Fair Market Value and Donated Stock: To Have and To Hold?

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There are tax advantages for donating stock rather than cash, so it is a popular choice among donors. How do you record this transaction in keeping with GAAP, and what should be done with the stock?

According to GAAP, you should record the stock as a gift at its fair market value. To determine this, average the high and low prices from the donation date.

There may be several dates involved: the day the broker was ordered to donate the stock, the day the broker originated the transfer, and the day ownership was actually transferred. It is best to use the origination date to determine fair market value.

To record the acquisition, debit an asset account, Donated Stock perhaps, and credit either Gift income or Pledges Receivable.

What happens next depends on your organization’s policies. Is this stock now your organization’s “to have and to hold,” or should you sell? Most non-profit organizations immediately sell, with good reason. If you choose to hold it, you are not simply receiving a gift, you are investing.

It can be tempting to hold onto donated stock because someone in your organization is sure the market price will rise. But if you do not sell right away, you have changed the game. You are now investing and this could be at odds with the donor’s intent, namely a gift in the amount of the fair market value of the stock when donated.

It is unwise to enter this arena without an investment strategy. Make sure your organization has a clear policy on how to handle donated stock, and if that includes holding and investing, that there is a plan.

When the stock is sold, you credit the Donated Stock (the asset account you used to record the acquisition) and debit cash. In keeping with GAAP, sales commissions and other fees should be expensed. Gains or losses in market price between the acquisition and the sale are recorded to Gain or Loss on Sale of Donated Stock, an income account.

If your organization keeps the stock, GAAP requires that you mark the stock to market, that is, adjust the value on your books to agree to the fair market value on a given day by crediting or debiting an income account, Gain/Loss on Investments.

Technically, you only have to do this on financial statements prepared in accordance with GAAP, and that’s probably once a year at year-end. You should do it more frequently if the users of the management reports you prepare find it useful.

Keep in mind that stock prices can be volatile and this can affect your bottom line, distorting the results of your normal operations. If you mark to market monthly, consider presenting Gain/Loss on Investments as an unusual item below the net income/loss generated by your normal activity.

Nancy Church

About Nancy Church

A CPA in Portland, Oregon with over 20 years experience in auditing, accounting and consulting for nonprofit organizations, Nancy Church is the director and primary driving force behind NFP Accounting Help. A mother of three children, Nancy enjoys music, dancing, working on her old house, hiking, and thinking about how NFPs can create a more effective and efficient accounting process.

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