Accounting for Donated Goods and Services - A New Accounting Standard for Charities
For all financial periods starting on or after 1st April 2015, Tier 1 and 2 Charities (mainly large and medium size charities) will need to apply the new “not for profit” accounting standards.
An interesting standard is PBE IPSAS 23: Revenue from Non-Exchange Transactions. This is a standard which prescribes how to account for donated goods and services. This standard is highly relevant to the parishes in our centralized accounting group.
We will use an example (Parish A) to translate the requirements of the standard into easily understood examples through this article.
The standard defines “non-exchange transactions” as goods or services provided for no return such as grants, bequests, cash donations and donated goods. In a non-exchange transaction, an entity receives value from another entity without directly giving approximately equal value in exchange.
Parish A receives offertories, and a grant from a Community Trust. Parish A has also an opportunity shop which receives donated goods from the community. Parish A has a number of volunteers, including a treasurer providing Parish A with monthly financial reports.
In some cases, assets may be transferred with the expectation that they will be used in a particular way defined as “stipulations” and, therefore, that the Charity receiving these assets will act or perform in a particular way. Conditions on transferred assets are stipulations that specify that the future economic benefits or service potential embodied in the asset is required to be consumed by the recipient as specified or future economic benefits or service potential must be returned to the transferor. Stipulations are enforceable through legal or administrative processes. If a term is unenforceable, it is not a stipulation as defined by this Standard. A key feature is that the Charity cannot impose stipulations themselves. It has to be done by the external entity providing the grant/bequest.
Recognition of Revenue from Non-Exchange Transactions
The non-exchange transaction shall be recognised as revenue, except to the extent that a liability is also recognised in respect of the same transaction. It shall be recognised at fair value at the date of the transaction.
As an entity satisfies a present obligation recognised as a liability in respect of an inflow of resources from a non-exchange transaction recognised as an asset, it shall reduce the carrying amount of the liability recognised and recognise an amount of revenue equal to that reduction.
Parish A receives a donation in cash and recognises this donation at its cash value at the date of the transaction. There is no condition attached to the donation so it is recognised as revenue and no liability recognised.
In January 2016, on receipt of the Community Trust grant, Parish A recognises a liability of $5,000. In February 2016, Parish A has paid $3,500 for the painting of the Church and can now recognise the revenue (and the expense) and reduce its liability to $1,500. As at 31st December 2016, Parish A has only spent $3,500 and has to repay $1,500 to the Community Trust.
Disclosure of services in kind such as services provided by volunteers
An entity may, but is not required to, recognise services in-kind as revenue and as an expense.
Services in-kind are services provided by individuals to entities in a non-exchange transaction. These services meet the definition of an asset because the entity controls a resource from which future economic benefits or service potential are expected to flow to the entity. These assets are, however, immediately consumed, and a transaction of equal value is also recognised (an expense) to reflect the consumption of these services in-kind.
Entities are encouraged to disclose the nature and type of major classes of services in-kind received, including those not recognised. The extent to which an entity is dependent on a class of services in-kind will determine the disclosures it makes in respect of that class.
Further developments related to donated goods and opportunity shops
Parish A has an opportunity shop selling clothes donated by the community. Parish A should recognise the value of the donated clothes at the time of acquisition. However, this presents Parish A with difficulties. In some cases the donated goods are not sold and later on Parish A has to throw the goods out. How can Parish A evaluate the value of the donated clothes when donated?
The New Zealand Accounting Standards Board (NZASB) recently published for public comment an Exposure Draft that, in certain circumstances, would allow entities not to recognise donated goods at the date of acquisition.
The Exposure Draft contains the following proposals:
Entities do not have to recognise goods in-kind at the date of acquisition where it is not practicable to measure reliably the fair value of the goods in-kind such that the costs of recognising the goods in-kind at the date of acquisition outweigh the benefits.
Where goods in-kind are intended for sale and the entity makes a judgement that it is not practicable to measure reliably the fair value of the goods at the date of acquisition such that the costs of recognising the donated goods at the date of acquisition outweigh the benefits, an entity will be permitted to recognise the revenue in the period when the goods in-kind are sold.
The Exposure Draft has now been incorporated into the Accounting Standard.
If you have any questions on this article, do not hesitate to contact Anne Edwards and email her on firstname.lastname@example.org.
In January 2016, Parish A has received a grant of $5,000 from a Community Trust to repaint the Church. Under the terms of the grant, any unspent amount as at 31st December 2016 will need to be repaid the Community Trust. Parish A has to prepare a report by 31st January 2017 showing how it has spent the grant and return any unspent amount.
Parish A receives accounting services from its volunteer treasurer. The value of these accounting services can easily be measured at a $1,000 a month (the rate the treasurer charges non-charitable clients so similar size). Parish A can recognise revenue of $1,000 every month together with an expense of $1,000 reflecting the consumption of the accounting services.
Parish A does not need to estimate the value of the goods donated, the Parish recognise the sales revenue as the donated goods are sold.