January 2017

Donations Can’t Be Receivables or Payables

A couple of years ago the Ministry of Education advised schools that they must not accrue donations from parents as ‘accounts receivable’ – a common practice until then. At the same time, it reminded schools that they may not pressurise parents to pay the requested donation or in any way disadvantage the children of those that don’t.

The reason for this is that a donation is a gift to which the recipient has no legal title. If a donation is a free gift with no obligation to pay, then accounting rules say the expected future receipt or payment of such a donation cannot be an asset or liability. It also can’t be considered income or expense until the cash has actually been handed over.

Schools are not the only organisations asking for donations. Sometimes club rooms or other facilities are made available on a donation basis, and where users use such a room regularly and always pay the same amount organisations often put this down as a ‘receivable’. Similar situations occur sometimes for workshops or memberships.

Organisations using invoicing-capable accounting software have the problem that accounting software cannot distinguish between voluntary payments and those that you are entitled to receive. The situation does not occur in business where things aren’t done on a ‘donation’ basis. The moment you enter an invoice in accounting software it will be added to your income and to Accounts Receivable. Sports clubs, for example, often generate membership invoices through software, however a person is not actually required to pay this if they no longer want to be a member. To get an accurate set of accounts under these circumstances then involves the time-consuming task of recording credit notices against each unpaid invoice.

We’ve covered the issue of ‘when is a donation not a donation’ a couple of times already in this newsletter. It is an important distinction for the purposes of GST and now also for Charities reporting (the two must not be mixed up anymore). The general principle in law is ‘substance over form’, meaning it does not matter what you call it, what matters is the nature or substance of the transaction.