The requirements of FRS 102, upon which Charities SORP 2015 is based, include a requirement to recognise the income from receipts of resources from non-exchange transactions (including donated goods) at the fair value of the donated goods received.

Accounting practice under SORP 2005 has historically been to account for income from donated goods only when the donated goods in question have been sold. This accounting practice is now challenged as FRS 102 states:

“An entity shall recognise receipts of resources from non-exchange transactions as follows: Transactions that do not impose specified future performance-related conditions on the recipient are recognised in income when the resources are received or receivable. Transactions that do impose specified future performance-related conditions on the recipient are recognised in income only when the performance-related conditions are met. Where resources are received before the revenue recognition criteria are satisfied, a liability is recognised. When applying [these] requirements an entity must take into consideration whether the resource can be measured reliably and whether the benefits of recognising the resource outweigh the costs. Therefore, where it is not practicable to estimate the value of the resource with sufficient reliability, the income shall be included in the financial period when the resource is sold.” Section 34 FRS 102

It is clear from the requirements of FRS 102 and  SORP 2015  that the intention is for preparers to recognise donated goods at fair value on receipt unless either the provision of such information is immaterial or the cost of obtaining and establishing such reliable information outweighs the benefit that the provision of such information in the financial statements will provide to the users of those statements. 

The presumption is therefore that, in the absence of a clear materiality or cost/benefit rationale, organisations will need to recognise donated stock at fair value on receipt. FRS 102 does not permit non-recognition on account of the fact that no cost has been incurred to acquire the goods in question. It is interesting that the recent proposed Sorp bulletin specifically does refer to the lower of cost or replacement cost in respect of goods given for distribution. Sadly, this option does not extend to donated goods for resale.

Why?

This new requirement contained within FRS 102 is arguably not the manifestation of a new concept or principle. Income is and has been broadly considered, under old and new frameworks, as being the result of increases in assets (or decreases in liabilities) that have not resulted from an increase in contributions from “owners.” Therefore the receipt of any resource with value should be recognised as income.

Historically SORP 2005 has determined, on the grounds of practicality, that the receipt of the resource occurs only when the goods have been sold. Many also consider this to be the right answer ie, it is at this moment that the real value and the benefit to charity becomes known or capable of reliable estimation. 

However, the inception of a new accounting framework has prompted a fresh look at this position acknowledging that increasingly sophisticated record keeping methods, more readily available valuation data, more effective use of IT, and sales controls mean that many organisations carrying significant stocks of donated retail goods are in fact keeping records that are sufficient to be able to determine an appropriate value for recognition in the financial statements. The question could also be posed to those organisations that do not maintain such records, why not?

In either case, the value of donated stock given for resale could be important information to users of the financial statements in making economic decisions. Stock that is expected to sell will represent an asset, and inclusion or omission could present very different perceptions of the charity’s financial position. What is clear from the requirements of FRS 102 is that for a charity to determine that such information need not be recognised in the accounts, the cost must outweigh the benefit to the users.

Cost versus benefit

The following is an approach for considering whether or not it is appropriate to exclude donated goods from a charity’s accounts on the basis of materiality or cost/benefit.

Are the amounts involved material?

The requirements of FRS 102 and the Charities SORP 2015 apply only to material balances or classes of transactions. Therefore, where donated goods are expected to be immaterial and there is evidence to suggest that this is the case, preparers of accounts may argue that donated goods need not be recognised on receipt.

To be in a position to determine whether the information is material preparers should consider the qualitative as well as quantitative position (acknowledging that some information is useful to users even if relatively small in amount).

To apply an immateriality argument to exclusion it will be necessary to arrive at an estimate of the value of the donated goods. If no estimate is possible then this implies a substantial lack of controls over retail activity generally and is therefore not always a credible conclusion. 

Assuming a rough estimate can be obtained

If immaterial and assuming trustees and auditors are both content with the degree of accuracy no further work required. Note though that:

• This represents an unadjusted item in the accounts.
• The accounting policy would note that material donated goods would nevertheless be recognised.

Exclusion on practicality

Cost

Benefit

Benefit must consider the users of the financial statement and the information that will be relevant to them. This will include but will not be limited to the trustees of the charity. Each organisation will need to carefully consider who their key users will be. We set out below some categories to consider.

• Trustees

Consider whether (or why not) it is likely/appropriate that a retailer will not benefit from an understanding of their stock levels and their associated value. 

In reality charities clearly are monitoring stock levels and producing useful information as a consequence. In many cases it would seem that either a cost/benefit argument to exclusion from the accounts seems difficult to justify or, arguably, this level of analysis should cease if it is of no significant use to management and represents a poor use of resources.

In addition, it is worth highlighting that the annual survey by Charity Finance magazine (Civil Society) regularly ranks stock supply as one of retailers’ highest risks.

• Other users 

Supporters, donors, beneficiaries of a charity have a valid and reasonable expectation that the financial statements will provide the true asset value of the charity. The information is also an important element of transparency, and allowing charities to benchmark. 

Implications of a cost greater than benefit

In the event that a charity determines that it is appropriate not to recognise donated goods for resale as stock on the balance sheet at any given year end, that fact will need to be stated in the accounting policies together with conclusions in relation to the cost/benefit analysis.

Such a conclusion will need to be discussed and agreed with the organisation’s auditors and auditors are likely to request to see minuted evidence that the matter has been considered in a sufficiently robust fashion. 

It will also appropriate for any cost/benefit conclusions to be reconsidered regularly (probably each balance sheet date) to ensure that the financial statements continue to meet the information needs of the users. 

Conclusion

In reaching the conclusion, trustees, auditors, and preparers of accounts should think beyond just the financial reporting process. The charity world has changed and continues to do so and public perception of the sector is paramount. There are increasing public expectations of transparency and the ability of systems to produce relevant data is in sharp focus. In addition there is an ever-increasing interest in the strength of charities balance sheets from a diverse range of users. 

Any decision to exclude information required by FRS 102 and SORP 2015 through application of a materiality or cost vs benefit argument therefore needs careful consideration which extends beyond what may, at first glance, seem to be a mere administrative irritation.

Don Bawtree, Partner, BDO LLP

Charity and Voluntary Sector Group, July 2015