Chasing Myths: Common Misapplications of IFRS and Their Implications Myth #6: Donations
How should an entity with a profit-making purpose recognize donations received when the donor is neither the public administration/government nor the entity’s capital holders?
The objective of general-purpose financial statements is to provide their users with financial information about the reporting entity that is useful for economic decision-making. According to the #IASB Conceptual Framework, for information to be useful, it must meet, among other criteria, the qualitative characteristic of faithfully representing transactions and other relevant events (faithful representation). Faithful representation assumes that such transactions and events are reported based on their true substance.
Thus, the first aspect to consider in determining how to treat the transactions mentioned in the question formulation is identifying their true substance. In this context, it is noted that the gratuitous transfer of an asset to an entity with a profit-making purpose only makes economic sense if the donor has some interest in the transaction—typically when the donor is the government or a public administration body, which constitutes a government grant as defined in IAS 20, or when the donor is a capital holder of the entity, which constitutes a capital contribution in kind. The transfer of an asset under these conditions, if not made by the public administration or the capital holders, does not have an apparent economic rationale. Therefore, it is necessary to identify its true substance, which will determine the appropriate accounting treatment in line with the qualitative characteristic of faithful representation.
Except when the donor is a capital holder of the entity, donations are considered income, as defined in paragraph 4.68 of the IASB Conceptual Framework. Considering the provisions of paragraph 88 of IAS 1 (and paragraph 46 of IFRS 18), it is concluded that all income is recognized in profit or loss for the period unless another IFRS standard requires or permits its recognition in other comprehensive income.
Therefore, when the donor is not a capital holder of the entity, it is not correct to recognize donations as a capital transaction.
Note: the identification of the true substance of a donation depends on the facts and circumstances and requires professional judgment and knowledge of the context.