Companion Guide to IFRS for SMEs for NFPs Samantha Musoke ACA, CPA 1 July 2016

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1 Companion Guide to IFRS for SMEs for NFPs Samantha Musoke ACA, CPA 1 July 2016

2 Overview Pros and cons of applying IFRS for SMEs to not-for-profits Introducing the Companion Guide Key differences from profit based financial statements Specific accounting issues Which basis of preparation and framework?

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4 Pros of applying IFRS for SMEs to NFPs IFRS designed for general purpose financial statements rather than for one specific user (eg a donor). Could remove need for separate donor reports altogether. Designed for non public entities, ie entities not listed on a stock exchange or with public accountability such as state organs. NGOs fit that criteria. Filters out huge raft of IFRS that are not relevant to NGOs, remaining with just a thin booklet, easier to comply with

5 Down sides of applying IFRS for SMEs to NFP entities

6 IFRS SME Downside#1: Written for profit oriented entities Preface to IFRS for SMEs: P7 IFRSs are designed to apply to the general purpose financial statements and other financial reporting of all profit-oriented entities Directors act as agents of shareholders to maximise shareholder wealth and return on investment. Trustees act as stewards of resources on behalf of beneficiaries to achieve social purpose.

7 IFRS SME Downside #2: Users and objective Preface to IFRS for SMEs: P7 General purpose financial statements are directed towards the common information needs of a wide range of users, for example shareholders, creditors, employees and the public at large Key users of NFP financial reports are beneficiaries, as well as existing and potential future donors. Some very different information needs. The objective of financial statements is to provide information about the financial position, performance and cash flows The performance of an NFP relates more to achievement of social purpose than financial bottom line. Key aspect of position relates to restricted vs unrestricted funds, not addressed.

8 IFRS SME Downside#3: Fixed assets IFRS for SMEs: 17.4 PPE Recognition The entity shall recognise the cost of an item of property, plant or equipment as an asset if, and only if it is probable that future economic benefits associated with the item will flow to the entity But many NGOs hold assets for the achievement of their social purpose, rather than to derive future economic benefits. Eg a medical facility used to treat patients, a building used to care for abandoned children, a vehicle used to move aid supplies to refugees.

9 IFRS SME Downside #4: Revenue IFRS for SMEs: 23.1 Scope This section shall be applied in accounting for revenue arising from the following transactions and events a)sale of goods b)rendering of services c) Construction contracts, where entity is contractor d)use by others of entity assets yielding interest, royalties or dividends These are all exchange transactions, ie the person paying for the goods or services receives the benefit of the goods or services Many NFPs engage in material non-exchange transactions

10 #4: Revenue continued Exchange vs non-exchange transactions I buy water for myself NGO A pays NGO B for services for the benefit of NGO A Govt contracts NGO to provide services, conditional on performance A Trust Fund grants an NGO funds specifically for girl-child education in Tororo district I donate money to a charity I like Exchange Non exchange

11 IFRS SME Downside #5: Government Grants IFRS for SMEs: 24.4 An entity shall recognise government grants as follows: a) A grant that does not impose specified future performance conditions on the recipient is recognised in income when the grant proceeds are receivable b) A grant that imposes specified future performance conditions on the recipient is recognised in income only when the performance conditions are met c) Grants received before revenue recognition criteria are met are recognised as a liability What about grants not from government? Is a restriction on the use of a grant the same as a performance condition?

12 True & Fair view? Most / Many / All NFPs: are not profit oriented by definition. have users who want information about income, expenses and balances on restricted and unrestricted funds seperately hold fixed assets for social purpose only generate voluntary income from non-exchange transactions receive restricted grants from non-government sources Proper and consistent presentation of the above is necessary to give a true and fair view, yet IFRS for SMEs provides insufficient guidance.

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14 Companion Guide to IFRS for SMEs for NFPs Developed by ACCA and UK Charity Commission Draws on 15 years of experience implementing the UK Charities SORP (Statement of Recommended Practice) which forms part of UK GAAP for registered charities Issued in 2015 Download it from mb/companion-guide-for-not-for-profits.pdf IASB forward to companion guide states: In a limited number of circumstances, applying the SME standard in an NFP does not provide appropriate accounting. This is because the activities of the NFP entity are so different to that of a for-profit entity that there is the potential to cause confusion. This is not an optimal outcome. The Companion Guide addresses these gaps...

15 Key differences from profit based FS 1. Statement of income & retained earnings 2. Grant income 3. Donations in kind 4. Expenditure by activity 5. Fixed assets 6. Capital grants 7. Statement of financial position 8. Grant receivable 9. Management Commentary

16 Difference 1. Statement of income 1. Name = Statement of income and retained earnings IFRS for SMEs 3.18: If the only changes to equity during the periods presented arise from profit or loss, dividends, prior year corrections and accounting policy changes, the entity may present a single statement of income and retained earnings in place of the statement of comprehensive income and statement of changes in equity. 2. Columns for restricted & unrestricted funds 3. Bottom line is closing funds, not surplus / (deficit) 4. Comparatives by fund on face or in the notes

17 1. Statement of income Have a go. An organisation has a Jan-Dec financial year end They receive a new one year grant in June for July to the following June of $100,000. By December, they have spent $40,000 of the $100,000 They also receive unrestricted income of $20,000, and spend $30,000, making use of their opening funds of $60,000.

18 1. Statement of income This could be presented as: Income Statement Income 120,000 Expenditure (70,000) Surplus 50,000 Statement of Changes in Equity Opening funds 60,000 Movement 50,000 Closing funds 110,000 What are the problems with this presentation? Can t see movement in restricted / unrestricted funds Income statement ends with a surplus, yet gen funds had a deficit Doesn t show that unrestricted funds have been depleted during the year

19 1. Statement of income Companion Guide presentation Statement of income and retained earnings How sustainable is this expenditure level without new income? UR R TOTAL Income 20, , ,000 Expenditure (30,000) (40,000) (70,000) Net inc / (exp) (10,000) 60,000 50,000 Is this caused by delays or just timing of the grant? Opening funds 60,000-60,000 Closing funds 50,000 60, ,000 What questions does this invite? 1.7 years worth of reserves is very high!

20 Example

21 Different 2. Grant income Grant restriction = performance condition? Companion Guide to IFRS for SMEs for NFPs D.64 A restriction on the use of a grant or donation for a particular purpose or activity of a NFP entity does not create a performance related condition. A restriction creates a requirement that limits the or directs the purpose for which a resource may be used but does not require a specific level of performance or output from the recipient organisation D.65 Where T&C have not been met, or uncertainty, then recognition of income should be deferred as a liability until it is probable that the T&C imposed can be met D.66 A donation or grant without conditions should not be deferred even if the resources are received in advance of the expenditure on the activity funded by them. D.67 A condition that allows for the recovery by the donor of any unexpended part of the grant does not prevent recognition. Instead, a liability to any repayment is recognised when repayment becomes probable.

22 Difference 3. Donations in kind Eg Items for beneficiaries, items for use, items for sale, donated services (eg professional advice, facilities, data), or assets Must be recognised (Dr Asset/Exp, Cr Inc) D48-D60 Valued at fair value (D48) Open market price (D57) Value of the gift to the organisation (D26, D56) Cost to donor (D48) Estimated resale value (D48) General volunteers excluded (D59) The term income is preferred to revenue (D47)

23 Different 4. Expenditure by activity Recommended (not required): We commonly see expenditure disclosed according to the type, eg salaries, transport, premises, operating costs, governance costs, assets or depreciation This is interesting and useful at one level, but does not tell you much about what the organisation actually used the money for. Eg Education, Livelihoods, Health or however the organisation categorises its social purpose activities Companion guide sets out three main headings: Fundraising Social Purpose Activities (give additional info in notes) Other costs Disclosure of costs by type is also permitted Full cost basis, ie overheads apportioned

24 4. Expenditure by activity Accounting implications 1. Assign each expenditure transaction to Account code (GL code) by type Activity code Fund code (Eg in QB use account, job and class) 2. Allocate direct costs to activities wherever possible (in ledger) 3. Apportion overheads to activities on a reasonable, disclosed basis (post TB)

25 Difference 5. Fixed assets Fixed assets may be capitalised even if they are held for social purposes (D23) This is important for consideration of asset impairment (D72)

26 Difference 6. Capital grants Donated assets, or restricted grants for purchase of assets Particularly complex area 4 treatments currently in common use in Uganda 1. Income deferral 2. Capital fund 3. Asset expense account 4. Depreciate asset from restricted fund Let s review pros and cons of each option with a grant of 100,000 used to buy an asset of 100,000, depreciated at 25%

27 6.1 Capital grants : income deferral 1. Receive grant: Dr Bank 100,000 Cr Cap grant liability 100, Buy asset: Dr Asset (BS) 100,000 Cr Bank 100, Depreciate asset: Dr Depn exp (gen fund) 25,000 Cr Acc depreciation (BS) 25, Revenue release: Dr Cap grant liab, 25,000 Cr Revenue release (general fund) 25,000

28 6.1 Capital grants : income deferral Income Statement Unrestricted funds Restricted funds Total funds Income Revenue release 25,000-25,000 Expenditure Depreciation (25,000) - (25,000) Pros Unspent income deferred in accordance with IAS20 Asset capitalised onto BS Net income Balance Sheet Fixed assets 75,000 Capital grant liability (75,000) Net assets - Cons Donor does not see their grant Asset does not appear in funds Funds General fund - Restricted fund - -

29 6.2 Capital grants : Capital fund 1. Receive grant: Dr Bank 100,000 Cr Income (Restricted) 100, Buy asset: Dr Asset (exp, restricted) 100,000 Cr Bank 100,000 Dr Asset (BS) 100,000 Cr Capital fund 100, Depreciate asset: Dr Depn exp (gen fund) 25,000 Cr Acc depreciation (BS) 25, Revenue release: Dr Capital fund 25,000 Cr Revenue release (general fund) 25,000

30 6.2 Capital grants : capital fund Income Statement Unrestricted funds Restricted funds Total funds Income Grant income - 100, ,000 Revenue release 25,000-25,000 25, , ,000 Expenditure Asset purchase (100,000) (100,000) Depreciation (25,000) - (25,000) (25,000) (100,000) (125,000) Net income Balance Sheet Fixed assets 75,000 Capital grant liability - Net assets 75,000 Funds Capital fund 75,000 Restricted fund - 75,000 Pros Restricted fund column mirrors what donor expects to see Asset capitalised onto BS Asset included in funds Cons Total income 125k overstated Total expenditure 125k overstated Mvt in funds per income statement = 0, but total funds have increased by 75k Concept of capital fund not internationally recognised Asset purchase within expenditure section

31 6.3 Capital grants : Asset expense a/c 1. Receive grant: Dr Bank 100,000 Cr Income (Restricted) 100, Buy asset: Dr Asset (exp, restricted) 100,000 Cr Asset (exp, general) 100,000 Dr Asset (BS) 100,000 Cr Bank 100, Depreciate asset: Dr Depn exp (gen fund) 25,000 Cr Acc depreciation (BS) 25,000

32 6.3 Capital grants : Asset expense a/c Income Statement Unrestricted funds Restricted funds Total funds Income Grant income - 100, , , ,000 Expenditure Asset purchase 100,000 (100,000) - Depreciation (25,000) - (25,000) 75,000 (100,000) (25,000) Net income 75,000-75,000 Pros Restricted fund column mirrors what donor expects to see Asset capitalised onto BS Asset included in funds Total income and expenditure correct Net income = mvt in funds Balance Sheet Fixed assets 75,000 Net assets 75,000 Funds General fund 75,000 Restricted fund - 75,000 Cons Asset purchase line within expenditure and weird negative expenditure from unrestricted fund Use of asset may be restricted / asset may be returnable

33 6.4 Capital grants : Keep in fund 1. Receive grant: Dr Bank 100,000 Cr Income (Restricted) 100, Buy asset: Dr Asset (BS) 100,000 Cr Bank 100, Depreciate asset: Dr Depn exp (restricted fund) 25,000 Cr Acc depreciation (BS) 25,000

34 6.4 Capital grants : keep in fund Income Statement Unrestricted funds Restricted funds Total funds Income Grant income - 100, , , ,000 Expenditure Depreciation (25,000) (25,000) - (25,000) (25,000) Net income - 75,000 75,000 Balance Sheet Fixed assets 75,000 Net assets 75,000 Funds General fund - Restricted fund 75,000 75,000 Pros Asset capitalised onto BS Asset included in funds Total income and expenditure correct Net income = mvt in funds Cons Expenditure does not match what donor expects to see Use of asset may not be restricted / asset may not be returnable Balance in restricted fund may remain after closure of the grant

35 6. Capital grants Companion Guide D25 Property donated for use by a NFP is recognised as PPE with corresponding gain recognised as income from donations D66 Where a donation or a grant is given specifically to provide a fixed asset, the NFP is normally entitled to the income when it is receivable. At this point all of the income must be recognised in the statement of income, not deferred over the life of the asset. D68 Acknowledges importance of what donors might expect to see, but recommends separate disclose in the notes to reconcile the fund balance on a depreciation basis vs fund balance on a cash basis. Ie, use method 6.4 above.

36 6.5 Capital grants : Another option 1. Receive grant: Dr Bank 100,000 Cr Income (Restricted) 100, Buy asset: Dr Asset (BS) 100,000 Cr Bank 100, Inter fund transfer Dr Inter fund trf (Res fund exp a/c) 100,000 Dr Inter fund trf (Gen fund exp a/c) 100, Depreciate asset: Dr Depn exp (restricted fund) 25,000 Cr Acc depreciation (BS) 25,000

37 6.5 Capital grants : Another option? Income Statement Unrestricted funds Restricted funds Total funds Income Grant income - 100, , , ,000 Expenditure Depreciation (25,000) (25,000) (25,000) - (25,000) Inter fund transfer 100,000 (100,000) - Net income 75,000-75,000 Pros Asset capitalised onto BS Asset included in funds Total income and expenditure correct Net income = mvt in funds Closing restricted fund balance agrees to donor reports Balance Sheet Fixed assets 75,000 Net assets 75,000 Funds General fund 75,000 Restricted fund - 75,000 Cons Expenditure does not match what donor expects to see, apart from in the notes If use of assets restricted, or returnable, should remain in restricted funds

38 Difference 7. Statement of financial position How many sections does a balance sheet have? 2,3,4? For NFP it s 3 sections: Assets minus liabilities on the top, equal to fund balances on the bottom. The movement in funds on the statement of income is the same as the movement in net assets. Assets (non current plus current) less liabilities (current and non current). No figure for net current assets in the worked example supplied by Companion Guide, but if relevant this could be shown.

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40 Difference 8. Grant receivable Recognise a debtor if 1. The NFP is entitled to the grant (eg contract / pledge / constructive obligation) 2. Receipt of the grant is probable 3. The value can be reliably measured Especially important if restricted funds are in deficit

41 Difference 9. Management commentary Distinct from Directors report as required by Uganda Companies Act, but some overlap Give details about Organisation Company / NGO registration Board members Registered office Organisation structure Key decisions made by who? Significant partners Year Objectives and activities Achievements (social impact) Financial review (inc graphs / charts) Reserves policy vs actual Financial risks

42 Accounting issues Each income / expenditure transaction needs to be allocated to three types of codes 1. Expense type (general ledger account) 2. Fund (donor or project for restricted fund, and unrestricted) 3. Activity type (for reporting by activity, including a type for overheads which get apportioned outside the accounting system) The Financial statements cannot be generated from a TB alone best done by exporting a transaction listing and creating a pivot table to link to FS

43 Basis of preparation and framework Mentioned in three places 1. Statement of directors / trustees responsibilities 2. Basis of preparation note 3. Audit opinion paragraph Which verb? Comply, conform, in accordance, adhere? C2 IFRS for SME para 3.3 requires a statement of compliance. This should be modified to note that the financial statements have been prepared in accordance with IFRS for SMEs and adhere to the applicable recommendations of this Guide.

44 Thank you For more information about NFP reporting standards, see or contact Samantha Musoke on