Presenting and Understanding Financial Information

Transcription

1 The best source of information and training on Aboriginal finance and management The Aboriginal Finance and Management Capacity Development Series Presenting and Understanding Financial Information

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3 The Aboriginal Finance and Management Capacity Development Series The best source of information and training on Aboriginal finance and management Presenting and Understanding Financial Information Table of Contents Introduction I Basic Introduction to Financial Management for Chief and Council A Financial Responsibility of Council B Role of the Finance Committee C Setting the Future Direction D Overseeing Community Financial Management E Reviewing Historical Financials II Federal Financial Contribution Process III Presenting Financial Information A To Chief and Council B To Community Members IV Sources of Information

4 The Aboriginal Finance and Management Capacity Development Series Introduction Council and management need timely and accurate financial data in order to make informed decisions. Simply providing the information, however, is not enough every effort must be made to ensure Council is also able to interpret the financial information put before it. This paper provides a basic introduction to financial management that can be used by a Chief and Council to help clarify their financial management responsibilities. We have endeavoured to make the toolkit easy to read it has been laid out in a question and answer format, and provides a comprehensive introduction to the subject in a very short time frame. Chief and Council can access the references in this toolkit as necessary when carrying out their financial management responsibilities. 2 Introduction

5 Presenting and Understanding Financial Information I A Financial Responsibility of Council Welcome! Whether a new Council member or a seasoned veteran, you are to be commended for taking time to learn more about financial management. Financial management knowledge is crucial to the position of Chief and Council. While land management and economic development may be more exciting topics at the Council table, financial management is the backbone of your First Nation. Sound financial management practices are a must without them, all Council plans and endeavours will struggle, or worse yet, fail. So, what are your responsibilities when it comes to financial management? The following summarizes the main items: 1 Setting the future direction of the First Nation a b c Establishing a Vision and Mission Statement Undertaking Planning, Setting Objectives Approving of Budgets 2 Overseeing the on-going financial management a b Establishing Financial Policy Making decisions based on the review of financial information 3 Reviewing historical performance a Approving annual audited financial statements b Management letter c Audit Review letter The terminology and statements above may not be entirely clear to someone new to financial management. So, we ll take a look at each responsibility in more detail in this section. B The Role of the Finance Committee Before getting into more detail about the responsibilities of Chief and Council, it is worthwhile to mention the function of a Finance Committee. A Finance Committee may be established by Council. It is comprised of certain Council members, the First Nation Administrator, the Finance Officer/Controller and interested First Nation members. The purpose of the Finance Committee is to carry out many of the functions of the Council as they pertain to financial management. The Committee may, for example: Review the budgets; Review the monthly financial statements; Review any other financial matters that it deems fit; Recommend the appointment of external auditors to Council; Review the audited financial statements and recommend their approval to Council; Review the auditor s management letter; and Investigate and report on any matter referred to it by Council. The advantage of a Finance Committee is that it doesn t require the involvement of every member of Council for more time consuming tasks such as budget formulation and monthly financial statement review. Where a Finance Committee is in place, it should make regular reports and recommendations to Council for all matters undertaken on Council s behalf. 3

6 The Aboriginal Finance and Management Capacity Development Series C Setting the future direction of the First Nation a Establishing a Vision and Mission Statement The main responsibility of Council is to establish vision and mission statements for the First Nation. In this respect, Council can be likened to the brains of the First Nation, providing direction to the rest of the body. The Vision Statement and Mission Statement are the foundation for all Council decisions. If no such statements exist in your First Nation, efforts should be taken to ensure they are established. What is a Vision Statement? The vision statement describes the First Nation as the members and Council want it to be in the future. What is a Mission Statement? The mission statement is a broad statement that outlines why the First Nation government is in existence (i.e. its purpose). Why are Vision and Mission Statements necessary? In order to achieve objectives, the First Nation needs to have a very clear idea of where it would like to be in the future. The First Nation government also needs to understand what the First Nation does, what it provides to its community. This provides the context in which the First Nation creates goals and objectives, and the plans to achieve them. How do the Vision and Mission Statements relate to financial management of the First Nation? The Vision and Mission Statements set out your goals and objectives. These goals and objectives are created for both the long term (two years or more) and short-term (one year). It is vital to ensure your budget provides the resources needed to carry out the plans you have established if it does not, you will in all likelihood fail to achieve your objectives. The creation of budgets that take into account long-term goals are most effective at moving the First Nation closer to achieving their vision. The relationships can be seen as follows: Vision Statement Mission Statement Long-term Planning / Mandate Objectives Short-term Planning / Budgets How does a Council establish Vision and Mission Statements? Consultation with the community, as well as First Nation s management, is highly recommended when The Council establishes or re-visits its Vision and Mission Statements. While it is acknowledged that Council is elected with the expectation that they are familiar with the needs and wants of their community, issues that Council is unaware of may be brought to light during public consultation. *For detailed procedures on how to establish the statements, see step one, the Planning Framework, of the AFOA First Nations Fiscal Calendar 4

7 Presenting and Understanding Financial Information b Undertaking Planning, setting Mandate Objectives What Planning is Necessary? With vision and mission statements in hand, concrete planning can truly commence. This includes the creation of strategies under long-term planning and the establishment of specific goals and objectives in a short-term context. Long-range planning provides the context for short-term planning, and encompasses a period of two or more years. Short-term planning is the breaking down of long-range plans into more specific goals and objectives, typically for a one-year period. Long-term plans should be reviewed periodically. Reviewing and updating the long-term plan each fall before budgeting occurs for the next calendar year is highly recommended. Election of a new Council also creates a scenario where long-term plans should be re-visited. How does the First Nation undertake long-term planning? Long-term planning is the responsibility of Council. And, like the preparation of vision and mission statements, long-term planning can benefit greatly from community input. Council needs to engage in a planning session, and address issues such as: 1 Expansion or contraction of services 2 Capital investment 3 Facility requirements 4 Personnel 5 Financing needs Long-term planning focuses on the entire environment of the First Nation, and requires knowledge of all the factors that have, or may have, an impact on the organization. Council needs to consider the internal environment: Past and current strategies Problems which could cause damage Capabilities Constraints As well as the external environment: Funding Agencies Lending agencies Customers for the First Nations services Technological changes Regulatory issues Economic factors Cultural considerations Demographic trends Constraints Long-term planning requires the collection, analysis and interpretation of a wide range of information that can be used to help forecast the future. *For detailed procedures on what data to utilize, see step one, the Planning Framework, of the AFOA First Nations Fiscal Calendar The result of long-term planning is the identification by Council of strategies for implementation, also called Mandate Objectives. 5

8 The Aboriginal Finance and Management Capacity Development Series What are Mandate Objectives? Mandate Objectives are specific, achievable, measurable goals that Council hopes to accomplish during their tenure as political leaders in the community. The Mandate Objectives provide direction to the First Nation management. *For detailed procedures on establishing Mandate Objectives, see step two, the Planning Framework, of the AFOA First Nations Fiscal Calendar How is short-term planning carried out? The responsibility for the planning function now shifts to First Nation management, who are primarily responsible for short-term planning, with approval by Council. Each department of the First Nation converts Mandate Objectives into detailed operating plans. A detailed operating plan outlines: 1 Specific activities necessary 2 Time frame for completion 3 Personnel responsible 4 Budget c Approval of Budgets While the planning process at this point shifts from the Council to the First Nation s management, Council remains involved through the budget approval process. What is a Budget? A budget is a detailed plan showing how monies will be acquired and used over a period of time. The budget includes individual revenue and expenditure estimates for each department, a capital budget, and a cash budget (or cash flow). *For more information on preparing budgets, see step five, the Planning Cycle, and steps one and two, the Budgetary Cycle, of the AFOA First Nations Fiscal Calendar What is a revenue and expenditure budget? The revenue and expenditure budget shows incoming revenue (inflows such as funding) and outgoing expenditures (outflows such as salaries). Each First Nation department should prepare a revenue and expenditure budget. *For detailed procedures on preparing budgets, see step five, the Planning Framework, of the AFOA First Nations Fiscal Calendar 6

9 Presenting and Understanding Financial Information Example of a budget for Band Administration: INAC-Band Support 15,978 15,978 15,980 15,978 15,978 15,980 15,978 15,978 15,980 15,978 15,978 15, ,742 Total Revenue 15,978 15,978 15,980 15,978 15,978 15,980 15,978 15,978 15,980 15,978 15,978 15, ,742 Expense Audit 10,000 10,000 Bank Charges ,200 Equipment Purchase 2,000 2,500 2,500 7,000 Honorarium - Council 2,400 2,400 2,400 2,400 2,400 2,400 2,400 2,400 2,400 2,400 2,400 2,400 28,800 Insurance 2,000 2,000 Legal 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 12,000 Material & Supplies ,600 Postage Telephone Expense ,000 Travel-Other ,400 Travel-Staff 1, ,000 1,000 1,000 1,000 1,000 6,100 Utilities ,000 Wages & Benefits 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 96,000 Total Expenses 13,560 18,560 13,660 14,560 14,560 17,060 13,560 14,560 16,060 14,560 13,560 23, ,820 Surplus/Deficit 2,418 (2,582) 2,320 1,418 1,418 (1,080) 2,418 1,418 (80) 1,418 2,418 (7,582) 3,922 Cumulative Total 2,418 (164) 2,156 3,574 4,992 3,912 6,330 7,748 7,668 9,086 11,504 3,922 What is a capital budget? A capital budget details expected revenues and expenditures for capital expenditures only. Capital items are resources that are held for an extended time such as land, buildings, equipment and natural resources. Capital budgets are normally prepared separately where a project encompasses a time period of more than one year. What is a cash budget? The cash budget represents the expected cash inflow and outflow for the year, and helps management maintain cash balances necessary. *For more information on cash flow, see step three, the Budgetary Cycle, of the AFOA First Nations Fiscal Calendar What is the difference between a cash budget and a revenue and expenditure budget? At first glance it may seem that there is little or no difference between the cash budget and the revenue and expenditure budgets as both include inflows and outflows (revenue and expenditures). A cash budget tracks actual bank balances by reporting cash inflows and outflows when they actually reach the bank. There are occasions, however, when all revenue may not be received until after year-end (outstanding accounts receivable), or expenditures are paid for at a later date (outstanding accounts payable). In addition, amortization and depreciation are not cash expenditures. Depreciation, for example, allocates the expenditure for a capital asset over years, as long as the capital asset is expected to live so in this case, the cash expenditure is made up front but the total expenditure is allocated over several fiscal periods. These facts and others are considered in the preparation of a revenue and expenditure budget versus a cash budget, making it a more accurate reflection of The Council s actual financial circumstance. 7

10 The Aboriginal Finance and Management Capacity Development Series What is the budget review process? The Council reviews and approves the budgets annually, typically in February or March. As First Nations have a March 31 year-end as required by their major funder, Indian and Northern Affairs Canada (INAC), budgets should be prepared at the beginning of the calendar year so they are in place by April 1. Budgets should be presented in a format determined by Council. Individual Council needs vary, as do the sizes of First Nations. As such, some Councils review all departmental budgets as well as the summary budget, while others confine their review and approval to the summary budget only. If the First Nation has a Finance Committee, the Finance Committee will likely review detailed department budgets and ultimately provide recommendation to the Council for acceptance. *For more information on the format of budgets to be presented, see section three, Communicating Financial Information, of this capacity development resource (web reference). The Finance Director/Controller and First Nation Administrator are normally responsible for presenting the budgets to Council. Council is at liberty to request presentations by one or more department heads as they deem necessary in the circumstance. The budgets should: 1 Take into account the Mandate Objectives 2 Include all revenues and expenditures 3 Achieve the approved surplus or deficit 1 Take into account the Mandate Objectives When reviewing budgets, Council should keep in mind the overall objectives of the First Nation, and ensure the budgets take their objectives into account. 2 Include all revenues and expenditures Revenues should be reviewed, and Council should determine to the best of their knowledge if all revenues are included and are reasonable. The expenditures should be reviewed for reasonableness and priority. Where limited funds are available, expenditures should be allocated on a priority basis. 3 Achieve the approved surplus or deficit Financial policy should outline what surpluses or deficits each First Nation department is permitted to achieve, taking into consideration any restrictions under the funding agreement. If a particular department is government funded to provide a specific service, under normal circumstances it should be presenting a balanced budget, where the revenues equal the expenditures. It is beneficial to group related departments into a pool structure. For example, the education pool would include the school, post-secondary, adult education, boarding home, and any other education type department. Some departments in the pool may budget a surplus, wile others budget a deficit, however, collectively the pool should achieve a balanced budget. This structure allows for surpluses in one department and funding deficits in others if permitted under any existing funding agreement and Council financial policy. Many First Nations have profit-oriented departments, such as a gas station in these cases, a surplus (net profit) is budgeted. A balanced summary budget or one that provides for a surplus is your ultimate goal as it will help ensure the continued solvency of the First Nation. 8

11 Presenting and Understanding Financial Information D Overseeing Community Financial Management a Establishing Financial/Fiscal Policy The establishment of policy is the responsibility of Council. Council policies are established for many areas of First Nations operation such as Personnel, Housing, Education and Governance. Financial Policy is critical to guiding the financial operations of the First Nation. What is Financial or Fiscal Policy? A Financial Policy outlines financial procedures and/or the roles and responsibilities of First Nation staff and Council with regard to financial management of the First Nation. How is a Financial Policy established? There are many excellent examples of Financial Policy available specific to First Nations. Council can review examples of Financial Policies in place in other First Nation communities and adapt them to meet their own particular needs. At minimum, Council should have Financial Policies in place covering: a Roles and responsibilities b Budgetary Process c Allocation of Surpluses d Accounting Process e Debt Management f Loans g Investments h Insurance i Internal Controls j Audit k First Nation owned enterprises l Code of Ethics/Conflict of Interest m Access to Information and Privacy *For detailed procedures on preparing Fiscal Policy, see step seven, the Planning Framework, of the AFOA First Nations Fiscal Calendar This includes a sample Fiscal Policy. *Another example of Financial Policy can be found on the Namgis First Nation website How is Financial Policy maintained? Situations may arise where Council determines a particular Financial Policy may need amendment. Proposed amendments should be submitted to the First Nation Administrator for presentation to Council for review and approval. b Decision making based on review of financial information Why review financial information? Regular review of financial reports by Council will enable it to make informed decisions about the future. In addition, Council can provide direction and make decisions on how to deal with significant variances (i.e. less than anticipated revenue) from ongoing operations during the year. Typically, financial information includes: 1 Revenue and expenditure statements for all departments 2 Departmental reports 9

12 The Aboriginal Finance and Management Capacity Development Series What format should the revenue and expenditure statements take? As in the case of budget review, Council needs to determine how much financial information it requires to monitor ongoing operations (i.e. a summary statement or statements for each department), and how frequently it requires it. Statements should show revenue and expenditure for the period under review, as well as a cumulative for the year. For comparative purposes, the budget for the period, the annual budget, and the variances between actual and budget should be included. This provides the necessary assurances to Council that expenses and revenues are on track with the budget. An example of a departmental statement, six months into the fiscal year: Actual Budget Actual Budget Variance Month Month Year Year Revenue: INAC Band Support 1, , , , Expenditures: Council Honorarium , , (100.00) Council Travel , (200.00) Insurance , , Office Supplies (50.00) Salaries , , (0.00) Total Expenditures 1, , , , (350.00) Net Surplus (Deficit) (75.00) 0.00 ( ) 0.00 A consolidated statement (total of all departments) should also be reviewed, as this provides the big picture of how the First Nation is operating. A useful consolidated statement would show the revenues by source (INAC, Health and Welfare, etc.) and the expenditures by department (Band Support, Health Transfer etc.) resulting in a net surplus/deficit for the entire First Nation. For example: Actual Budget Actual Budget Variance Month Month Year Year Revenue: INAC 1, , , , Health and Welfare Canada 2, , , , Public Works 3, , , , CMHC 3, , , , Total Revenues: 9, , , , Expenditures: Band Support 1, , , , Education 1, , , , (1,000.00) Health , , (500.00) Sewer system 4, , , , Social Housing 3, , , , (1,000.00) Total Expenditures 10, , , , ( 2,500.00) Net Surplus (Deficit) (1,000.00) ( 2,500.00)

13 Presenting and Understanding Financial Information This is where the utilization of the pool concept can assist in making the summary review more relevant. The pool concept is where all the departments are grouped into relevant pools, i.e. the education departments all belong together. A revenue and expenditure statement for each pool can be provided which shows more detail than the summary statement, but less detail than breaking down individual departments. *For more information on the format of financial information to be presented, see section three, Communicating Financial Information, of this capacity development resource (web reference). What kind of departmental reports should be provided? Each department manager should provide explanations for significant variances, either on the revenue and expenditure statements or in a separate narrative report. If action is necessary (or has already been taken) to address the variances this should also be noted. *For detailed procedures on revenue and expenditure and variance reports, see step four, the Budgetary Cycle, and step two, Accountability, of the AFOA First Nations Fiscal Calendar How is the review performed? The review is normally carried out on a monthly basis. Council of a First Nation with long-standing good financial management may decide to review statements on a quarterly basis, in which case the quarterly amounts would be included. Less frequent review is not recommended as the financial information becomes too dated to be relevant and leaves less time to take corrective action should it be necessary. Council should scan revenues and expenditures, look for significant variances from budget, and review any explanations provided for those variances. Net surpluses and deficits should be reviewed to identify any problem areas. The department manager or First Nation Administrator may already have a plan to address any variances, and this should be communicated to Council in departmental reports. If alternative actions are being considered to help resolve a particular fiscal concern, Council can provide direction if needed. E Reviewing Historical Financials a Approval of the Annual Audited Financial Statements While monthly financial reports are historical, they contain fairly recent data. Council is also responsible for the approval of annual audited financial statements these provide an annual overview of the First Nation s financial operations as verified by a third party. What is an audit? The audit is an independent examination of the First Nation s financial transactions and financial statements, conducted in accordance with generally accepted auditing standards. What are generally accepted auditing standards (GAAS)? GAAS are guidelines and detailed practices for auditing that are established by the Canadian Institute of Chartered Accountants. This ensures a standard by which audits are performed. Who performs an audit? Two types of certified professional accountants are able to perform audits: Certified General Accountants (CGA) and Chartered Accountants (CA). 11

14 The Aboriginal Finance and Management Capacity Development Series What is Council s responsibility in regards to the audit? Council reviews and approves the audited financial statements, and the Chief must sign the Statement of Financial Position. Often, a Management s Statement of Responsibility is included with the audited financial statements. The Management Statement of Responsibility states that the audited financial statements are the responsibility of management and have been approved by the Council. It also states that: The Council is responsible for ensuring that management fulfills its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the financial statements. Council is also responsible for approving the appointment of an auditor. What do the audited financial statements include? The audited financial statements include: 1 Auditors Report 2 Consolidated Statement of Financial Position 3 Consolidated Statement of Revenue and Expenditures 4 Consolidated Statement of Cash Flows 5 Notes to the Financial Statements 6 Statements of Revenue and Expenditure for each department 7 Social Housing statements 8 Statement of Receipt and Expenditure of Indian moneys* 9 Schedule of Federal Government Funding* 10 Schedule of Honoraria, Remuneration and Travel for Chief and Council* 11 Schedule of Remuneration and Travel for Senior Staff* * required only by INAC Consolidated means that all the operations of the First Nation are included in one statement.this includes all departments and businesses that the First Nation administers. Auditor s Opinion The Auditors Opinion describes what was audited, how the audit was performed, and an opinion as to whether the statements present fairly the financial position of the First Nation. Consolidated Statement of Financial Position This statement shows a snapshot of the First Nation s financial position at a fixed moment in time, the year-end. A sample Statement of Financial Position: First Nation Consolidated Statement of Financial Position March 31, ASSETS Current Assets Cash 1, , Accounts receivable 2, , , , Restricted Cash 6, , Capital Assets 16, , $25, $31, LIABILITIES Current Liabilities Accounts payable and accrued liabilities 1, , Deferred revenue 5, Current portion of long-term debt 2, , , , Long-term Debt 5, , , , MEMBERS EQUITY Equity in Capital Assets 9, , Equity in Trust Funds 6, , Surplus (Deficit) (3,000.00) 4, , , $25, $31,

15 Presenting and Understanding Financial Information The statement shows the assets (what the First Nation owns), less the liabilities (what the First Nation owes) and the members equity. The assets and liabilities are divided into current (short-term) and long-term categories. Accounts receivable are amounts owing to the First Nation. Restricted cash is cash that is restricted as to its purpose, in most cases relating to the Ottawa Trust Funds (see below) and funds for the replacement of assets under Canada Mortgage and Housing Corporation housing (social housing). Capital assets are those physical assets expected to have a useful life longer than one year, such as equipment, buildings, and infrastructure. Accounts payable and accrued liabilities are amounts that the First Nation owes to other parties. Deferred Revenue is revenue that has been received in cash, but has not yet been spent for the purpose that it is intended. Therefore it is put aside for the next period to be recorded as revenue when the matching expenditure is made. Long-term debt includes: loans payable with a term of more than one year, and typically includes mortgages on social housing. The members equity is the residual interest in the assets, after deducting the liabilities relating to the assets.the Members Equity typically includes the accumulated surplus, equity in capital assets, equity in trust funds, and equity in the enterprise fund. The surplus is accumulated, and is the sum of all previous annual surpluses and deficits. The equity in capital assets discloses the investment the First Nation has in its capital assets after the liabilities are deducted. The equity in the trust funds,are funds that the First Nation is entitled to, that are held by the federal government in trust for the First Nation. ( Ottawa Trust Funds ) The equity in the enterprise fund is the accumulated surplus/deficit arising from certain business operations. Consolidated Statement of Revenue and Expenditures This statement discloses how the First Nation has performed over a period of time, normally a year. All revenues and expenditures are included in this statement, showing a net surplus or deficit for the year. Consolidated Statement of Cash Flows This statement shows how the cash position has changed for the year, showing all cash inflows and outflows, and beginning and ending balances for the year. Notes to the Financial Statements The notes include a description of the accounting policies that were used to prepare the statements, as well as more detailed information for some of the assets, liabilities and equity items. For instance, a note could disclose a breakdown of the accounts receivable, detailing who owes money to the First Nation at year-end. Social Housing Statements Social Housing statements are required if the First Nation has housing funded by Canada Mortgage and Housing Corporation (CMHC). The operations for Social Housing are disclosed separately for CMHC, but are also consolidated with the First Nation s consolidated financial statements. Statement of Receipt and Expenditure of Indian Moneys This statement discloses transactions relating to what is commonly known as the Ottawa Trust Funds. These are comprised of both revenue and capital trust funds, and result from monies that the First Nation is entitled to in connection with transactions on reserve lands. 13

16 The Aboriginal Finance and Management Capacity Development Series Schedule of Federal Government Funding The Schedule details transfer payments received from any federal government department, including those that have been initially flowed through another organization. Schedule of Honoraria, Remuneration and Travel for Chief and Council Schedule of Remuneration and Travel for Senior Staff INAC requires the disclosure of compensation paid to elected or appointed officials and to non-elected senior officials. How does Council review the audit? Council conducts a preliminary review of the draft audited statements before they are finalized. Council then approves the final audited financial statements. This can be undertaken with the assistance of the auditor or finance director. Council should look for: Significant variances between the current year and the previous year The solvency of the First Nation Excessive surpluses or deficits in individual departments Net surplus/deficit for the year The net surplus/deficit to the total revenues (adjusted) Council may direct the Finance Director to analyze the above items and present a report to Council to help facilitate the review. Council should request explanations for significant variances. For example, the accounts receivable may have doubled from the previous year because the First Nation is having difficulty collecting rents. This identifies a problem that Council need to address. The solvency of the First Nation can be determined by looking at the amount of working capital (current assets less current liabilities). This demonstrates the capacity of the First Nation to pay its short-term debts. Excessive surpluses or deficits in departments can indicate a serious problem that Council will need to take into account when planning for the next fiscal year. Council will obviously be very interested in the net surplus or deficit for the year. Council should inquire if there are any unusual events, outside of normal operations, that may have had an impact on the surplus/deficit. For example, the start-up of a new business may have a noticeable effect on the surplus/deficit in this scenario, the overall surplus/deficit may not truly illustrate how well the First Nation performed in its standard operations. Council should also compare the net surplus/deficit to total revenues, as this is the measurement used by Indian and Northern Affairs to assess the financial position of the First Nation. If a First Nation has a deficit greater than 8% of total revenues, remedial action will be required by INAC. The surplus/deficit and revenues are adjusted so they do not include capital, enterprise and trust fund amounts. b Management letter What is a management letter? The management letter is a document provided by the auditors that makes recommendations for the improvement to financial management activity of the First Nation. As part of the audit, the auditors review internal control procedures of the First Nation and note any problems or deficiencies. This excellent tool can help Council and management assess how their financial department is operating, as well as access professional recommendations for improvement. Council should review the management letter and ensure that the First Nation administrator implements any recommendations contained therein. 14

17 Presenting and Understanding Financial Information c Audit Review letter What is an Audit Review letter? The Audit Review letter is provided by the First Nation s funding service officer from INAC. The letter provides the results of the review of the First Nation s audited financial statements and typically includes: 1 A calculation of the cumulative surplus/deficit as a percentage of adjusted revenue 2 Program recoveries/reimbursements 3 Program deferred revenue 4 Financial Indicators If the First Nation has a deficit greater than 8% of total adjusted revenue, this triggers remedial action required by INAC. The cumulative surplus/deficit is the surplus or deficit for all years to date. Specific funding provided by INAC, called contribution funding, must be returned to INAC if it has not been spent in accordance with its specified purpose and a specified time frame. These are program recoveries. If the First Nation has spent more than the initial contribution, they may be entitled to reimbursements. Contribution funding is provided for a specific purpose only. Any unexpended balances of funding provided for capital projects (buildings, equipment, infrastructure) that are not complete at year-end must be deferred. This means that the surplus is not carried forward as a surplus to the next year, but recorded as deferred revenue in the liability section of the Statement of Financial Position. This deferred revenue will be recorded as revenue for the project as additional expenditures are made in the following fiscal year. The Audit Review letter also contains certain Financial Indicators for the past three years of operation this is useful for Council to review. It includes a calculation of working capital (current assets less current liabilities), as well as the cumulative surplus as a percentage of total adjusted revenue. This gives Council a good overview of how the First Nation has performed during recent years. Why review the Audit Review letter? The Audit Review letter is addressed directly to Chief and Council, and provides comprehensive information on the First Nation s financial position on an annual basis. It is important for Council to know how it is performing in the eyes of INAC as they are a primary funder. *For detailed information on audits, see Understanding Audits A Primer, AFOA Capacity Development Resources. 15

18 The Aboriginal Finance and Management Capacity Development Series II Federal Financial Contribution Process 1 The Department of Indian Affairs, through its Transfer Payment Directorate, develops and maintains generic funding agreement models for those First Nation communities not governed by their own self-government agreement. A General Requirements All of INAC s funding agreements outline specific accountability requirements which are categorized as follows: General: requirement for an audit provision for access to records provisions for reporting and data quality provisions for default and remedial management Recipient (First Nation) Specific: project-specific requirements (could relate to training or capacity development initiatives) Program Specific: minimum program delivery and reporting requirements B Types of Agreements There are different types of agreements for use by First Nations and INAC that govern funding arrangements, each with varying degrees of flexibility and term. i ii iii a b c a b c a b Comprehensive Funding Arrangement (CFA) Program-budgeted funding agreement, for a one year term Programs funded by reimbursement of actual expenditures Flexible Transfer Payment terms, which is formula funded (mostly on a per-capita basis). Note that surpluses may be retained provided terms and conditions have been fulfilled INAC/First Nations Funding Agreement (D/FNFA) Block-budget arrangement, for a 5 year term Agreement spells out minimum standards for First Nation accountability. Allows communities the flexibility to redesign programs to meet community needs, while maintaining minimum delivery standards Canada/First Nations Funding Agreement Block-budgeted funding agreement involving INAC and other federal government departments, for a 5 year term Similar flexibility as D/FNFA 1 ITAB First Nation Financial Administration By-Law [Funding Agreements] 16 Federal Financial Contribution Process

19 Presenting and Understanding Financial Information III Presenting Financial Information and Reports A To Chief and Council As covered in Section One, it is crucial for Chief and Council to regularly review financial information in order to supervise the financial management of the First Nation. In most cases, Financial Information and Reports will be presented by the First Nations Administrator, the Finance Director, and the department heads. If a Finance Committee has been established, normally the Administrator and/or the Finance Director will present information on behalf of the Committee. For each type of information that Council should be reviewing, this section provides: Definition: a description of the information Format: outlining a recommended format Presentation: who, how, and when The types of information recommended to review are: Budgets Monthly Financial Statements Departmental reports Annual Audited Financial Statement and Management letter Indian and Northern Affairs Audit Review letter Other as requested a) Budgets Definition A budget is a detailed plan showing how monies will be acquired and used over a period of time. The budget includes individual revenue and expenditure budgets for each department, a capital budget, and a cash budget (or cash flow). For a full definition of the budget and its components, see Section one of this document. Format A budget is often prepared on a spreadsheet, in Excel. The annual budget is broken down by month, showing revenue and expenditures for each month and projected surplus or deficit for the month. The budget should also show the cumulative balance for the year. It is helpful to provide narrative comments to the budgets where relevant. An example of a budget (see Section One) Each department head should prepare an annual budget for each department they are responsible for. It is also recommended that the department head prepare a summary of the budgets they are responsible for, to show a total surplus/deficit for their area of responsibility (the pool concept). For example, the School Administrator will be responsible for all education programs: First Nation School, Post-Secondary, Boarding Home Program, and Adult Education. A budget should be prepared for each of these departments, and a summary budget totalling all four departments together. An example of a capital budget A capital budget will be the summary of all the individual capital project budgets. Budgets must be created for each capital project. The cash budget shows the cash inflows and outflows and a running total to show the change in the cash balance. Presenting Financial Information and Reports 17

20 The Aboriginal Finance and Management Capacity Development Series Presentation The department heads should present their budgets annually to the Finance Committee or directly to Council, if a Finance Committee does not exist. It is helpful to have the department heads present in addition to the First Nation Administrator as the department heads know their departments in more detail. The department head should go briefly over the expected revenues and the reasoning behind the projected expenditures. It is not necessary to go line by line; highlighting the significant revenues and expenditures is more time effective. The department head should be prepared to discuss how the expenditures have been prioritized and budgeted for. The capital budget may be prepared by a department head, if there is one manager responsible for capital projects, with the assistance of the First Nation Administrator. The cash budget/flow is the responsibility of the Finance Director. b) Monthly Financial Statements Definition A monthly financial statement is a presentation of the community s revenue and expenditure statements. This statement shows how your community has spent the funding that it has received to date. If your community does not conduct monthly meetings it is important that these statements are presented on a quarterly basis at a minimum. Format Prepare on a quarterly basis, if not monthly. You should present your financial statements in a manner that can describe how your community s finances are being managed against what was planned in the budget. To do this you compare, in a spreadsheet format your expenditures to date, against the periodic budget amount. To make the statements relevant it is important to show department reports as well as a summary report which includes all community programs. Your department reports can also be pooled to show all revenues (funding) and expenditures in a general area such as education or community health. It is important to recognize and explain variances, or differences, that appear in your statements. If you planned (budgeted) to spend $100,000 in the first quarter of the year, but your statements show you only spent $50,000, you should provide a written explanation to this. It may be more helpful to use graphs and charts to illustrate financial performance (i.e. comparison to budget) for a more visual view of the community s finances. Presentation It is the responsibility of the Finance Director to prepare consolidated financial information for Chief and Council, and sub-committee s on a regular basis. The recommended process is for the various department heads, after review of their reports, provide explanations for variances. The Finance Director will then prepare a consolidated report, incorporating departmental comments, for review with the Band Administrator. At a regularly scheduled meeting, the Band Administrator and the Finance Director present the periodic statements to the Chief and Council. Depending on the level of experience and comfort the Chief and Council may prefer to see only summarized statements. c) Departmental Reports See step Two, Program Accountability, of the Accountability Cycle, AFOA Fiscal Planning Calendar, 18 Presenting Financial Information and Reports

21 Presenting and Understanding Financial Information d) Annual audited financial statements and management letter See Section One for definitions. Format see Guide to understanding financial statements, namgis.org, for good ideas Presenting summary information, refer also to Section One for types of information to prepare: assessing solvency, etc., repetition here Present annually to Chief and Council, and to community, auditor may be present Management letter may want to already establish who is going to deal with recommendations e) INAC Audit Review letter See Section One for definitions Format may want to provide one page summary of important highlights Presentation Finance Director or First Nations Administrator d) Specific Financial Information From time to time, Council may request specific financial information, such as can we afford to purchase a skidder, or what funds do we have available to purchase a business? Should present in a timely, concise manner, easy to read. B To Community Members It is important that the ultimate stakeholder of the community, its membership, is kept informed of the program and financial performance of the community. Community members, many with voting privileges, are the ultimate users of its First Nations programs and services. The types of information recommended to present are: 1 Annual Budgets 2 Annual Audited Financial Statements 3 Annual Report - see Step Four and Five of the Accountability Cycle of the AFOA Fiscal Planning Calendar, Some key points relative to communicating to community members are: Present the information in a reader-friendly manner Don t just present tables of numbers, but also use graphical depictions of the communities financial state User easy to understand financial language Use all types of methods to communicate the information, including; Door to door delivery in small communities Community meetings Website include a financial section Community newspaper Presenting Financial Information and Reports 19

22 The Aboriginal Finance and Management Capacity Development Series Sources of Information Year-end Reporting Handbook for First Nations,Tribal Councils and First Nation Political Organizations, INAC, November Year-end reporting handbook for First Nations,Tribal Councils and First Nation Political Organizations - INAC Year-end Reporting Handbook Session Presentation notes, INAC, February First Nations Fiscal Planning Program, Aboriginal Financial Officers Association. Guide to Namgis Financial Statements, Garry Ullstrom, Namgis First Nation and Namgis Financial Policies. Introduction to Financial Accounting, 3rd. Canadian Edition, Horngren, Sunden, Elliott,Teall. Prentice Hall,Toronto. Generic Financial Procedures Manual, Medium-size First Nation, Aboriginal Financial Officers Association, Strategic Budgeting and Planning for Competitive Advantage Presentation notes, Reider Associates, Institute of Chartered Accountants Professional Development Course. 20 Sources of information

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