialized skill.
7.5.1.1 The volunteer services involve specialized skills
This criterion has two elements, both of which must be met for recognition to occur. The first is that the services must involve specialized skills provided by individuals possessing those skills—for example, skills that require a license or certification and are not possessed by the public at large. ASC 958-605-25-16(b) lists accountants, architects, carpenters, doctors, electricians, lawyers, nurses, plumbers, and teachers as examples of the professionals whose services would be recognized. In practice, this designation is often extended to any skills that require a license or certification and that are not possessed by the general public. According to ASC 958-605-55-28, an individual who receives some training in a particular field does not necessarily possess a specialized skill. For example, if a volunteer receives some training from an NFP to learn how to help other people learn to read, that volunteer does not possess the specialized skills that a reading teacher possesses.
The second element of this criterion is whether, if the volunteer services were not available, similar services would need to be purchased by the NFP. In some cases, this determination is straightforward, but in others it requires judgment based on the facts and circumstances. For example:
- A telemarketing company contributes services of its personnel for use by a college in its annual telephone fund-raising campaign that has previously been staffed by unpaid student volunteers. The college would not recognize the contributed services because it would not need to purchase the services if they were not provided by donation.
- An architect contributes her time to draw plans to be submitted to the local zoning board to obtain the necessary approvals for an animal shelter to build a new facility. The animal shelter would recognize the contributed services because the architect possesses specialized skills and the animal shelter otherwise would have had to purchase those services in order to obtain the zoning approvals.
7.5.1.2 The volunteer services create or enhance a nonfinancial asset
Donated services that create or enhance a nonfinancial asset (for example, construction of a building) should be recognized regardless of whether they involve specialized skills. In those situations, the value of the services (including the value of unskilled labor) is a component of the asset’s cost basis. Question NP 7-3 addresses this principle.
Question NP 7-3
NFP constructed a new facility using labor contributed by a local construction company. Should NFP recognize contribution revenue for all the labor contributed by the construction company, or only for the skilled labor?
NFP constructed a new facility using labor contributed by a local construction company. Should NFP recognize contribution revenue for all the labor contributed by the construction company, or only for the skilled labor?
PwC response
NFP would recognize all of the labor contributed because those services were used to create a nonfinancial asset (criterion (a) in ASC 958-605-25-16). While many of the services contributed would also require specialized skills that would typically need to be purchased if not provided by donation, as long as criteria (a) is met, additional criteria do not need to be considered.
7.5.1.3 Measuring donated volunteer services
When donated volunteer services meet the criteria to be recognized, the donee NFP recognizes contribution revenue when the services are performed. Because the receipt and use of the services is simultaneous, the contribution revenue increases net assets without donor restrictions.
If the services create or enhance a nonfinancial asset (see NP 7.5.1.2), the corresponding entry would be to an applicable asset account. ASC 958-605-30-10 states that those contributions should be measured at fair value by reference to either the fair value of the services received or the fair value of the asset or of the asset enhancement resulting from the services. Example NP 7-8 illustrates application of the guidance for services that create or enhance a nonfinancial asset.
EXAMPLE NP 7-8
Contribution of services to construct a building
Contribution of services to construct a building
NFP constructed a new facility using labor contributed by a local construction company. NFP purchases the necessary materials, architectural services, permits, and remaining items required at a total cost of $400,000. An independent appraisal of the completed building (exclusive of land) obtained for insurance purposes estimated the fair value at $725,000. How would NFP record the contributed labor?
Analysis
NFP could use one of two possible approaches for determining the value of the contributed labor. NFP might derive the value of the contributed labor indirectly by subtracting the capitalizable out-of-pocket costs ($400,000) from the fair value of the asset created ($725,000). Under that approach, NFP would record the following entry:
Dr. PP&E
|
$725,000
|
|
Cr. Contribution revenue
|
$325,000
|
|
Cr. Cash
|
$400,000
|
To record facility constructed with combination of purchased materials and contributed services.
Alternatively, NFP could measure the contribution directly based on the fair value of the services received by obtaining an estimate from the construction company, if that amount was more readily available. In that case, the basis recognized for the building would have been the $400,000 of capitalizable out-of-pocket costs plus the directly-determined amount of contributed labor.
If instead, the services are specialized skills that would otherwise need to be purchased and are immediately consumed in the NFP’s operations (see NP 7.5.1.1), the corresponding entry would be to expense. Those contributions (and the corresponding compensation expense) are required to be measured based on the fair value of the services received.
According to ASC 958-605-30-10, the fair value of contributed services should represent an amount the organization would have been charged for the individual’s services in similar circumstances, even if the NFP would not otherwise be able to afford to purchase the services (for example, if the organization receives contributed services from professionals with high standard hourly billing rates). However, if an individual’s services to nonprofit organizations typically are discounted, any contributed services should be valued based on those discounted rates.
Example NP 7-9 illustrates application of the guidance to contributed services that meet the “specialized skills” criterion and was derived from ASC-958-605-55-52.
EXAMPLE NP 7-9
Contribution of teaching services
Contribution of teaching services
University’s faculty consists of both compensated faculty members and uncompensated faculty members who are associated with religious orders. The performance of the uncompensated faculty members is evaluated in the same manner as the performance of the compensated faculty members, and both are expected to meet the University’s standards. University concludes that the services provided by the uncompensated faculty members are specialized skills that meet the criteria in ASC 958-605-25-16(b) and that similar services from compensated faculty would have cost $2,500,000, which includes salary and benefits. How would University record the contributed services?
Analysis
The contributed services should be recorded at an amount the University would have been charged for the individuals’ services in similar circumstances. University would record the following entry to reflect the contributed services:
Dr. Compensation and benefits expense
|
$2,500,000
|
|
Cr. Contribution revenue
|
$2,500,000
|
To record donated teaching services from uncompensated religious personnel.
If uncompensated faculty are paid a nominal stipend to help defray certain of their out-of-pocket expenses, the contribution received would be measured at the fair value of the services received less the amount of the nominal stipend paid.
7.5.1.4 Promises to give volunteer services in the future
Most promises to give personal services are inherently conditioned on the future availability of the promisor. For example, an attorney who promises to provide free legal services for three years might subsequently become incapacitated (and thus, be incapable of fulfilling the promise). Therefore, such contributions generally are recognized when or as the condition is fulfilled (that is, when the services are provided). However, the facts and circumstances of the promise should be considered. If the promise does not depend on the availability of a specific individual—for example, a promise of free legal services from a large law firm with many attorneys—the contribution would likely be recognizable in advance of when the services are actually performed (see NP 7.4.4).
7.5.1.5 Disclosure of contributed volunteer services
When an NFP relies significantly on volunteer services, users of its financial statements need information about those services in order to understand the entity’s operations. Contributed services are also considered contributed nonfinancial assets and NFP entities are subject to the presentation and disclosure requirements described in NP 7.4.6. In addition, all entities (both NFPs and business entities) are required by ASC 958-605-50-1B to disclose the activities or programs in which they utilized services of volunteers, the nature and extent of those services, and the amount of contribution revenue recognized in connection with those services (if any). Entities are encouraged to disclose the fair value of services for which revenue was not recognized, if practicable.
An entity (NFPs and business entities) that receives contributed services shall describe the programs or activities for which those services were used, including the nature and extent of contributed services received for the period and the amount recognized as revenues for the period. Entities are encouraged to disclose the fair value of contributed services received but not recognized as revenues if that is practicable. The nature and extent of contributed services received can be described by nonmonetary information, such as the number and trends of donated hours received or service outputs provided by volunteer efforts, or other monetary information, such as the dollar amount of contributions raised by volunteers. Disclosure of contributed services is required regardless of whether the services received are recognized as revenue in the financial statements.
7.5.2 Donated personnel services received from an affiliate
NFPs may operate under arrangements in which some or all its program or administrative activities are carried out by employees of a closely-related entity. For example, a company or financial institution might establish a controlled NFP foundation to manage its charitable giving program, or a university may form a related NFP to manage its fundraising and development activities. Often, such an NFP will not hire its own employees, but instead will utilize employees of the sponsor, who donates the employees’ services to the NFP without an expectation of reimbursement. What it means to provide services without charge is described in ASC 958-720-05-7.
This guidance applies only to personnel-related services; it does not extend to other types of services that might be subsidized or provided without charge by an affiliate.
If the sponsor and NFP are affiliates, as defined in the ASC Master Glossary, nonreciprocal transfers between them do not meet the definition of a contribution. As a result, any donated personnel services are outside the scope of the rules for contributed services discussed in NP 7.5.1. Instead, guidance for recognizing, measuring, and reporting them is provided in the “Services Received from Personnel of an Affiliate” subsections of ASC 958-605 and in ASC 958-720. This guidance applies only to separately-issued financial statements of the NFP that receives the services; it does not establish reporting standards for the affiliate that provides the services (which could be either a for-profit or NFP entity).
ASC Master Glossary
Affiliate
A party that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with an entity.
The Services Received from Personnel of an Affiliate Subsections provide guidance for reporting services received by a not-for-profit entity (NFP) from personnel of an affiliate that directly benefit the recipient NFP and for which the affiliate does not charge the recipient NFP. Charging the recipient NFP means requiring payment from the recipient NFP at least for the approximate amount of the direct personnel costs (for example, compensation and any payroll-related fringe benefits) incurred by the affiliate in providing a service to the recipient NFP or the approximate fair value of that service.
The focus of the guidance is on services provided for the NFP’s direct benefit—that is, costs associated with services that would be performed by employees that otherwise would need to be directly engaged by the NFP. It includes services performed for and under the direction of the receiving NFP's own personnel (if any) as well as allocations of shared services costs. Question NP 7-4 addresses the scope of this guidance.
Question NP 7-4
Is there a difference between being financially interrelated with another entity (as defined in ASC 958-20) and being an affiliate of another entity for purposes of applying the guidance for “Services Received from Personnel of an Affiliate”?
Is there a difference between being financially interrelated with another entity (as defined in ASC 958-20) and being an affiliate of another entity for purposes of applying the guidance for “Services Received from Personnel of an Affiliate”?
PwC response
Yes. The threshold for entities to be financially interrelated is lower than the threshold for entities to be considered affiliates, and entities can be considered financially interrelated but not be affiliates. The guidance for “Services Received from Personnel of an Affiliate” only applies to affiliate relationships (see NP 8.4.1). Otherwise, the general rules for recognition of contributed services that are described in ASC 958-605 and NP 7.5.1 would apply.
7.5.2.1 Measurement of personnel services donated by an affiliate
In most cases, recognized services would be measured based on the affiliate's cost, which presumably would be readily available. While the components of cost depend on the specific nature and type of services provided, it would include, at a minimum, the direct personnel costs (for example, compensation and any payroll-related fringe benefits) incurred by the affiliate in providing the services. However, if using cost would significantly overstate or understate the value of the services received, the recipient may elect to report the services based on the fair value of what it would normally pay if required to purchase the services, as described by ASC 958-720-30-3. The option to use fair value instead of the affiliate’s cost was provided to address concerns that the guidance might produce distorted results in a situation when a highly-compensated employee regularly provides routine services to an NFP affiliate—for example, if the CFO of a large corporation performs bookkeeping services for the corporation's charitable foundation. In these unusual situations, the allocated cost of the individual's compensation might far exceed the amount the NFP would normally pay for the services. In the original basis for conclusions related to this guidance, the FASB observed that such situations are expected to be uncommon.
Question NP 7-5 and Question NP 7-6 illustrate two potential scenarios.
Question NP 7-5
If the NFP is charged (or allocated through an intercompany account) an amount that is at least the approximate amount of direct personnel costs of the services provided, should they record any adjustments to record the amount at fair value?
If the NFP is charged (or allocated through an intercompany account) an amount that is at least the approximate amount of direct personnel costs of the services provided, should they record any adjustments to record the amount at fair value?
PwC response
No. In those situations, the recipient NFP's financial statements already reflect the costs of the services performed by the affiliate on its behalf. Unless the NFP believes the amounts charged or allocated significantly overstate or understate the value received, recording the amounts at fair value is not required, since this is a transaction between affiliates.
Question NP 7-6
If an NFP is charged (or allocated through an intercompany account) an amount that is lower than the cost or fair value of the services provided, should the NFP record any adjustments to record the amount at fair value?
If an NFP is charged (or allocated through an intercompany account) an amount that is lower than the cost or fair value of the services provided, should the NFP record any adjustments to record the amount at fair value?
PwC response
Neither ASC 958-605-25-17 nor the “Services Received from Personnel of an Affiliate” subsections of ASC 958-720 explicitly address such situations. Except for the situations described in ASC 958-720-30-3 when the amount charged is significantly understated, we believe that the incremental difference between the affiliate's cost and the amount charged should be recognized, measured, and presented in the manner specified by this guidance.
7.5.2.2 Presentation of personnel services donated by an affiliate
When services are donated by an affiliate, the recipient NFP’s statements would reflect an increase in net assets (for the donation) along with a corresponding amount of personnel expense or an increase in an asset (for example, when the personnel are involved in the construction of a fixed asset) based on the nature of the work performed. According to ASC 958-220-45-21, the increase in net assets is considered an equity transfer (as defined in the ASC Master Glossary); it is not reported as contribution revenue. Although an equity transfer typically describes a transaction between NFP affiliates, in this instance, we believe that equity transfer reporting should also be used when a for-profit entity provides the services. This is based on ASC 958-220-45-21, which states that personnel services donated by “any other affiliate” should be reported as equity transfers. If the recipient is a health care entity, the equity transfer is excluded from (reported below) the performance indicator. See NP 3.4.8 for additional discussion of equity transfers.
The increase in net assets associated with services received from personnel of an affiliate that directly benefit the recipient not-for-profit (NFP) and for which the affiliate does not charge the recipient NFP shall be reported as an equity transfer, regardless of whether those services are received from personnel of an NFP affiliate or any other affiliate. The corresponding decrease in net assets or the creation or enhancement of an asset resulting from the use of services received from personnel of an affiliate shall be presented similar to how other such expenses or assets are presented. Paragraphs 954-220-45-2 through 45-3 provide additional guidance for not-for-profit, business-oriented health care entities.
ASC Master Glossary
Equity transfer
An equity transfer is nonreciprocal. An equity transfer is a transaction directly between a transferor and a transferee. Equity transfers are similar to ownership transactions between a for-profit parent and its owned subsidiary (for example, additional paid-in capital or dividends). However, equity transfers can occur only between related not-for-profit entities (NFPs) if one controls the other or both are under common control. An equity transfer embodies no expectation of repayment, nor does the transferor receive anything of immediate economic value (such as a financial interest or ownership).
Because equity transfers are not contributions, they are not subject to the disclosure requirements for contributions received in ASC 958-605-50. However, entities should consider the appropriate related party disclosures, including a description of the transaction and any other information deemed necessary to understanding the effects of the transaction on the financial statements.
Example NP 7-10 illustrates the recognition, measurement, and presentation considerations for personnel services donated by an affiliate.
EXAMPLE NP 7-10
Personnel provided by a NFP to its charitable foundation
Personnel provided by a NFP to its charitable foundation
Foundation is a grant-making entity that administers NFP's charitable giving program. Foundation’s articles of incorporation indicate that NFP is its sole corporate member. Foundation has no employees of its own; all its activities are carried out by NFP employees. NFP estimates that $100,000 of its employee salary and benefit costs are attributable to time spent on Foundation activities. Those costs are in line with amounts that Foundation would have to pay for the services if the services were not provided by NFP employees.
How would Foundation reflect the salary and benefit costs of the donated personnel services in its separately-issued financial statements?
Analysis
When preparing stand-alone financial statements, Foundation would first need to consider whether NFP is an affiliate (as defined in the ASC master glossary). Based on the definition of “control” used in evaluating relationships between donors and intermediaries that facilitate contributions on their behalf (refer to NP 5), Foundation is controlled (by virtue of the sole corporate member relationship) and thus, NFP would be an affiliate.
A recipient not-for-profit (in this example, Foundation) must recognize all services provided by personnel of an affiliate for its direct benefit. Therefore, Foundation would record the following entry to reflect the donated personnel services provided by NFP, based on the costs incurred by NFP:
Dr. Compensation and benefits expense
|
$100,000
|
|
Cr. Donated services received from affiliate
|
$100,000
|
|
To record administrative services performed by NFP personnel.
|
||
The donated services represent an equity transfer received by Foundation. In the separately issued financial statements, they would be displayed as a separate line within changes in net assets without donor restrictions.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
Link copied
