the silver guide to non-monetary transactions

about
guide
start table of contents
toolkit
glossary templates procedures diagrams scales
links credits fr

faq

Why the “Silver Guide”?

We have selected the shortened title Silver Guide to evoke the notion of money without having to give the full title (The Silver Guide to Non-Monetary Transactions). The title also aims at situating this work within the wider suite of resources produced by ARCA, such as The Grey Guide to Artist-Run Publications and Circulation, as well as those produced by the RCAAQ in its series of red, blue, orange, and green “Petits Guides.”

^ top

Why account for non-monetary transactions?

In most financial arrangements, an organization that requests public funding must report its own contribution to the overall financing of its activities. Typically, funding agencies will finance only part of the organization’s programming and thus usually require that a percentage be obtained via other sources. For example, in the case of an internship or employment program, expenses related to fixed costs (rent, insurance, etc.), supervision, and workstation may be covered under the organization’s core funding. But when, in applying for core funding, an organization is required to demonstrate that a percentage of its overall support comes from other sources, it is assumed that it has access to other levels of public funding, to reduce its dependence on a single agency.

Looking at the funding provided by arts councils at the provincial level, however, not all provinces are equal: in 2019–20, average funding for artist-run centres by the Ontario Arts Council was just $32,611, compared to those supported by the Conseil des arts et des lettres du Québec, which averaged $142,705.

To bridge such great disparities in provincial (and municipal) funding, some organizations must take advantage of all the opportunities available through their partnerships. Converting non-monetary contributions received into book value can help them reach the percentage required to qualify for funding.

^ top

How to determine the fair market value of non-monetary transactions?

The fair market value (FMV) of donated goods or services is based on the normal sale price established by the donor organization at the time when the goods/services are given.

The FMV of goods or services received is established by the donating party based on the sale price that would normally be charged to the client/partner organization.

Since the transaction is non-monetary in nature, FMV is defined here as a payment amount agreed upon by willing parties in the normal course of business and on a level playing field, such as the retail sale price for local or online commerce.

However, FMV valuation is not an exact science and there is no universal scale. Adequate, reliable, and reasonable valuation is essential when accounting for gifts and barter of non-monetary services in financial statements.

Fair market valuation may vary from one organization to another, depending on various market parameters: visibility, reputation, profitability, scarcity, duration of event, print run, etc.

FMV may fluctuate over time, as it is established at the time of the transaction.

Parties engaged in a non-monetary transaction must be able to justify their valuation method to the tax authorities. Your Chartered Professional Accountant (CPA) can help you determine a valuation method and explain what supporting documentation is required.

Below are three methods that can guide you in this process.

Comparison Method
This method is based on transactions of comparable goods or services. To be considered as comparable, transactions must be carried out in a similar sector of activity, under similar socio-geographical conditions, and at a relatively recent date.

For example, the price of a donated good or service may be compared against prices in requested quotations, against earlier purchases, or by comparing with prices offered by competitors in the same sector of activity. The method of comparison must also be contextualized, as this may vary even within the same sector.

In this regard, factors that may influence FMV may include notoriety in the case of an exchange with a highly visible event with extensive media coverage and documented attendance statistics, or scarcity such as an artwork or other collectible item.

Cost Method
This method is based on the cost of a good or service (i.e., the cost of its manufacture).

In the case of goods, this method involves determining the replacement cost as of the current date, under the assumption that the actual cost reflects the market cost (i.e., the FMV). This method is similar to those used by insurance companies to determine the replacement cost of goods.

In the case of services, all indirect expenses incurred in the provision of the service must be taken into consideration (e.g., management costs, salaries or fees, telecom or utility costs, insurance, etc.). Evaluation of these indirect expenses makes it possible to estimate the true cost of the service and to evaluate that cost against market rates.

It may be the case that the estimated cost ends up being higher than the market price. For example, if the cost of renting a gallery space was $5,000 per month, even as an equivalent space was available on the market for $2,000, the FMV may be reasonably justified by what is or is not included (e.g., technicians, bar service, caretaker, insurance, furniture, equipment, etc.).

Expert Evaluation
In cases of extraordinary or luxury assets (e.g., land, buildings, collectibles, works of art), it may be appropriate to call upon an independent professional third party. You can also set up a committee of experts or peers who can establish evaluation criteria.

^ top

How to record non-monetary transactions in your accounting system?

Please consult section 3 of the Silver Guide to determine in advance whether the value of non-monetary transactions relating to goods or services can be recorded in your financial statements. If it can, please continue reading.

For all organizations and businesses, revenues and expenses for the fiscal year must appear in the financial statements, in the “statement of operations” document. Subtracting the expenses from the revenues will yield either a deficit or a surplus (also called a profit).

In cases of non-monetary transactions of goods or services received as gifts or via barter, it is important to properly record these in the financial statements so as not to generate a false profit or a false deficit.

For example, suppose your organization receives a printer ink cartridge for free, with a market value of $175. The FMV of such a good or service received constitutes a revenue. When recording this non-monetary transaction in the accounting system, the $175 should therefore be recorded in a revenue line item. The organization does not hold the $175 in cash: it is simply the market value of the ink cartridge. Further, by the fiscal year-end, the ink cartridge has been used and is empty.

It is important to remember that the third requirement when accounting for a gift is that it be something that the organization would otherwise have had to purchase (see section 2 of the Silver Guide). It is therefore an office supply expense that is covered, in this example, by receipt of the free cartridge. For this reason, it is important also to enter the market value of the ink cartridge in an expense line item, in return for the donation received. Thus, through the symmetry of the accounting system, the false profit effect is cancelled out.

In order to represent financial information accurately in the financial statements, and to follow accounting standards, revenue items must be presented separately under appropriate categories, such as sponsorships and bartered services, non-monetary transactions, or in-kind contributions.

As for expenses, these may be presented separately or incorporated into the existing statement of accounts, depending on your organization’s practices. Your CPA can help you with such accounting operations.

Using the example of the ink cartridge gift, the account post would look like this:
Expenses: In-kind or office supplies – Debit (DT) $175
Revenues: Sponsorship and service exchange – Credit (CT) $175

The principle is the same for bartered services. An amount corresponding to the FMV must be posted in a revenue line and, symmetrically, in an expense line.

For example, a partner lends you a digital projector free of charge for a ten-day event—a service worth $450. In exchange, this partner will be offered visibility of an equivalent market value.

For this sponsorship, the accounting entry would look like this:
Expenses: Marketing sponsorship and exchange – DT $450
Revenues: Sponsorship and service exchange – CT $450

Another example: let’s say you rent a space for an event, agreeing to a discount in exchange for visibility. The market value of the rental is $700, but you are offered a discount of $300 in exchange for visibility on your social networks.

Here’s how the accounting entry for this rebate would look:
Expenses: Space rental – DT $700
Revenues: sponsorship and service exchange – CT $300

Accordingly, the cost to your organization would be $400.

^ top

What is the difference between donation and barter of goods and services?

Bartered goods or services are commercial transactions between two parties and are therefore subject to taxes (if the organization is registered for taxes). Fiscally speaking, however, donations are not a taxable supply and are therefore not subject to taxes.

To learn more about donations, see section 2 of the Silver Guide.

Only a registered charity may issue a charitable donation receipt for cash donations, donations of property, or donations of artwork. A donation of services does not qualify for such a receipt unless the donation happens as two separate transactions: payment for provision of a service and the receipt of a cash donation. On this matter, see section 5.3 of the Silver Guide.

Non-profit organizations that are not registered charities may still receive donations of cash or of goods or services, but they are not allowed to issue charitable donation receipts. To learn more about charities, see section 5 of the Silver Guide.

^ top

What is the difference between a sponsorship and an exchange of services (barter)?

Unlike donations received (either goods or services), sponsorships and exchanges of services involve an equivalent transaction between two parties.

A sponsorship is a donation of money, goods, or services in exchange for promotional visibility. For consumer tax purposes, sponsorship is not a taxable supply and, unless otherwise specified, is not subject to tax. For applicable exceptions, see section 4.2 of the Silver Guide.

The exchange of services is a commercial transaction between two parties. Technically, the transaction is counted as a reciprocal sale, but instead of exchanging money, it can be an exchange of goods or services of equivalent value. In terms of consumer tax, the exchange of services is a taxable supply and taxes apply for parties registered for taxes. For more information, see section 4 of the Silver Guide.

Commercial transactions can also take the form of a discount in return for visibility, or even an invoice discount in exchange for services. In these cases, it is important to determine if consumer taxes apply, depending on whether or not your organization is registered for taxes. For more information, see section 4.1 of the Silver Guide.

^ top

What is the difference between a donation and a volunteer contribution?

Many people volunteer with non-profit organizations. Can we account for volunteering as a donation? Before you do anything else, please consult section 2 of the Silver Guide: “Accounting for contributions received in the form of goods or services.”

In accordance with accounting standards for non-profit organizations, if an organization accounts for volunteer contributions in its financial statements, it must ensure that three criteria are met:

1 - The fair market value (see the Silver Guide glossary) of these contributions can be reasonably estimated;
2 - The goods and services received are used for operational purposes;
3 - The goods and services received are of a kind that the organization would have otherwise purchased.

In general, volunteer labour is not recorded in an organization’s revenues and expenses, for two reasons:

1 - Evaluating its fair value is too difficult;
2 - The organization does not have the financial ability to purchase these services and therefore the third condition for accounting (that the organization would have otherwise purchased the service) cannot be met.

However, such information can be included in the notes to the financial statements.

For an example of a note to the financial statements, see section 2.2 of the Silver Guide. For a sample volunteer tracking tool, see the volunteer registry template in the Silver Guide toolkit.

Otherwise, if the organization receives donations or services—for example, office work performed free of charge by a professional—and if, had it not been for this donation, the organization would nonetheless have purchased these services, it may be accounted for as a donation received in the form of services.

For more information on accounting for gifts received in the form of goods or services, see section 2.1.2 of the Silver Guide.

For each case of volunteer work carried out, it would be wise to check that the type of work performed is covered by your organization’s civil liability insurance or protected by the CNESST (in Quebec) or under another province’s labour standards and workplace health and safety agency.

Please note: only registered charities may issue charitable donation receipts. A donation received by a registered charity must meet certain criteria for such a receipt to be issued. Unfortunately, volunteer support and donations of services do not meet these criteria, unless such a contribution happens as two separate transactions: payment for provision of a service and the receipt of a cash donation. See section 5.3 of the Silver Guide.

^ top

How can visibility be accounted for in the context of exchanges of services between the organization and multiple partners?

In the case of an event or a program, it is common to negotiate exchanges of services with various partners in return for visibility. This is a sponsorship. It is necessary to offer fair visibility to these sponsoring partners.

It is recommended that the organization establish a visibility plan that functions in progressive stages or packages. Such a plan will permit account recognition of the visibility offered in the context of non-monetary transactions with multiple sponsors. The visibility plan template found in the Silver Guide toolbox offers some helpful ideas in this regard.

Consider the fictitious example of an organization that receives free rental of a digital projector for a ten-day event. The fair market value is set at $450. A second sponsor donates a free buffet for the launch, valued at $675. In exchange, both organizations are offered visibility. A visibility plan is established for the event, to be available in packages according to the market value of the contribution: package A, for contributions valued $250–$499; package B, for $500–$999; package C, for $1,000–$1,500, and so on.

According to the proposed plan, the first sponsor will be offered package A, and the second sponsor, package B, as per the example provided in the visibility plan template.

Remember that FMV valuation is not an exact science and that there are no universal scales. Several methods may be used to establish FMV: the comparison method, the cost method, or valuation by an expert. On this subject, please refer to the above FAQ item How to determine the fair market value of non-monetary transactions.

^ top

Is it necessary to produce documentary evidence of a non-monetary transaction?

For purposes of reporting, accounting, and tax audits, documentation is required to certify any non-monetary transaction recorded in the financial statements.

Usually, the FMV of a good or service received is determined by the party making the donation, based on the sale price normally paid by their customers and partners. See section 3.1 of the Silver Guide: “Evaluation of the exchange.”

It is important to note that persons or organizations that offer donations of goods or services do so to contribute to a project or cause. Demanding an invoice or contract may create additional work for the donor, and could even discourage the donation.

In order to avoid creating problematic situations, it is advised that the organization receiving the donation offer to assume responsibility for documenting the non-monetary transaction, and complete the paperwork on the donor’s behalf.

In addition to doing your donor a favour, you also ensure that you have the documents required for your accounting—a practice worth adopting!

For further reading, see section 3.2 of the Silver Guide: “Letter of agreement or contract.” A template donation receipt (as distinguished from a charitable donation receipt) may also be found in the Silver Guide toolbox.

^ top

How can we calculate the value of the services provided by an organization to its members?

Some organizations offer benefits to their members: freebies, discounts, or access to certain services such as a documentation centre or specialized equipment. These are member privileges.

To become a member, a person must pay annual dues according to the organization’s regulations. It is reasonable to assume that in a non-profit organization, the market value of the services and equipment offered is well in excess of these annual dues. As such, the organization expends more money than what it receives from its members. In essence, grants and other earned revenues fund the services offered to members.

For this reason, accounting for the market value of member services against the annual dues in the financial statements is not recommended. This is not a non-monetary transaction per se.

^ top

What about the FMV of an artwork donated for auction?

In cases of donations of works of art, it is important to define intent and context. For example, is the donation intended as a fundraising contribution or to build a collection within the organization? May the work be resold, or not?

To establish the FMV of an artwork, we use the third method provided above: evaluation by an expert or a committee of experts or peers. A document attesting to the work’s value is produced once the evaluation criteria have been established.

In cases of exceptional or high-end assets (land, buildings, collectibles, works of art by renowned artists), it may be appropriate to call upon an independent professional third party.

On the issuance of charitable donation receipts by charitable organizations in return for artworks, see sections 5.2.1, 5.2.2, and 5.2.3 of the Silver Guide.

Various tax and accounting considerations must also be addressed, including tax calculation both for organizations as well as for registered artists, which kinds of artworks constitute assets for the recipient organization, and amortization of artworks. Your CPA can help you with these accounting operations.

^ top