A foundation co-wrote a grant proposal with the City of Los Angeles. The hospital supported by the foundation leases a building from the City of Los Angeles and operates a treatment center for victims of violence in this building. The grant application was approved, and funds were disbursed to the City of Los Angeles for building upgrades. The City of Los Angeles is responsible for hiring and paying all contractors. These upgrades benefit the treatment center operated by the hospital. The foundation participated in writing the grant proposal. Can the foundation record these upgrades as an in-kind donation from the City of Los Angeles?

To answer this question, it is necessary to examine the recognition criteria for in-kind gifts from an accounting recognition perspective. Under U.S. GAAP and nonprofit accounting practice, in-kind gifts typically refer to donations of non-cash assets, including building improvements, equipment, or services, where the donor has a clear donative intent, meaning the asset or service is transferred without an equivalent exchange condition.

In this case, the key chain of facts is as follows: the grant was received and controlled by the City of Los Angeles, which is the contracting party, directly hiring and paying contractors; the hospital is the building lessee but is not the grant recipient; the foundation only participated in writing the proposal and was not directly involved in the construction contracts or fund flows. Therefore, from a legal form perspective, the beneficiary of the upgrades is the hospital (as lessee), but the contractual relationship exists between the City of Los Angeles and the contractors, not the hospital or the foundation.

If the foundation wishes to recognize this improvement as an in-kind donation, the following conditions must be met: first, the foundation must be able to control or own the improvement asset or have usage rights to it; second, the donation must be directed to the foundation itself, not to a third party (such as the hospital); third, the value of the improvement must be reliably measurable. However, in this case, the improvement is attached to a building owned by the City of Los Angeles, the hospital is merely a lessee, and the foundation is neither the lessee nor the asset owner, so the foundation cannot recognize the improvement asset as its own asset.

Furthermore, from the perspective of donative intent, the direct purpose of the City of Los Angeles in carrying out the upgrades was to fulfill the grant agreement, not to transfer assets to the foundation without consideration. Even if the foundation co-wrote the proposal, this does not constitute a donation commitment from the City of Los Angeles to the foundation. Therefore, the foundation lacks a reasonable accounting basis for recording this improvement as an in-kind donation.

Possible alternative treatments include: if there is a related-party relationship between the hospital and the foundation, and the foundation substantively bore part of the improvement costs, the foundation could consider recording the corresponding expenditure as a grant or program expense to the hospital, rather than as an in-kind donation. If the foundation merely acted as an intermediary to assist with the grant application, no accounting recognition is needed, and the activity only needs to be disclosed in the notes.

In summary, based on the existing facts, the foundation should not record the leasehold improvements implemented by the City of Los Angeles as an in-kind donation. It is recommended that the foundation consult with professional accountants to determine the appropriate accounting treatment based on the specific agreement terms and the relationship between the foundation and the hospital.