AERDO Interagency GIK Standards,
January 1999

Guidance for Understanding Standards

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Standard #5 - Recognition of Revenue and Expenses

Background: One of the most significant, and sometimes abused, issues is which organization should record the value of donated GIK. It is very common for non-profit organizations to "partner" in the acquisition, transportation, and use of GIK. The organizations in these "partnerships" have many varying degrees of involvement and responsibility. As noted earlier, the accounting literature only states that if donated items pass through the organization to its charitable beneficiaries and the organization serves only as an agent for the donor, the donated items are usually not recorded.*  But, what does this statement really mean and how should the various "partnership" activities be accounted for?

To understand these "partnership" arrangements and how they affect the recording of GIK, it is important to understand the definition of the words principal, agent, agency relationship, partnership, possession, and "pass through." The definition of these terms as used in this document can be found in the glossary in Appendix A.

The abuse of GIK programs has come through what the Task Force identified as "pass through" donations. The Task Force defined a "pass through" donation as a GIK that is accepted from someone other than the original donor and is then donated to another organization which is not the end-user (consumer) of the GIK. The organization accepting the donation, and then donating the GIK, may or may not take actual possession of the GIK. The organization in these circumstances has not added any value to the GIK other than maybe matching a donor with a recipient. The abuse comes when the organization records the value of these GIK even though no value was added nor was the GIK used in its own program or in programs in which the organization has a clear and ongoing partnership.

This recording issue becomes somewhat more clouded by the stated purpose of various non-profit organizations. The Task Force identified three basic types of organizations involved in GIK programs. First, an operational agency is one that actually has a physical presence in the region/country/ project where the GIK will be received and utilized. A second type of organization is the service agency whose mandate is to supply or support humanitarian, relief, or development programs through the procurement and/or transportation and/or distribution of GIK. The third type is the intermediary agency, which may be a non-profit or for-profit agency. These types of agencies normally procure or transfer GIK between other non-profit organizations, but generally do not take physical possession or handle the GIK. These agencies may or may not charge fees. Some non-profit organizations may have characteristics of all three types of agencies at any given time. The recording issue becomes most clouded with service and intermediary type agencies. A service-type agency may not be the organization to actually procure the GIK or to use the GIK, but may provide the transportation to get the GIK from the donor to the end-user. In this case, should the organization record the value of the GIK or just the expense of the transportation? Perhaps the value should be recorded because the purpose of the organization is to support this type of activity. Perhaps the value should not be recorded because the organization really had no role in the procurement or end- use of the GIK. Should the donor agency and end-use agency record the value of the GIK and the transportation or just the value of the GIK? The same questions could also be asked about intermediary agencies, except instead of transportation, the intermediary may charge a "handling" fee.

If a partnership is made by two or more non-profit organizations for the procurement and use of a GIK donation, all partners will allocate the value of the donation based on their percentage of participation, not to exceed the equivalent fair value which would be recorded by no more than two non-profit organizations. If a partnership is limited to either the procurement or the use of a GIK donation, then each partner will record the value of the donation based on their percentage of participation, not to exceed one hundred percent of the fair value.

Guidance: The Task Force recognizes there are two ways of accounting for recognition of revenue and expenses for GIK. First, revenue may be recognized at the date of donation and recorded as inventory. The expense is then recorded when the GIK is shipped, transferred, or designated for program use and inventory is reduced. The second method is to recognize both the revenue and expense at the date of shipment, transfer, or designated for program use. Both methods have strengths and weaknesses and either method is acceptable. An organization should consider the impact of either method before making a choice.

When can a partnership be said to exist? A partnership assumes a clear sharing of responsibilities for major processes in a GIK transaction. Critical factors which should be considered in determining whether a partnership exists between two or more non-profit organizations include:

In general, our guidance suggests that only two non-profit organizations record the value of a given GIK donation. However, in certain instances our guidance suggests that it may be appropriate for more than two non-profit organizations to record a partial value of the same GIK donation based on the percentage of participation by each member of a partnership.

For example, in a desire to respond to the compelling needs of an emergency relief situation, non-profit organization A procures and receives donated GIK appropriate to the program needs of an emergency situation, non-profit organization B desires to respond and enters into a field-based partnership with non-profit organization C for end-use distribution in a specific project addressing the emergency situation. What factors in this example would or would not suggest recording revenues as a partnership?

In reviewing the factors outlined on the table (above), this example does not necessarily demonstrate shared planning and decision making. However, there is clearly a specific project/program designation in this example. The information for this example does not clearly indicate that written documentation or a formal agreement for partnership is in place among any or all of the non-profit organizations. Additionally, the information in this example does not indicate an ongoing/long-term collaboration, or whether non-profit organizations A or B necessarily assumed physical possession of the donation. It is, of course, assumed that the organization C does take physical title in order to undertake end-use distribution.

Depending on which organizations assumed physical title and whether any formal agreement or other written documentation exists between the organizations, there is not sufficient evidence here to suggest a partnership. If no partnership exists, then organization A would likely record full fair value, providing that they assumed physical possession/title. Organization B would only record their expenses such as freight or other direct costs associated with the donation, and organization C would record full fair value as the end-use distributor.

However, if organization A had not assumed physical possession/title and served merely as an intermediary agency in the transaction with no other clear "value-addedness" to the transaction, it is questionable whether organization A should record full or partial fair value of the donation. Moreover, if organization B entered into a partnership with organization C to support that agency’s ongoing project in this emergency situation and had assumed physical possession/title of the donation, the organization B could record full or partial fair value.

If a formal agreement or other substantive written documentation does exist between all or some of the organizations in this example, then it would be the responsibility of the partners to allocate the fair value of each donation based on the terms of their overall formal agreement or separate case-by-case agreements depending on the terms and circumstances of each donation.