Receipt of donated assets

On occasion, companies acquire assets without significant cost through the donation of land or buildings. For example, a local government unit may make the donation in order to influence the recipient to establish operations in the area and thereby contribute to the local economy.

Two possibilities can be considered for determining the amount to debit to the asset account. The actual costs could be used; however, because this figure would be unrealistically low compared to the fair value, virtually no resource would be reported on the balance sheet, and virtually no depreciation would appear on future income statements.

Alternatively, the fair value of the asset could be recorded, which would result in reporting both the value of the resource and the related depreciation expense. GAAP resolved the dilemma by requiring the latter approach when accounting for “nonreciprocal transfers” which involve a transfer of value in only one direction.

Two possibilities exist for selecting the account to be credited. One approach would record an income item (generally in a special nonoperating account), which would result in higher reported income and an ultimate increase in retained earnings.

Alternatively, the credit could be recorded in a special stockholders’ equity account, showing that the owners’ claims have been increased by something other than their investment activity or the firm’s successful operations. The latter position appears to be dominant in practice, although no authoritative pronouncement has specified that it be used.

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