Overview of Financial Statements of NGOs

Need for financial reporting framework for NGOs

• Financial reporting should provide true and fair view of state of affairs in conformity with generally accepted accounting principles (GAAP).

• This confirmation is provided by an external auditor as per its opinion in the auditor report.

• Financial reporting (statements) should provide uniformity, clarity and common understanding to various stakeholders.

• For NGOs, lack of awareness and uniform applicability, inconsistency in basis of accounting, non-uniform terminology etc. results in financial statements being neither standard nor comparable.

• Financial reporting framework for NGOs is detailed in Technical Guide on Accounting of NGOs (Jan 2022) by ICAI for uniformity and standardisation.

Components of Accounting Framework as per Technical Guide

(a) Elements of financial statements

• Identify and define the items that should be considered as income, expenses, assets and liabilities in NPOs.

(b) Principles for recognition of items

• These principles lay down the timing of recognition (when) in the financial statements.

(c) Principles of measurement

• These lay down at what amount items should be recognised.

(d) Presentation and disclosure principles

• These explain the manner of presentation and disclosures required.

Note: a, b and c are sector-neutral, while presentation and disclosure differ for not-for-profit and for-profit sectors.

Accounting Terms

Accounting Transaction: A monetary activity recorded in account books with monetary effect on the financial statements.

Sales: Products/services are transferred from sellers to buyers for cash or credit.

Purchases: Transactions to obtain materials and services to accomplish goals.

Receipts: Payments received for providing services or goods.

Payments: Payments made for availing goods/services from vendors, staff etc.

More Accounting Terms

Assets

• Resources/items that the NGO owns. Measurable in monetary terms.

• Two categories: Fixed Assets and Current Assets.

Liabilities

• Legal financial obligations or debts to be settled over time.

• Two types: Long-term and Short-term.

Equity/Capital

• Amount an NGO would return to shareholders after assets are liquidated and debt is paid.

Expenses

• Costs incurred to generate revenue. Examples: wages, payments, equipment depreciation.

Revenue/Income

• Income from normal business operations.

What is a Financial Statement?

• Collection of summary-level reports:
  a. Balance Sheet
  b. Income and Expenditure Account
  c. Receipt & Payment Statement (cash flow)
  d. Accounting Policies and Explanatory Notes

• Accompanied by Auditor Report.

BS, I&E, R&P

• Balance Sheet: Shows assets and liabilities (what you own and owe).

• Income & Expenditure Statement: Income earned and expenses incurred.

• Receipt & Payment Statement: Actual cash receipts and payments.

• FCRA Note: Separate FCRA financial statements required for FC operations.

Key Points for Preparation of Financial Statement

• Accrual system of accounting recommended.

• Prepared annually.

• Include comparative information for at least one year.

• Different from donor reporting or taxation.

• Reflect restricted and unrestricted funds separately.

• Format: Schedule III of Companies Act (used even by charitable organisations).

MRL and ML

Management Representation Letter (MRL)

• Issued by the client to the auditor during audit as audit evidence.

• Clarifies separation of responsibilities.

Management Letter (ML)

• Sent by auditor to Governing Board highlighting control weaknesses and suggestions.

• Board should respond and confirm compliance.

Maintaining Books of Accounts for NGOs

• No prior regulation till FY 21-22.

• Section 12A(1)(b)(i) added wef AY 23-24.

• Books must include:

  • Cash book, ledger, journal

  • Receipts (serially numbered), invoices etc.

Other Required Documents

• Records of projects, income, application of income, voluntary corpus contributions, 80G corpus, loans, properties, specified persons (section 13(3)), etc.

Bookkeeping Guidelines

1. Form: Books can be in written, electronic, digital or print-out form.

2. Place: Kept at registered office. If kept elsewhere, AO must be informed.

3. Period: Maintain for 10 years from end of relevant assessment year.

4. Note: Entities under section 11(4) and 11(4)(a) must keep separate books for that income.

Accounting Standards

• Necessary for uniformity in preparation and presentation.

• Prescribed by ICAI.

AS-1: Disclosure of Accounting Policies

• Fundamental assumptions: Going concern, Consistency, Accrual.

Considerations
a. Prudence – Do not anticipate profits, provide for all known liabilities.
b. Substance over Form – Economic substance over legal form.
c. Materiality – Disclose material items that influence user decisions.

AS-1 Points to Remember

• Disclose accounting policies: depreciation, valuation, employee benefits, etc.

• Any change affecting financials must be disclosed.

• If fundamental assumptions are not followed, disclose in statements.

AS-10: Accounting for Fixed Assets

1. Gross and net book values

2. Construction/acquisition expenditure

3. Revaluation method, appraisal year, valuer involvement

AS-13: Accounting for Investments

• Assets held for income, appreciation or other benefits.

• Follow classification, cost, disposal, reclassification norms.