Advising the managing director of Recyclers Limited of the best accounting treatment and justification
Discuss about the Analyze the Treatment of Donated Capital of Recyclers Limited.
The particular case study is on accounting for a donation. Here, Recyclers Limited is non-profit entity whose main purpose is to collect and recycle household garbage in Australia’s capital cities (Weil, Schipper and Francis 2013). Recyclers Limited has been in operation for 5 years as well as managed well to remain profitable enough for survival purpose. The company has faced numerous problems that were related to the need for new technology for increasing the amount of recyclable waste. Other issue faced by Recyclers Limited is separating recyclable as well as non-recyclable materials as household had been placing in their recycle bins.
Recyclers Limited had been seeking financial support from the local as well as international community for carrying out the research program so that they can bring improvement in the technology of the industry. To solve the problem of Recyclers Limited, one of the well-known environmentally philanthropist named as Richard Rich had decided to donate a sum of $ 1000000 to the company to continue in their research activities. Rich wanted that the money should be used wisely and that the company should provide him with financial statements after 6 months that will show how money was spent as well as progression of the research activities (Saunders and Cornett 2014).
Recyclers Limited accepted the money gratefully as well as happy to comply with wishes that were asked by Rich. The Managing Director of Recyclers Limited believed that Rich may be prepared to donate more money in future if technological progress can be shown to him in form of financial statement to every 6 months of time span. Rich has given cheque of 1000000 to Recyclers Limited to continue with their research activities. To this, there was disagreement that took place among the accounting staff on how the transaction will be recorded or treated. Among that, one accountant believes that the money should be treated as revenue and other argued that it is a type of capital account and should be treated as “donated capital”.
This study has been conducted to advice the Managing Director of Recyclers Limited to use the best accounting treatment for the cheque received from Rich.
Accounting for Donations
AASB 1004 applies when non-profit-entities receives a donation otherwise termed as non-reciprocal transfer. Not for profit entities complies with the requirements of AASB 1004 that may not simultaneously be in compliance with the requirements of IAS 20 (Accounting for Government Grants and Disclosure of Government Assistance). A donation occurs when an entity receives cash that include right to receive the cash or any other forms of asset without directly giving approximately equal value to the other party to the transfer (Pratt 2013).
Income that arises from donations in terms of AASB 1004, then it is recognized when all the following conditions are met:
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Accounting for Donations Criteria as per AASB 1004 (Recognition criteria) |
Facts from the case study on Recyclers Limited (non-profit entity |
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The entity obtains control of the donation or the right to receive the donation Determining whether control has been gained can be a problematic affair as it mainly depends on the terms as well as conditions in relation to the donation received (Holland 2016). It is the control that can be obtained before the actual receipts of funds in case when binding contract or funding agreement is signed. In other conditions, an entity that may received donation in cash but not access over the control unit until the funds are applied for the required purpose It depends upon the timing of the recognition criteria of income that is separated as well as unrelated to the point where expenditure related with the occurrence of donations. In case of non for profit entities, the matching principle does not apply necessarily (Henderson et al. 2016). |
The first criteria are not met as noted from the case study of Recyclers Limited. Recyclers Limited obtains no money control of the donation that is paid by Rich. The reason behind the statement is that the company needs to show the financial statement for each 6 months of time span to Rich so that he is convinced the money id spent wisely on research and development activities. Here, it can be noted that Recyclers Limited had no control over the money because if they fails to show the treatment of donated money to Rich, the results that there will be no further payment by the person. It was clearly mentioned by Rich that recyclers limited will get 1000000 for continuing with the research but no control over the money as they have to show financial statement on whether the money is spent wisely. Hence, this recognition criterion does not satisfy in accordance with AASB 1004. Recyclers Limited cannot treat 1000000 as income (Edwards 2013). The company can only treat the donated money as income after 6 months at the time of showing the financial statement to Rich and then that portion of donated money can be treated as income that are spend on the research activities that has been allowed by Rich before giving the cheque to the Managing Director of Recyclers Limited. |
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It is probable that the economic benefits comprises the donation with flow of the entity |
This criterion has been fulfilled by Recyclers Limited as they are engaged with research activities so that will be providing economic benefits and proper flow of activities within the company. |
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The amount of the donation can be reliably measured |
Recyclers Limited received a cheque from Rich with the amount 1000000 and this reliable measurement and hence the recognition criterion is fulfilled. |
From the above three recognition criterion, it can be stated that the first criterion has not been fulfilled but the rest two fulfills the criterion as mentioned in AASB 1004. This explains the fact that the amount of 1000000 that was paid to Rich to the Managing Director cannot be treated as income as it fails to fulfill the first criterion (Deegan 2013).
Accounting for Donations
Now, it is important to suggest the Managing Director on how to treat the sum of $1000000 in the books of accounts so that they can present the financial statements to Rich after every 6 months of time period. It is suggested to Managing Director to first treat $1000000 as donated capital and show in the capital account. Then, after showing the financial statements to Rich, the amount that is spent on research activities will be treated as revenue by the company. The accountant of Recyclers Limited cannot treat the donated capital as revenue fully after receiving the cheque from Rich, the reason behind that is the company has not yet guaranteed with the money where they can show it as revenue in the income statement. After showing the financial statement to Rich, then the company is liable to get the hold of money and then show it in the revenue account in the income statement. On the contrary, entire money cannot be shown in the donated capital after sanction of money has been done by rich by looking at the financial statements. Previously, entire money donated by Rich should be treated as donated capital and then it should be treated as revenue (Dakis 2016).
Conclusion
At the end of the study, it is concluded that Recyclers Limited is a non-profit entity and received donation worth of $1000000 from Rich, a well-known environmentally conscious philanthropist. This case study analyzes the accounting treatment of donations in accordance to AASB 1004. In this standard, it is clearly mentioned about the recognition criteria that help in understanding whether the donated amount can be considered as income for the company or not. There are three main recognition criteria of AASB 1004, to which the first criterion does not match or align with the situation mentioned in the case study. The other two criteria match with the elements as shown in the case study. Hence, the donation amount of $1000000 cannot be treated as income as it fails to match with the first criteria. It is suggested that Managing Director of Recyclers Limited to ask their accountants to treat the donation amount of $1000000, firstly as capital account under the heading “donated capital”. Then the treatment will be changed after 6 months when the financial statement is shown to Rich and he gets convinced with the fact that the money is used wisely, then the amount that are spend till now can be treated as revenue generated for the company as this money has been used by Recyclers Limited for research activities. The Managing Director is of the opinion that the company can get more money from Rich if they can show the financial statement with greater transparency and relevant facts. The only motive of Rich to donate money to Recyclers Limited was to see that the money are spent wisely on the research activities as he is more concerned on environmental related issues and works hard to best serve the society as a whole. In that way, he decided to contribute money to Recyclers Limited so that money is spent wisely and that leads to protection of environment as a whole.
References
Dakis, G.S., 2016. Upcoming changes to contributions and leasing standards. Governance Directions, 68(2), p.99.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Edwards, J.R., 2013. A History of Financial Accounting (RLE Accounting) (Vol. 29). Routledge.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.
Holland, D., 2016. Simplifying income recognition for not-for-profit entities. Governance Directions, 68(11), p.666.
Pratt, J., 2013. Financial accounting in an economic context. Wiley Global Education.
Saunders, A. and Cornett, M.M., 2014. Financial institutions management. McGraw-Hill Education,.
Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.
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