I have always thought that traffic congestion along EDSA is the most frequent topic of conversation among Filipinos. In recent months, my country proved me wrong. Seeing the way the 2016 election campaign period unfolded, I can say now that the national elections, the candidates, or anything related to both, are the only trending topics daily in all types of media. Suddenly, people have become some kind of political analysts, campaigning for their candidate of choice or simply sharing their thoughts and views about a particular candidate. Social media walls and feeds, which used to be our daily dose of good vibes, are now all about the elections, candidates, and political bashing. Casual chats have turned into heated exchanges that drive people to take a firm, passionate stance that sometimes even hurt great friendships.
With less than three days to go before the much-awaited national elections, the candidates’ political spending continues to dominate media and public discussions. Every time I see figures on their spending I cannot help but wonder where all those funds are coming from.
While I recognize that the candidates also spend much of their own money, it is also safe to assume that they receive support from individuals, groups or organizations as well. This leads me to wonder even more whether the report on each candidate’s political spending includes both donations in cash and in kind, and how they account for donations in kind.
Political or not, it would be good to revisit how donations should be accounted for local statutory reporting. When we look at the local accounting standards in the Philippines or the Philippine Financial Reporting Standards (PFRS), we don’t see any explicit discussion about accounting for donations. However, we can apply the general guidance in accounting for assets, receipts/income and expenses under PFRS, which provides an accounting treatment that is aligned with the US GAAP guidance on accounting for donations. In practice, we usually refer to other available references when the local GAAP does not explicitly provide a specific guidance for a certain type of transaction.
For the donor, the accounting should be straightforward, just a reduction in its cash account based on actual cash donated, or a reduction in a non-cash account (e.g. equipment) based on the carrying amount of the non-cash asset donated in the donor’s financial records. Accordingly, a donation expense would be recognized in its books in relation to this transaction.
For the donee, which could be an individual like a political candidate, a company or an organization, the accounting would only be straightforward when the donation received is in the form of cash. The donation received will just be recognized as additional cash, with a corresponding donation income in its financial records. If the donation is in any other form, for example—cars, inventories, supplies, free use of space and media airtime, the accounting may be a bit complicated. If the donee receives an asset, the initial recognition of the asset should be at fair value, or its acquisition price when purchased in an open market. The related donation income will be recognized for the same amount. This may come across as straightforward but the difficulty usually lies in the identification of fair value. Certain donations in kind may be difficult to value when no market exists for the item donated. In cases where there is no active market, judgment is key in assessing and identifying the most reasonable fair value of the donation in kind. For donations in kind that may result in a recognition of a very significant asset amount in the financial records of the donee, it is best to engage a valuation expert to assist in the process.
On top of general accounting of donations, it is also good to know how some specific types of donations in kind should be accounted for in the financial statements.
If an organization, like a foundation, receives medicines for its medical mission, it should present supplies or inventories in its balance sheet and donation income in its income statement at fair value. Upon usage of the medicines, it should take up an expense in its income statement and on an annual basis; it should assess any remaining supply or inventories for possible obsolescence, which needs to be reported as an additional expense in its income statement.
If a company receives a donation such as free use of space (e.g. warehouse) for several years, the transaction would result in a ‘right-of-use asset’ in its balance sheet and a donation income in its income statement recorded at fair value. As the company uses the space, it should recognize an expense equivalent to the annual amortization of the right-of-use asset in its income statement.
If an individual, such as a political candidate, receives a donation in the form of a free TV ad airtime, initial recognition of the free airtime should be taken up at fair value with a prepaid asset in the balance sheet and a donation income in the income statement. An expense or spending should be recorded when incurred, which is upon media display of the advertisement, with the cost spread over the agreed advertising period.
This is how donations are accounted for under the PFRS, but for purposes of the political candidate’s reporting to the Commission on Elections, a different accounting framework may be required.
Correct and consistent accounting treatment of transactions taken up in the financial statements or in any type of financial report is essential for stakeholders, like the public in the case of political spending reports, to make better use of such information. We cannot compare any report when the information is not comparable in the first place. So the next time we see another report or social media post about the candidate’s spending, we must exercise a more critical assessment of the information. Check consistency and comparability of reported spending by candidate, including the reliability of its source and content before sharing it further to social media.
Much has been publicized about our candidates’ political spending, but it would be more interesting to know how much of each candidate’s spending came from its political party, from the candidate’s own pockets, and from donations. Funding from the first two sources are expected, but once funding from donations appear to be very significant, the auditor in me would surely kick in and ask if these are indeed, donations, to be able to assess the reasonableness of amounts and make sure that the reports do not contain any material error.
At the end of the day, the most important thing to know is the donor’s true intention in making a contribution, because the transaction would only qualify as a donation if the donor does not expect anything in return.
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Ma. Lois Gregorio-Abad is a Partner from Assurance, Accounting Consulting Services and Human Capital of Isla Lipana & Co./PwC Philippines. Email your comments and questions to firstname.lastname@example.org. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.