With limited budgets, companies are increasingly looking beyond cash. In last decade, the focus has been on employees, their time and the special skills they can offer, whether in paid hours or with employer encouragement in their own. Just some of the activity includes extensive support for volunteering, money-for-time incentives, more flexible short-term secondments and formal time-off schemes.
These moves have been supported by the many ‘intermediary’ agencies at national and local level performing a brokerage role – and have recognised by successive governments. Gordon Brown is only the latest chancellor, promising in his November pre-Budget speech to clarify the tax deductibility of staff secondments to education and colleges.
Some companies are also including the cost of paid time off in the published totals of their community contribution, and so starting to present a better picture of the scale of investment and the ways they can help.
Poor relation
But until recently, in-kind gifts, such as products, equipment and company facilities, have been the ‘poor relation’. Current UK tax rules (unlike the US) can act as a disincentive, companies remain confused about how to value their donations, and effective easy mechanisms to make transfers were until recently lacking. Now things are starting to improve.
In 1997, Gifts in Kind UK started operations, modelled on the American initiative and concentrating mainly on new goods, usually slight seconds, samples, slow-moving ranges and returned stock. Goods worth ?4 million at full retail value have been donated by more than 200 companies, with some 900 charities benefiting.
Smaller scale agencies help to recycle specialist equipment, such as redundant computers, often at a local level. In October, the Department for Trade and Industry issued a directory for companies to find help in getting old PCs reused. The DTI says that around five million items of old IT equipment are thrown away each year.
Then in December, a new national charity, Tools for Schools was launched, supported by the Financial Times, the Guardian and other national media, with the aim of recycling 30,000 PCs a year for schools by the year 2000.
US and UK
In the United States, Gifts in Kind has been running since 1984 and raises more than 6300 million a year at market valuation (www.giftsinkind.org). Around four in ten of manufacturing and retail corporations in Fortune 500 now participate. The Conference Board reports that in-kind giving is a growing proportion of total contributions, now at around one fifth.
Eight in ten firms in the retail sector give product donations, according to the Retail Federation, while the advertising industry alone donates media worth nearly 61 billion a year at commercial rates.
Estimates of how much UK companies contribute in this way are very unreliable, thanks to poor recording and confusion over valuation. In 1996, the Charities Aid Foundation surveyed 42 companies known for making gifts in kind. Only half replied and of these just one in five could give any monetary figure. CAF’s survey of the top 500 UK charities found donations worth ?33 million reported. But in 1997, the figure had dropped to ?19 million, a dramatic decline likely to be caused by unreliable valuations, not a reduced volume of activity.
Valuation questions
In the USA, Microsoft and IBM have debated how to present their contributions. In 1996, Microsoft claimed 673.2 million in total and came top of the corporate funders list. Third placed IBM had used wholesale prices, saying it was “a more realistic value of what a company is giving”. Using retail price as per Microsoft, contributions would have been 692.7 million and by 1997, IBM was using the bigger figure, with worldwide contributions at 696.8 million. The methodology matters, as only a quarter of IBM’s contribution is cash, the rest in technology and services (time and in-kind).
So what is the right way to value in-kind giving – notional retail price or wholesale? Neither, according to the London Benchmarking Group: if you are trying to quantify the company’s contribution, cost to the company is the ‘input’ to the community. Using retail or wholesale inflates the figure with a profit that might not have been earned.
Valuation at a sales price is only justifiable as an indicator of ‘output’, the benefit to the community, but even then it can be misleading. Rarely would the charity be in a position to buy the goods new. Often in-kind good are slightly damaged and could not have been sold at normal prices.
In the UK, charities are required to declare in their accounts incoming resources in the form of gifts in-kind at “a reasonable estimate of their value to the charity”. This is usually taken as the amount it would have cost the charity to buy them on the open market. For damaged goods, this is usually less than the normal retail price.
Tax treatment
Valuation treatment is confused by the tax position. In the USA, the tax code is a major incentive to give in-kind. Companies can claim a tax deduction of cost plus half the notional profit (up to double its cost value) for a range of donations to causes such as the care of infants, the ill and the needy and to educational institutions from kindergarten to 12 years old. The incentive to give big numbers in clear. In the UK, by contrast, tax acts as a sever disincentive, especially VAT, where Customs and Excise can theoretically demand 17.5% of the notional value of goods donated. No wonder companies understate their value.
Valuation guidance
The London Benchmarking Group follow-up project, Getting the Measure, is developing clear guidance on valuing in-kind giving. Based on the clear principle of ‘cost to the company’, here is some of its latest thinking on detailed guidance.
Gifts of products from inventory stocks rather than being sold as new commercially are normally valued at the average unit cost of production. This information should be easily available from accounting records.
Manufacture-to-give schemes may not have a normal inventory cost. One example is run by SmithKline Beecham which offers pharmaceuticals specially added to the production line, after discussions with aid agencies to meet their particular needs. In such limited cases, the company will need to apply the general principle of unit (not marginal) cost and estimate a suitable input valuation.
Note that the treatment of an item can change rapidly: perishable food stuffs such as sandwiches are stock, valued at cost, on the day before their ‘best by’ date. The following day, the company must withdraw them from sale and they only have scrap value.
Such products, stocks or other assets are ‘written down’ in the accounts for a variety of reasons, perhaps time dated, slightly damaged or end of range; they may also be trials not put into full production or simply surplus to market demand.
Equipment such as office equipment and computers may be surplus to requirements or approaching obsolescence. They should normally be valued at the depreciated value held in the company’s books of account.
Sometimes donated items have a zero book value because they have been fully written down over (say) a four year and any residual value is not significant (‘material’) in terms of the company’s whole accounts – but in the context of the community programme and for charities, zero is not a fair figure. Under such circumstances, a notional amount, based on net realisable value, can be used as the input cost to the company, since the equipment could have been sold second hand or as scrap.
At other times, no figure is readily available from the books of account, especially for products. Then a fair estimate will usually suffice. But if they are major or regular contributions, then a professional valuation should be sought, providing proper substantiation to the claimed figure for cost to the company.
In-kind donations can also cover a broad range of items, including holding meetings, providing places on in-house training courses, photocopying and printing facilities, other business services, office premises made available at nil or reduced cost, loan of specialist equipment, etc.
Normally, only the genuine additional costs can be counted, for example only refreshments during meetings or the paper used in photocopying or the heating and maintenance of premises. For ease, simply take the standard internal charging rates, for example those used by the catering or reprographics departments.
Exceptionally, the full cost of a donated resource can be used where the company suffers genuine costs by choosing to support a community organisation or project. One example is the use of training facilities when fully booked and which would otherwise be let at commercial rates. Another is the loan of a whole office block which is permanently redundant and would otherwise be sold or commercially relet. Likewise, services offered free or discounted on a regular basis should be counted at their full cost, rather than just the marginal cost, the rationale again being that significant savings could be made if the community contribution ceased.
For information on Gifts in Kind UK, contact Susan Iwanek on 0171 204 5003
For comments on valuation guidance and the London Benchmarking Group follow-up project, contact David Logan on 0171 945 6130
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