On occasion, companies acquire assets without significant cost through the donation of land or buildings.

For example, a local government agency may make an asset donation in order to motivate the recipient to establish operations in the area and, in this way, to contribute to the local economy.

Two possibilities can be considered for determining the amount to debit to the asset account.

First, 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 almost no depreciation would appear on future income statements.

Second, 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 “non-reciprocal transfers” (i.e., transfers of value in only one direction).

Two possibilities exist for selecting the account to be credited.

One approach is to record an income item (generally in a special non-operating account), which will lead to a 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 is dominant in practice, but no authoritative bodies in the field of accounting have specified that it must used.

Frequently Asked Questions

How will the amount to debit assets account be determined?

The choice is between the actual costs and fair value. Actual cost is not a very reliable figure so it is usually preferred to use fair value for recording asset.

What two possibilities exist for selecting the account to credit?

Two possibilities are: 1) Credit could be recorded in a special non-operating account leading to higher reported income and ultimate increase in Retained Earnings or 2) Credit could be recorded in a special stockholders equity account showing that owners' claims have been increased by something other than their investment activity or the firm's successful operation. The latter position is dominant in practice, but no authoritative bodies in the field of accounting have specified that it must used.

How is the amount of asset's depreciation calculated?

It can be calculated in two ways: 1) Using book value or 2) Using fair value.

Is there any non-reciprocal transfer reported on income statement or balance sheet?

Yes, if an asset is donated then it is not treated as a reciprocal transfer because the fair value of the resources received by the recipient is higher than its book cost. So, if asset donated then non-reciprocal transfers will be reported on balance sheet.

How can you determine whether the donation was given for cash or non-cash benefits?

If only benefit was received then it is recorded as non-cash benefit. If cash was also paid by the donor for donation purpose, then at least some of the benefits are treated as cash and it will be shown on income statement through special account called "donations"

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.