Accounting for goods received in kind by NFP entities

Accounting for discounted and in-kind inventories received by Not-For-Profit entities

Not-For-profit entities (NFPs) often acquire assets for consideration that is less than fair value, principally to enable them to further their objectives. Examples include assets such as plant and equipment, land and buildings or inventories gifted to NFPs for no consideration (‘in-kind’), or for consideration that is substantially less than the fair value.

For-profit entities generally have to recognise assets acquired at ‘cost’, which is the amount of cash paid, or the fair value of the other consideration given, to acquire the asset. When transactions are undertaken between unrelated parties on commercial terms, ‘cost’ usually represents an amount that approximates fair value. To date, many NFPs have adopted this same approach, resulting in inventories and other assets received ‘in-kind’ or at substantial discounts not being reflected in the balance sheet.

This article discusses the accounting for inventories (goods) received by NFPs ‘in-kind’ or at significant discounts to their fair value.

Which Accounting Standard?

AASB 1058 Income of Not-For-Profit Entities is the Australian Accounting Standard that describes the accounting treatment for income of NFPs, that is, the credit entry. It requires that the asset be recognised in accordance with the relevant Australian Accounting Standard - for donated or discounted inventories, this is AASB 102 Inventories.

What are inventories?

AASB 102 defines ‘inventories’ as follows:

"Inventories are assets:

Held for sale in the ordinary course of business;
In the process of production for such sale; or
In the form of materials or supplies to be consumed in the production process or in the rendering of services."

Definition of ‘inventories’ in AASB 102

In many cases it is likely that donated or discounted goods received by a NFP would meet the definition of inventories, and should therefore be recognised in the balance sheet. An example would be a charity shop receiving donated clothing which it sells in the ordinary course of business.

Inventories held for distribution

From time-to-time NFPs receive goods for distribution to others at no or for nominal consideration, rather than for sale or use in a production process. These items do not meet the definition of ‘inventories’ but instead are considered ‘inventories held for distribution’. AASB 102 defines ‘inventories held for distribution’ as follows:

‘Inventories held for distribution are assets:

held for distribution at no or nominal consideration in the ordinary course of operations;
in the process of production for distribution at no or nominal consideration in the ordinary course of operations; or
in the form of materials or supplies to be consumed in the production process or in the rendering of services at no or nominal consideration.’^Note

_{Note: The measurement requirements in paragraphs 10–18 and 20–27 in AASB 102 apply to both inventories and inventories held for distribution.}

Definition of ‘inventories held for distribution’ in AASB 102

Note: The measurement requirements in paragraphs 10–18 and 20–27 in AASB 102 apply to both inventories and inventories held for distribution.

An example of inventories held for distribution would be the donation of medical supplies to be distributed to those in need for no or nominal consideration.

Principal vs agent assessment

The Framework for the Preparation and Presentation of Financial Statements (Conceptual Framework) applicable to NFPs, defines an ‘asset’ as follows:

A resource controlled by the entity as a result of past events, and
From which future economic benefits are expected to flow to the entity.

Care should be taken when concluding that an NFP has an inventory, or inventory held for distribution, asset. In some cases, an NFP may not control the inventory or inventory held for distribution, and therefore not have an asset, because it is acting as agent rather than as principal.

Example 1:

A grantor donates inventories to a charity for distribution to the needy. The contract specifies the recipients, or category of recipients, to which the inventories must be distributed. It also specifies that the charity will have to return the goods or pay a penalty if they are unable to, or fail to, comply with the terms of the contract. In these circumstances, the charity is likely acting as agent for the grantor.

Example 2:

A grantor donates inventories to a charity for distribution to the needy. The contract merely requires that the grantor distribute the inventories to those in necessitous circumstances. In this instance, the charity is likely acting as principal.

Once an NFP has concluded that in-kind or discounted goods meet the definitions of an asset in the Conceptual Framework, and inventories, or inventories held for distribution, in AASB 102, the next question is, how should these be measured?

Measuring discounted and in-kind inventories and inventories held for distribution

Under AASB 102, both inventories and inventories held for distribution must initially be measured at cost. However, there are special provisions applicable to NFPs.

NFPs that receive ‘in-kind’ inventories or inventories held for distribution for free or at a significant discount, principally to enable them to further their objectives, must initially measure them at the current replacement cost (the cost the entity would incur to acquire the asset at the end of the reporting period). Current replacement cost is basically the same as the fair value determined under AASB 13 Fair Value Measurement using the ‘cost approach’ valuation technique. This results in income being recognised when goods are received (donated) rather than when they are sold or distributed.

Determining current replacement cost of donated or discounted inventory or inventory held for distribution will be easier if the goods are brand new because there are likely to be observable market prices available. However, the exercise is likely to be more complex where goods are second hand or used.

Practical expedient

Many NFPs lack the expertise and resources to maintain systems for tracking and measuring a high volume of inventories and inventories held for distribution, received in-kind or acquired at substantial discounts. Rather than providing guidance on how to interpret materiality, the Australian Accounting Standards Board decided instead to provide relief from the normal manner in which materiality would otherwise apply to a NFP (AASB 1058.BC117).

AASB 102 therefore provides a practical expedient where an NFP acquires inventory or inventory held for distribution for consideration significantly less than fair value, principally to enable it to further its objectives. It can elect to recognise these items based on an assessment of the materiality, either of the individual item, or of inventories (or inventories held for distribution) at an aggregate or portfolio level.

The practical expedient allows NFPs to develop a policy whereby immaterial items of in-kind or discounted inventories and inventories held for distribution do not have to be recognised when they are received. Instead, revenue will be recognised when the goods are sold or distributed. The policy should be consistently applied to similar types of inventories and inventories held for distribution. An example of this could be an op shop selling second hand clothing, used furniture and white goods - it may determine that each item of second-hand clothing is not material, but that each item of furniture and white goods are material.

Disclosure

NFPs must disclose their accounting policy for measuring in-kind or discounted inventories and inventories held for distribution. This includes whether they have been measured at current replacement cost, or at Nil consideration because the practical expedient in paragraph Aus10.2 has been applied. In practice, we expect many NFPs to apply the practical expedient to all such inventories and inventories held for distribution.

However, sometimes an NFP may choose to apply the practical expedient to some classes of inventories (or inventories held for distribution) and not others. Our example above illustrated an op shop selling second hand clothing, used furniture and white goods. The NFP may choose to apply the practical expedient to second hand clothing but not to used furniture and white goods. In such cases, it must disclose the policy for measuring second hand clothing separately from the policy for measuring used furniture and white goods.

Management considerations

Where NFPs receive in-kind or discounted goods, management should:

List the sources of all in-kind and discounted goods
For each source or type of good, consider whether:
- They meet the definition of inventories or inventories held for distribution under AASB 102 (i.e. will they be sold, used in a production process, or used as part of a service delivery?)
- They are controlled by the NFP (i.e. is the NFP acting as principal rather than agent?)
For assets meeting the definition of inventories or inventories held for distribution where the practical expedient will be applied - assess materiality either for each individual item at year-end, or at an aggregate or portfolio level
For assets meeting the definition of inventories or inventories held for distribution where the practical expedient won’t be applied, or where the practical expedient cannot be applied because inventories or inventories held for distribution are material:
- Define a process for how these items will be tracked so that the volume of goods in-kind can be quantified at any point in time, particularly at year-end
- Assess how the current replacement cost will be initially determined and audited.

What we are seeing in practice?

Few NFPs are recognising in-kind and discounted inventories and inventories held for distribution on the balance sheet. This is likely to be due to the high volume and low value of items, and the cost and expertise required to track receipts and determine current replacement costs. Nevertheless, material in-kind and discounted inventories and inventories held for distribution must be appropriately recognised in the balance sheet at current replacement cost.

We are here to help

If you need help navigating the requirements for recognising receipts of in-kind or discounted inventories and inventories held for distribution, our Not-For-Profit and IFRS & corporate reporting experts are here to help. Please contact us today.