Accounting for volunteer services by private sector not-for-profit entities

According to Volunteering Australia, the national peak body for volunteering:

‘Volunteering is a tower of strength in our communities with 5.8 million Australians or 31 per cent of the population volunteering, making an estimated annual contribution of $290 billion to our economic and social good.’

These free services contribute enormous value to Australian not-for-profit entities (NFPs), and in some cases, are not being reflected in their financial statements. With grant funding often dependent on an NFP’s cost structure, some NFPs wish to recognise the value of these volunteer services in their income statement as contributions and related expenses.

What is a volunteer service? 

Volunteer services are services transferred by individuals or other entities without charge, or for consideration significantly less than the fair value of those services. Examples of volunteer services received by NFPs include, but are not limited to: 

• Charities and religious organisations receive free professional accounting or legal services
• Board members of NFPs serving without compensation
• Technical assistance provided by international aid organisations
• Persons convicted of offences who are required to perform community service for the entity
• Health and disability organisations receiving the services of volunteers
• Schools receiving voluntary services from parents as teachers’ aides.

What is the relevant Australian Accounting Standard? 

The relevant Australian Accounting Standard which describes the accounting for volunteering services is AASB 1058 Income of Not-for-Profit Entities. While public sector NFPs, such as local governments, government departments, etc., must recognise volunteer services if certain criteria are met, private sector NFPs have a choice. 

How do public sector NFPs account for volunteer services? 

Public sector NFPs must recognise volunteer services as an expense (or an asset if the definition of an asset is met) and income if both of the following apply: 

1. The fair value of those services can be measured reliably, and 
2. The services would have been purchased if they had not been donated.

How do private sector NFPs account for volunteer services? 

On the other hand, private sector NFPs have an accounting policy choice of whether to recognise volunteer services (or a class of volunteer services). This applies if the fair value of the volunteer services can be measured reliably (criterion (a) above), regardless of whether the volunteer services would have been purchased if they had not been donated. So, criterion (b) does not have to be met for private sector NFPs to recognise volunteer services.  

Why account for volunteer services? 

Many private sector NFPs may wish to account for volunteer services in the income statement because: 

• It identifies the cost of services that would be required to be paid for if they were not provided for free or below market value
• It provides a complete picture of costs, which can assist in obtaining grant funding.

Challenges accounting for volunteer services 

Despite the benefits and desire to bring volunteer services onto the books, private sector NFPs wishing to do so will experience many practical challenges. These include: 

• A considerable amount of record keeping is required to monitor volunteer staff, including keeping complete and accurate time records. This includes directors and consultants providing free services. 
• Difficultly obtaining evidence for the fair market value of each volunteer (what is the market value of their time, how much would you pay someone to perform the equivalent tasks, etc.?).
• No consensus on how to assess what classes of volunteer services to include and how to ensure completeness of services in that class each year.
• Having staff with sufficient skills and expertise to maintain systems and processes for recognising volunteer services – if you have to pay for these services, a cost-benefit analysis is warranted.
• Once an entity elects to account for volunteer services, it is difficult to revert back. This is because a NFP is only permitted to change policies if it results in the financial statements providing reliable and more relevant information, which is unlikely to be the case if the entity stops measuring and disclosing volunteer services. There is an inability to try and then change in future years.
• Accounting for volunteer services at fair value may tip your organisation’s revenue into a higher revenue bracket, resulting in more onerous reporting obligations under section 45B of the Corporations Act 2001 for companies limited by guarantee, and for entities reporting under the Australian Charities and Not-for-profits Commission Act 2012. In particular, the Australian Charities and Not-for-profits Commission’s revenue fact sheet includes in-kind donations such as volunteer time as revenue. 

What we are seeing in practice 

Very few NFP private sector entities are recognising volunteer services. The reasons for this are the likely high cost/benefit burden and the difficulty of supporting fair value judgements. 

Rather, where some of the attributes of volunteer services can be measured, this information is disclosed in the directors’ report or the annual report, separate from financial statements. The information disclosed typically includes the number of hours of service provided, days worked, and type of voluntary services received, along with a list of organisations that have volunteered.  

Disclosures 

Private sector NFPs preparing general purpose financial statements must include all relevant AASB 1058 disclosures about volunteer services, including: 

• Disaggregated revenue amounts from recognised volunteer services, separately from other types of revenue such as grants, bequests and donations (Tier 1 and Tier 2 entities)
• Qualitative information about the entity’s dependence on volunteer services it receives, including those not recognised (Tier 1 entities only). 

Where an NFP is preparing Tier 2 general purpose financial statements, AASB 1058 contains no explicit disclosure requirements for information beyond recognised volunteer services. However, recent amendments to AASB 101 Presentation of Financial Statements require disclosure of ‘material accounting policy information’. This includes where there is an accounting policy choice between more than one accounting treatment. In our view, private sector NFPs preparing Tier 2 general purpose financial statements should disclose their accounting policy for volunteer services unless the fair value is very small, i.e. do they recognise them or not? An example of where volunteer services are not recognised is shown below. 

Disclosures by NFPs not recognising volunteer services could also include: 

• Hours of volunteer time
• Name of entities providing volunteer services (noting there is a challenge in completeness, this could be overcome by stating the list is for services over a threshold).

If you decide to recognise 

If an NFP completes their cost-benefit analysis and concludes, despite the practical challenges noted above, that volunteer services will be recognised and measured in the financial statements, the following steps are important: 

• Establish a policy on which classes of volunteer services are to be recognised
• Document processes on how the services will be tracked for completeness
• Set processes on how fair value will be determined, ensuring that it can be audited
• Establish a monitoring process throughout the year, this is not just a year-end activity
• Develop and deliver staff training.

We are here to help 

If you need help navigating the requirements for recognising volunteer services, our not-for-profit or IFRS & corporate reporting experts are here to help. Please contact us today.