There's a perception that sponsors are always throwing wads of cash at events such as the Olympic Games and football and rugby World Cups to promote their brands.
In reality, they are more likely to be offering soft drinks and food, clothing, air travel, motor vehicles and a range of other goods and services as part of value-in-kind (VIK) deals – also known as contra – with organisers.
While these sponsorships are usually welcome, they have traditionally caused challenges for accountants in deciding how to best treat these resources in financial statements.
VIK has long fascinated Brian Burfitt, a former manager in the finance team for sponsorships at the Sydney 2000 Olympic Games. Now a lecturer in the school of accounting at UNSW Business School, Burfitt has co-written a paper on the subject – 'Accounting for Value-in-Kind Sponsorship Resources: A Sporting Organisation Plays the VIK Game' – with Jane Baxter, an associate professor at UNSW Business School, and Jan Mouritsen, a professor at Copenhagen Business School.
According to the researchers, VIK transactions should be captured by accounting systems to promote sound resource management, in addition to robust record-keeping, budgetary planning and internal audit processes.
"When we have cash coming into an organisation we know how to deal with it and the processes are straightforward," Burfitt says. "With VIK it's a different story and there aren't always processes that are outlined to follow."
'Cash is king'
Non-cash VIK resources are often acquired by sports clubs, charities, arts organisations and community groups. It can be a more attractive option for sponsors than giving cash because they can achieve a desired sponsorship level – or profile – at a lower cost.
At the London 2012 Olympics, VIK accounted for 55% of domestic sponsorship, and two-thirds of the International Olympic Committee sponsors' contribution to the budget of the London Organising Committee of the Olympic Games.
'It’s far easier for sponsors to cough up things they have available to them rather than writing cheques'
– BRIAN BURFITT
VIK was also an important criterion for selection of the host city for the 2020 Olympics, with Tokyo winning the day.
Burfitt notes that it is not just big-ticket events that depend on VIK; it is also a valuable resource for many clubs and smaller groups that cannot convince sponsors to hand over cash.
"It's far easier for sponsors to cough up things they have available to them rather than writing cheques," he says.
Nevertheless, Brent Barootes, CEO of Canadian consulting firm Partnership Group – Sponsorship Specialists, reminds beneficiaries that "cash is king" and suggests trying to push for a cash deal if possible.
"Then the sponsor gets the assets they need to achieve their marketing goals and pay a fair market price for that exposure," he says. "In return, the [organisation] gets cash … VIK products do not help make payroll payments at the end of the week – cash does."
Barootes argues that VIK can be a "lazy approach" to securing sponsorships, but acknowledges that it can work if a VIK product offsets a budgeted line item.
"So if you need $50,000 in bottled water or have budgeted to purchase a $25,000 pick-up truck, and the sponsor is willing to provide this in VIK versus cash, then it is a good deal. If there is no budget offset line, the deal is not good."
Getting it right
Burfitt, Baxter and Mouritsen conducted a case study of a Queensland rugby league team – which, for confidentiality, they rename The Giants – to better understand effective practices of accounting for VIK resources.
Overall, VIK contributed about 15% of the club's total revenue, courtesy of sponsors ranging from airlines and insurance companies to suppliers of sporting clothing, alcohol and hire cars.
Burfitt says The Giants' management focused on "budget-relieving" sponsorships and separated the recording of cash-based transactions and the VIK-based deals, which were then brought together as the processes moved through transformation stages to completion.
While management showed a commendable commitment to accurately analysing the value of their VIK sponsorships, it faced common challenges.
For instance, their bank questioned why the club's cash flow differed from its financial statements, prompting discussions about the impact of VIK. They also engaged in hybrid transactions that can result in an entanglement of financial and non-financial numbers.
The club's staff responded by developing, improvising and experimenting with a variety of methods to inscribe VIK in their accounting system.
'You actually have to address VIK and use trial and error to work through different scenarios'
– BRIAN BURFITT
In their paper, the authors note: "In particular, they aimed to determine practices that worked best in achieving their objectives of an accounting system, which combined both cash information and VIK (non-financial) information."
During interviews and discussion, club managers indicated that they stuck with what had worked for them, discarding methods that didn't work."
Elements that helped The Giants' VIK approach included having a stable management team that could consistently assess and review VIK sponsorships; creating awareness internally that VIK deals were important for the club, as well as a key part of prudent financial management; and implementing a range of methods to deal with VIK resources within the various operational departments (for example, senior executives managed the highly valuable VIK airfare deal, while other resources such as energy drinks were managed by the areas that used the resource).
Burfitt says The Giants' club management was ahead of the game in that it recognised the importance of VIK and getting it right. Many clubs do not.
"You actually have to address VIK and use trial and error to work through different scenarios. That's what The Giants did."
Offset genuine costs
For business leaders and finance specialists weighing up the pros and cons of VIK, Barootes says they should follow a simple rule – only do such deals if they help offset genuine costs the organisation would otherwise have to pick up.
"If your policy is that VIK only exists for budget-line items, then there are no accounting issues," he says. "The expenditure should still show on your accounting ledger, but just noted as VIK versus cash payment."
That means knowing exactly what resources the organisation needs, or risk being at the mercy of sponsors. A sports club, for example, may need 500ml bottles of water for their athletes, whereas a sponsor may be keen to offload excess litre bottles that are impractical for the club to use.
Barootes says other critical factors to cover off include who pays shipping costs; who handles the task if a product has to be assembled; who pays for maintenance in the case of a car lease; and what is the deal if you need more, or less, of a resource.
Burfitt and his co-authors are confident their study promotes an understanding of how VIK resources are incorporated into accounting systems.
It also contributes to the practical aspects of accounting for VIK resources and the notion of bricolage – that is, something created from a variety of available things – especially in terms of the use of local books.
Burfitt says it is crucial for leaders and managers to understand the economic significance of VIK to inform accounting standard-setting and to ensure that professional training of accountants encompasses VIK transactions, planning and control.
As he and his co-authors conclude: "There is still much to be learned about accounting for VIK resources, particularly understanding why such a significant aspect of funding the operations of so many organisations has escaped the gaze of standard-setters and policy-makers alike."