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Overview of Financial Statements of NGOs

Need for financialFinancial reportingReporting frameworkFramework for NGOs

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

  • India GAAP is based on Accounting Standards formulated by ICAI
TFV means financial statements are accurate, complete and present a fair representation of the company's
financial position and performance.

This confirmation is provided by an external auditor as per its opinion in the auditor report. This auditor is accredited with the apex accounting body i.e. ICAI

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 statementsstatements:

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

      (b) Principles for recognition of itemsitems:

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

        (c) Principles of measurementmeasurement:

          These lay down at what amount items should be recognised.

          (d) Presentation and disclosure principlesprinciples:

            These explain the manner of presentation and disclosures required.

            Note: a,1, b2 and c3 are sector-neutral,neutral (not different for NPOs and for profit entities), while presentation and disclosure differ for not-for-profitthe and for-profittwo 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

              These

              are

              Resources/resources or items that the NGO owns.owns MeasurableAssets have future economic value that can be measured and can be expressed in monetary terms. Examples include investments, cash, inventory, accounts receivable, land, supplies, equipment, buildings and vehicles.

              Three categories:

                Fixed Assets

                Two categories: Fixed Assets and Current Assets.Investments

                Current Assets

                Liabilities

                These

                refer

                Legalto the legal financial obligations or debts tothat beNGOs incur during business operations. They are settled over time.time through the transfer of economic benefits such as money, services or goods. Liabilities include payables, loans, accrued expenses, provisions.

                Two types:

                  Long term

                  TwoShort types: Long-term and Short-term.

                  Equity/CapitalCapital, Net Assets

                    Refers

                    to

                    Amountthe anamount NGOof wouldmoney that is required to return to its shareholders after all assets are liquidated and debtall liabilities paid off.

                    Equity capital is paid.

                    not

                    Expenses

                      Costs incurredreturned to generatefounders/promoters revenue.in Examples: wages, payments, equipment depreciation.NGOs

                      Revenue/Income

                        Refers

                        to

                        Incomeincome fromthat an NGO generates for/on its normal businessoperations operations.i.e. grants, donations, interest etc.

                        Expenses

                        Expenses

                        refer

                        to the costs of operations that for profit incur to generate revenue. In NPOs, income is received for making expenses normally. Common expenses include employee wages, payments to suppliers, equipment depreciation and factory leases.

                         

                        What is a financial statement?

                        Financial Statement?statement

                          is a

                          Collectioncollection of summary-level reports:
                          a.reports Balanceabout Sheet
                          b.an Incomeorganization's financial results, position and Expenditurecash Account
                          c.flows.

                          Financial statements include:

                            balance sheet as at the end of the financial year, income and expenditure account during the financial year, Receipt & Payment Statementpayment (cash flow)
                            d. statement during the financial year and Accounting Policies (principles for preparing the financial statement based on Accounting Standards) and Explanatoryexplanatory Notes notes

                            AccompaniedThese bycome with Auditor Report.Report with its opinion on the TFV of financials statements

                            BS, I&E, R&P

                            • Balance Sheet: ShowsPresents assets and liabilities (I.e. what you own and owe).owe.

                            • Income & Expenditure Statement: IncomePresents income earned and expensesexpenditure incurred.incurred during the year, Any excess is carried to the Balance Sheet

                            • Receipt & Payment Statement: ActualPresent cashactual receipts of funds and payments.payments during the reporting period.

                            • FCRA Note:registered Separateentities have to prepare FCRA financial statements requiredseparately for its FC operations.

                            Key Points for Preparation of Financial Statement

                            • Basis of accounting: Accrual system of accounting recommended.recommended

                            • Prepared annually.annually

                            • IncludeContain comparativestandard information for various stakeholders

                            Comparative information for at least one year.year

                            Different from donor reportingreporting, orgovt taxation.compliance but these are extracted from the financial statements 

                            ReflectShould reflect restricted and unrestricted funds separately.separately

                            Format: Schedule III of Companies Act (usedfor evensection by8 company and other forms of charitable organisations).organisations also follow CA

                            MRL and ML

                            Management Representation Letter (MRL) 

                            is

                              Issuedissued by the client (Auditee/NGO) to the auditor in writing as part of Audit Evidence. Management takes responsibility for the complete and accurate information provided to auditor to provide TFV. This document during the audit asclarifies audit evidence.

                              Clarifiesthe separation of responsibilities.responsibilities of the auditor and auditee (management).

                              Management Letter (ML) 

                              is
                                a letter

                                Sentsent byfrom auditorauditors to Governing Board highlightingadvising them of findings indicating control weaknesses identified during the audit, and suggestions.

                                suggestions to remedy

                                these. It is an outcome of the audit process. The Board shouldis supposed to respond to the observations and confirm compliance.compliance within a timeframe

                                Maintaining Books of Accounts for NGOs

                                • NoThere priorwas no regulation tillregarding books of accounts by NGOs upto FY 21-22.22

                                • Section 12A(1)(b)(i) addedinserted for maintaining of books of accounts and other documents wef AY 23-24.

                                Books mustof include:accounts & other documents:
                                The specified books of accounts shall include

                                • Cash book, ledger, journal

                                  book
                                • Ledger

                                Receipts

                                Journal (Copies of serially numbered),numbered invoicesreceipts, original copy of invoices, etc.

                                Other Required Documents

                                  1. RecordsRecord of projects,all income,the projects and institutions run by the organisation

                                Record of income of the organisation during the previous year Record of application out of income,the income during the year Record of specified application out of the income of preceding years Record of voluntary contribution with a specific direction to form Corpus Record of contribution received under 80G(2)(b) being treated as corpus contributions,Record 80Gof corpus,Loans loans,and properties,Borrowings Record of properties held by the organisaiton Record of specified personspersons, as per section 13 (section3) 13(3)),of etc.the Act Any
                                other document

                                Bookkeeping Guidelines

                                1. Form: Booksof cankeeping bebooks of accounts and documents: Kept in written,written electronic,form or electronic form or digital form or print-outprintouts form.or any other form of electromagnetic data storage device.

                                2. Place

                                  Place:of Keptmaintaining books of accounts and other documents: shall be kept and maintained at its "registered office.office“. If keptthe elsewhere,accounts AOare mustmaintained beother informed.

                                  than the registered office or at various project locations, intimate Assessing Officer in writing, giving full address of the other places supported by resolution of the board

                                3. Period: Maintain for 10which books of accounts & other documents should be kept: Kept and maintained for a period of ten years from the end of the relevant assessment year.year

                                  • Note:Organisation Entitieshaving underincome subject to section 11(4) and 11(4)(a) mustto keepmaintain separate set of books forof thataccount income.of such income in line with the provision under Income Tax Act.

                                Accounting Standards

                                • NecessaryFormulation of uniform Accounting Standards is necessary in the preparation of accounting information and its presentation in financial statements for bringing about a greater degree of uniformity in preparationaccounting and presentation.measurements.

                                • PrescribedAccounting Standards lay down the rules for measurement and presentation of accounting information by ICAI.organizations and are prescribed by ICAI

                                AS-1: Disclosure of Accounting Policies

                                  Fundamental assumptions: Going concern, Consistency, Accrual.

                                  Considerations in selection of accounting policies to reflect true and fair view of the financial statement 
                                  a. PrudencePrudence: –Profits Doare not anticipateanticipated profits,but providerecognized when realized. Provision is made for all known liabilities.liabilities and losses even though the amount cannot be determined with certainty and represents only as an estimate.
                                  b. Substance over Form: –The Economicaccounting treatment and presentation of transactions and events in financial statements should be governed by their economic substance overand not merely by the legal form.
                                  c. MaterialityMateriality: –Financial Disclosestatements materialshould disclose all “material” items, i.e. items thatthe knowledge of which might influence the decisions of the user decisions.of the financial statements.

                                  AS-1 Points to Remember

                                  • DiscloseAreas for accounting policies:policy depreciation,disclosure for NPOs-Depreciation, FA valuation, valuation of investment, treatment of employee benefits, etc.contingent liabilities. 

                                  • AnyAll changesignificant affectingaccounting financialspolicies mustused in the preparation and presentation of financial statements should form part of the financial statements as a Schedule.

                                  Change in the accounting policies which has a material effect should be disclosed and amount by which the financial statements is affected should also be disclosed. Where such amount is not ascertainable, wholly or in part, the fact should be indicated.

                                  If the fundamental accounting assumptions are not followed, disclosethe fact should be disclosed in financial statements.

                                  AS-10: Accounting for Fixed Assets

                                  1. Gross and net book values of fixed assets at the beginning and end of an accounting period showing additions, disposals, acquisitions and other movements;

                                  2. Construction/acquisitionExpenditure expenditureincurred on account of fixed assets in the course of construction or acquisition; and

                                  3. RevaluationRevalued method,amounts, the method adopted, the nature of indices used, the year of any appraisal year,made and whether an external valuer involvementwas involved

                                  AS-13: Accounting for Investments

                                  • AssetsInvestments are assets held by an organization for income,earning appreciationincome by way of dividends, interest and rentals, for capital appreciation, or for other benefits.

                                  • FollowClassification classification,of cost,Long term and short term investments should be as specified in the standards.

                                  The requirements of this Standard regarding cost of investment, carrying amount of investment, disposal, reclassification norms.etc should be followed.

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