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.

Donated Services

October 2023

It is common for community organisations to have professional stuff done for free or at a large discount either by someone involved in the organisation, or an external company. Most often these are legal or accounting services, but might also involve building, IT or other services.

For example, one of your Board members is an accountant in private practice, and does your annual accounts for free. She says that she would normally charge $750 for this job.

Many organisations want to show these donated services in their accounts. For organisations that have to report under accounting standards, such as registered charities, this is only possible in the Notes to the accounts. It is not allowed to put the retail or market value of such services, such as the $750 above, as an expense and a corresponding amount into donations income. But it is required to put significant donated services in the Notes.

Other organisation, that are not registered as charities, can probably get away with reporting such donated services as expenses and donation income, but it is bad accounting practice.

Accountants generally only recognise something as income or expense if the amount can be reliably determined. In the case of donated services, there are a lot of uncertainties. For example:

  • If the services hadn’t been donated, would the organisation still have used them? Or would they maybe have used another, cheaper supplier instead?
  • The estimate for the value of the donated services is usually based on hours worked times the charge-out rate. But if the services had to be paid for, the organisation may have negotiated a lower fixed price rather than running up a bill for every hour used.
  • The retail or charge-out rates include profit margins, and they are not a reflection of what it actually costs the donor to supply the service. But, realistically, only the cost of the service could be considered a donation, not what the service would be charged out for.

These are some of the reasons why putting donated services to expenses and donation income can be a  distortion of the organisation’s expenses and income, and why this should not be done.

The same applies to discounts. Some accounting firms, especially, cheekily put a ‘donation’ amount in their invoice to show how much cheaper they are making it for not-for-profits. This is not a real donation. What you are paying is the agreed price, and you have no real way of knowing anyway whether this really is a special not-for-profit discount.

You can also not issue a donation receipt for donated services. The donation rebate can only be claimed by a donor, if they have transferred actual cash to the charity.