I have been asked by my readers to explain gifts-in-kind. Thank you for the question.
In short, gifts-in-kind includes donated food, clothing, supplies and volunteer hours, booked by The Salvation Army at market value. When the entry is made for gifts-in-kind, The Salvation Army records income equal to the amount it records as expense, or puts it into inventory.
There is actually nothing wrong with that entry. It is the way most non-profit organizations record gifts-in-kind. It follows Generally Accepted Accounting Principles. What The Salvation Army does those numbers in its written reports is the problem.
I mentioned in other blogs that disaster relief is big business for The Salvation Army. Gifts-in-kind are a very large part of that disaster relief business. The Salvation Army distributes gifts-in-kind to disaster victims, which is a good thing. However, gifts-in-kind are valued as costs of the disaster relief effort by The Salvation Army when reporting costs associated with the disaster relief effort. Remember, gifts-in-kind cost The Salvation Army absolutely nothing.
When disasters strike, such as the tornado that recently hit Moore, Oklahoma, The Salvation Army quickly places ads, asking you to donate to the organization. Read the ads carefully. Those ads do not state that the money you donate will go to disaster victims and it does not go to the victims. Your donations go into the general fund of The Salvation Army. The organization uses those donations as it sees fit.
Reporting for disaster relief operations is sketchy at best, but it does release some reporting to major donors who press for an accounting. That reporting is less than honest reporting.
This reporting is not offered to the general public, but the organization uses it to entice major donors to keep giving money. These major donors give very large sums of money to The Salvation Army and some do press for reporting as to how their donations are spent. What they should press for is an audit, conducted by an outside auditing firm. The truth with respect to how disaster donations are used would infuriate donors.
Example: Assume The Salvation Army collects $100,000 in cash donations from pleas for disaster assistance. It reports the out of pocket dollars to send its disaster vehicles and officers to the disaster site as $50,000. For the sake of argument, assume that $50,000 is an actual cost to the organization. The Salvation Army reports a profit of $50,000 from the disaster relief donations.... right? Wrong!
The Salvation Army also reports the market value of gifts-in-kind it distributes to victims against those donated dollars. For purposes of this example, assume the market value of the gifts-in-kind is $75,000. The Salvation Army reports a shortfall of $25,000 to major donors for the disaster relief effort, in hopes those donors will dig deeper and donate more money to the organization.
The Salvation Army actually spent $50,000, but includes the value of $75,000 in gifts-in-kind as costs incurred; a total cost of $125,000 for the disaster relief effort is reported to major donors. So, The Salvation Army reports a $25,000 shortfall with respect to dollars received and dollars spent for the specific disaster relief effort. Of course The Salvation Army gladly accepts donations to make up that shortfall, that does not really exist.
What's wrong with this picture? The gifts-in-kind cost The Salvation Army absolutely nothing. The organization gets these items at no cost from donors. Then the organization, in effect, sells the gifts-in-kind that donors previously gave to the organization to donors, at market value when it distributes them in disaster relief efforts. In some cases it even charges volunteer hours at market value to the disaster relief. Volunteers donate their time to the disaster relief and the Salvation Army charges donors for those volunteer hours at market value.
It's all smoke and mirrors with the numbers The Salvation Army reports to major donors. Gifts-in-kind are a large part of this smoke and mirrors reporting. No ethical accountant would endorse this type of reporting.
Is it illegal? Sadly, no, but it is highly misleading and many view it as an unethical practice. Donors give food, clothing and supplies to The Salvation Army and the organization sells those items back to those donors at market value when it distributes the items to disaster victims. The Salvation Army keeps a large portion of your disaster donated dollars, thanks to the gifts-in-kind you donate.