Receipt of Donated Assets

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on November 17, 2021

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.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, 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, his interview on CBS, or check out his speaker profile on the CFA Institute website.

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