Valuation of Gifts in Kind: Other Considerations - Part 3
There are many variables to consider when assessing the fair market value of a donated item. As with so many things in life, a task that should be simple and straightforward too often is not. Two of the most commonly misunderstood variables in assessing fair market value are donor restrictions and international customs values.
When a manufacturer donates a product, it may place a restriction or condition on that product. A common restriction is that the product not be sold, traded, or bartered. A restriction prevents certain things from happening with the donation, as opposed to a condition, which requires that certain things happen with the donation.
The donor restriction that tends to create confusion, as it relates to fair market value, is when a donor restricts the distribution potential of a donated item. For example, when US medicines are restricted from being distributed within the US as a donation, the question often arises, “Why would a nonprofit use US valuation prices on items that cannot be distributed as a donation in the US?”
To help answer that question, let’s review the accounting principles governing the fair market value assessment approach to donated goods. Fair Market Value is the price that would be received to (1) sell an asset or paid to transfer a liability in an (2) orderly transaction between (3) market participants at the (4) measurement date. It’s important to note that there are no stated fair market value considerations related to restrictions placed on donated items.
Accounting Standards Codification (ASC) Topic 820, Fair Value Measurement, states that fair market value is driven either by the primary market for an item or by the main market in which that item is traded, not the market where the goods are distributed as a donation.
US pharmaceutical manufacturers, when donating excess medicines to nonprofits, restrict those donated medicines from being distributed within the US market. According to accounting guidelines, however, the US market is still their primary market. The medicines being donated were being sold in the US market prior to their donation. Newer-dated versions of the exact same product are being actively sold within the US. In other words, the restriction placed on donated pharmaceuticals does not change or impact the primary market in which the assets typically trade, which is why the US market is used to determine fair market value.
Another area of confusion surrounding the fair market value of donated items is the difference between the US donation value and the international customs value. The customs, or importation, value used by customs offices in foreign countries and the fair market donation value used by US-based charities are unrelated and have no bearing on each other. These two values are used for entirely different reasons, are founded on different sets of rules, and are reported to two separate regulatory agencies, one US and one foreign.
The assessed fair market value of donated goods is required by and reported to US regulatory authorities using the Generally Accepted Accounting Principles (GAAP). The fair market value of the donated goods determines the trade value of those goods in their primary market.
The customs importation value is required by and reported to the foreign customs office where the goods are being imported. Goods imported into a foreign country are taxed on their sales value, or on what that product could be sold for in the country of import. This is called an importation tax. Donated goods have a $0 sales value because they cannot be sold. They are given away free of charge.
Foreign customs offices do not typically allow a $0 sales value to be placed on an imported item, even if the item is a donation that cannot be sold. This puts nonprofit shippers into a bit of a pickle. They have just entered a logistical twilight zone.
There are no laws or authoritative guidelines* for handling this situation, so nonprofit shippers must determine for themselves how to address this conundrum. In an effort to meet the requirements of foreign customs offices and to reduce the expenses of bringing lifesaving aid to those in need, the international aid community has, over the course of the past few decades, followed a pattern of assigning a minimal value to imported items. This satisfies the foreign customs office as well as minimizing the importation tax that is paid to bring the donated goods into the country. If the customs value on a donated item were to be reported as the US fair market value, the importation tax on that item would be cost-prohibitive, thereby preventing much-needed lifesaving humanitarian aid from getting into the hands of the people in need. The nonprofit community has found that the best-case scenario is to assign the lowest value that the foreign customs office will accept.
Assessing fair market value to donated goods can be a complex undertaking, sprinkled with confusion. But remember that you do not have to tackle these issues on your own. Your CPA, as well as service providers, can help you navigate the twists and turns of the fair market value process.
*Note: I am not an attorney nor am I providing legal, accounting, or other advice. Always consult with an attorney, accountant, or other professional competent in this area before making important decisions on valuation.
We'll inform you about just-published articles, our upcoming books, professional Summits, live interviews, webinars, and more
Request Permission to Reprint This Article
Copyright © 1992-2020 CharityChannel LLC.