Transcript Standards on Internal Audit - ICAI | Online Web TV | Live

Accounting aspects of
NPOs
Presented by:
CA VIJAY JOSHI
Contents of Presentation 
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Introduction
Accounting of Non Profit Organisations (NPO)
Applicable provisions, forms, standards
Applicable Laws for Charitable Organizations
Applicability of Accounting Standards
Issues under Accounting Standards
Conclusion
CHARITABLE ORGANISATIONS
Introduction 
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Charity is an age old activity.
Over the years, there has been growth
in
charitable activities.
India has also witnessed a spurt in such activities.
New generation looks at charitable activities as an
option in career.
Government in National Policy framed in 2007
has looked at partnership between NPO and
Government for distribution of benefits of
government policy reaching lower strata of society
Accounting Aspects
Accounting aspect of every organisation
largely is common.
 Charitable Organisations however, are
governed by different laws as well as
different forms of organisations also
necessitate different accounting aspects
to be complied.
 Projects undertaken by a Charitable
Organisation may also necessitate
consideration.
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Accounting Aspects - Issues
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Large number of unregistered NPOs
Varying size of operations make uniformity difficult
Lack of awareness of applicability of Accounting Standards
Adoption of different basis of accounting – Cash vs Accrual
Large influence of Tax and other laws
Different disclosure practices adopted by individual NPOs
Diversity in terminologies and accounting policies
Accounting Aspects - Issues
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Maintenance of Accounting and preparation of financial
statements is also affected by different users of the
financial statements.
Different users of the financial statements
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Resource Providers
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Beneficiaries
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Those who use and benefit from services of the NPO
Managers
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Suppliers, employees, members, contributors and donors
Managing day-to-day affairs of the NPO
Governing Bodies
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Trustees, Managing Committees, Boards of Trustees, Board of Directors
Accounting Aspects
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Depending on Forms of Organization:
 Public
Trust
 Society
 S. 8 Company (Companies Act, 2013)
 Co-operative Society
 Multi State Co-operative Society
 Autonomous Body functioning with
Government Aid
Accounting Aspects
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Depending on regulating laws:
 State
Public Trusts Act
 Societies Registration Act, 1860
 State Co-operative Societies Act
 Multi State Co-operative Societies Act,2002
 Income Tax Act, 1961
 Foreign Contribution (Regulation) Act, 2010
 Format of Accounts prescribed by MoF, GoI
Accounting Aspects
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Accounting Standards applicable prescribed by
ICAI
Indian Government Accounting Standards (IGAS)
Indian Government Financial Reporting
Standards (IGFRS)
International Public Sector Accounting Standards
(IPSAS)
Accounting for Local Bodies
Accounting under State Public Trust Acts
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Many states which have enacted separate acts governing
Public Trusts have by and large common provisions and
the same cover broadly following aspects.
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Submission of Budget to Charity Commissioner
Maintenance of Accounts
Balancing and auditing of accounts
Auditor’s duty to prepare Balance Sheet
Rules prescribed under such State Public Trust acts
broadly provide for the following –
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Maintenance of Accounts
Certain powers facilitating audit
Contents of audit report
Fee for Special Audit
Time for audit and submission of audit report
Accounting under Societies Registration Act
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Applicable provisions –
Societies Registration Act, 1860
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S. 12D – Maintenance of Accounts and Balancing and auditing
S. 12E – Auditor’s duty to prepare Balance Sheet and report
irregularities
Societies Registration (Maharashtra) Rules, 1971
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Rule 9 – Maintenance of Accountants
Rule 10 – Audit
Rule 11 – Manner of Audit
Rule 12 – Time limit
Accounting under Companies Act, 2013
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Applicable Provisions –
Companies Act, 2013
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S. 8 – Formation of Companies with Charitable Objects
S. 128 – Books of Accounts etc. to be kept by company
S. 129 – Financial statement
S. 133 – Central Government to prescribe Accounting Standards
S. 134 – Financial Statements, Board report
S. 137 – Copy of financial statement to be filed with Registrar
The Companies (Accounts) Rules, 2014
Since Ministry of Corporate Affairs has not yet come out with new
rules in regard applicability of Accounting Standards, old rules
contained in Companies (Accounting Standards) Rules, 2006
shall continue to apply.
Accounting under FCRA
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Applicable Provisions –
Foreign Contribution (Regulation) Act, 2010
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S. 19 – Maintenance of Accounts
S. 20 – Audit of Accounts
S. 23 – Inspection of Accounts
S. 24 – Seizure of Accounts or records
Foreign Contribution (Regulation) Rules, 2011
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Rule 11 – Maintenance of Accounts
Forms – Requiring Certification by Chartered Accountant
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FC-6
FC-7
FC-8
Accounting for Autonomous Bodies
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Applicable Provisions –
 Indian
Government Accounting Standards
 Indian Government Financial Reporting
Standards
 Common Format of Accounting prescribed by
Government
[Refer Government Accounting Standards
Advisory Board (GASAB) website for more
details]
Accounting depending on Activities
Applicable Provisions –
 Depends on activities undertaken – e.g.
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 Hospitals
 Educational
Institutions
 Schools, Colleges
 Medical Aid Society
 Hostel
 Libraries
 And likes . . .
Accounting under Societies
Registration Act, 1860
Rule 12D and Rule 12E inserted by
Government of Maharashtra in 1968
 Govern maintenance of accounts and audit.
 A society registered under Bombay Public
Trusts Act, 1950 is also required to comply
with latter act.
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Accounting under Societies Registration Act,
Rule 12D - Contents
Every governing body is entrusted with the
duty of maintenance of proper accounts.
 Society Registrar to prescribe the format and
contents of such accounts.
 Accounts to be balanced every year on 31st
March.
 Accounts to be audited by a Chartered
Accountant or such other person as
authorised by State Government.
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Rule 12E - Contents
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It shall be the duty of the Auditor to prepare a
Balance Sheet and Income and Expenditure
Account and forward the same to the Registrar.
Auditor shall specify all cases of irregular, illegal
or improper expenditure or failure or omission to
recover monies or other property belonging to
society or of loss or waste of money or other
property thereof.
He shall also report whether such expenditure or
waste was caused in consequence of breach of
trust or misapplication or any other misconduct
on the part of governing body.
Accounts & Audit - FCRA
S. 13 – Maintenance of Accounts by
receipt of Foreign Contribution.
 S.14 & 15A – Inspection of Accounts
 Form FC 3 – Account of Foreign
Contribution with the Certificate by
Chartered Accountant (Rule 4a)
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Form FC – 3
The form contains a Statement of Foreign
Contributions received during the year with
the breakup of the same purpose wise as
well as donor wise.
 Name and Address of donor, purpose for
which the contribution is given, date of
receipt and amount of receipt is also
required to be given
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Form FC – 3
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Country wise break up of the foreign contribution
received should be furnished.
In regard to individual donors, foreign
contributions during the financial year received
exceeding Rs. 1 Lakh are to be reported.
Chief Functionary who is an officer bearer
should make out the application in his name.
Chartered Accountant should certify the contents
of the Form.
Form FC – 3
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Annual Form FC – 3 is required to be filed on
or before 31st July every year for the previous
financial year.
In addition, following documents should be
submitted –
 Audited
Balance Sheet and Receipts & Payments
Account
 Country wise and donor wise receipts of Foreign
Contributions
 To be filed in duplicate with the Home Ministry.
Form FC – 6
This form is required to be maintained for
receipt and utilisation of articles received
as Foreign Contribution.
 Its particulars form part of Form FC – 3.
 Hence, this is also required to be checked
by the Auditor.
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Other significant Laws
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By virtue of type or location or any other factor,
there are other laws, which are also applicable to
the NPO.
For.eg. Muslim charitable trust falling under Wakf
Act, Society in Rajasthan coming under Rajasthan
Societies Registration Act, 1958.
Literary/scientific/charitable society in Kerala
falling under The Travancore Cochin Literary
Scientific and Charitable Societies Registration
Act, 1955.
Compliances under such relevant laws also needs
to be observed.
Accounting Standards-Applicability
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The ‘Preface to the Statements of Accounting Standards’ issued by
ICAI states that Accounting Standards for use in the general purpose
financial statements shall be issued by ICAI.
The reference to commercial, industrial and business enterprise in
the aforesaid statement is in the context of nature of activities carried
on by the enterprise rather than with reference to its objects.
Even if a very small proportion of activities of an entity was
considered to be commercial, industrial or business in nature, then it
could not claim exemption from the application of accounting
standards.
In such case, Accounting standards shall apply to all its activities
including those which were not commercial, industrial or business in
nature.
Though these would be mandatory in many cases, it is
recommended to adopt its use even in cases where these are not
mandatory.
Issues in accounting and auditing
of Charitable Organisations
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In spite of promulgation of various regulations, standards,
guidance notes and amendments from time to time, the
accounting and auditing of charitable organisations gives
rise to certain issues.
The issues may have been dealt with in a number of ways
by various entities but in view of introduction of CSR in
Companies Act, 2013, the issues would arise in larger
proportion and would certainly deserve application of mind.
Some of them are dealt with here after.
Issues
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Issues in application of Accounting Standards (AS) –
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AS-1
AS-3
AS-5
AS-10
AS-6
AS-12
AS-17
AS-18
AS-22
AS-23
AS-24
AS-27
Accounting Policies
Cash Flow Statements
Net Profit or Loss, Prior period items
Fixed Assets
Depreciation
Government Grants
Segment Reporting
Related Party Disclosure
Taxes on Income
Investment in Associates in Consolidated Fin Stmt
Discontinuing Operations
Financial Reporting in JV
AS 1-Disclosure of Accounting Policies
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NPOs should disclose their significant accounting policies,
preferably at one place.
Where an NPO has followed a basis of accounting other
than accrual, a disclosure in this regard should be made.
The policies to be disclosed may cover aspects regarding
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Method of Depreciation
Basis of recognition of expenses
Accounting for income and expenditure on scientific research etc.
Valuation of inventories
Valuation of investments
Treatment of retirement benefits
Valuation of fixed assets
Treatment of contingent liabilities
AS-2 Valuation of Inventories
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Where NPO is carrying on any trading/manufacturing activity
and has inventories at the year end that are held for sale in
the ordinary course of business or in the process of
production for such sale or in the form of materials or
supplies to be consumed in the production, the inventories
should be valued at lower of cost or net realizable value.
Where NPO purchases or manufactures items for
distribution top beneficiaries, such items, though not
regarded as inventory should be valued at the lower of cost
or replacement cost.
Items remaining undistributed out of quantities received from
donors for distribution should be disclosed at market prices
or estimated net realisable value in the notes to accounts
along with quantitative details.
AS 3 – Cash Flow Statements
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Information presented in a cash flow statement is useful
for economic decision making.
NPOs should present cash flow statement as a part of
their financial statements.
Such Cash Flow Statements should be prepared in
accordance with requirements of AS 3.
AS 4-Contingencies and events
occurring after the Balance Sheet date
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The principles laid down in AS 4 are applicable irrespective
of the type of the entity.
Accordingly, they should be complied with in their entirety
by NPOs.
Reference to the report of Board of Directors made in AS 4
may be construed as report of the governing body of NPO.
Where such reports are made by governing body on more
than one such occasion, all such reports need to be
considered.
AS 5-Net profit or loss for the period, prior
period items, changes in accounting policies
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This standard lays down requirements for accounting for
prior period items, extraordinary items, changes in
accounting policies and changes in accounting estimates in
the Profit and Loss Account (Income and Expenditure
Account in the case of NPO).
The purpose is to allow users to make meaningful
comparison of performance of the enterprise over time and
also with other enterprise.
NPOs are expected to comply fully with this standard.
AS 6-Depreciation
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Depreciation is an important item and any over/under
charging would vitiate the true and fair view of financial
statements.
In case of donated fixed assets, no depreciation is
required to be provided since the assets are to be
recorded at nominal value as per AS 12.
The purpose of depreciation is to allocate the cost of fixed
assets over its useful life.
The treatment of depreciation under Income Tax Act in
the case of NPO or acquisition of fixed asset being
treated as ‘application of income’ is not relevant for
application of accounting standards.
AS 7-Accounting for Construction Contract
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Applicability of this accounting standard to NPO is limited.
Where in case of NPO, a building or other such asset is
under construction by or on behalf of NPO, it should
recognise it as capital work-in-progress based on the stage
of completion rather than recognising the same only when
the construction is completed.
AS 8-Accounting for Research and Development
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AS 26 – Intangible Assets, which, inter alia, deals with
treatment of research and development costs
supersedes AS 8 with effect from former becoming
mandatory.
Therefore, NPOS which carry out research and
development should follow AS 26 with regard to
accounting for research and development costs.
AS 9-Revenue Recognition
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NPOs should follow this standard in its entirety for
recognition of revenue arising from sale of goods, rendering
of services and use by others of enterprise resources
yielding interest, royalties and dividends.
However, treatment of grants received from Government is
covered by AS 12.
AS 10-Fixed Assets
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The principles enunciated in AS 10 regarding accounting
for fixed assets would apply equally to NPOs and other
bodies.
Peculiar features of NPO may require some variation in
treatment in case of accounting of fixed assets.
A major problem may arise at the time, the NPO switches
over to accrual basis of accounting. Many assets may not
have been recorded appropriately at the time of their
acquisition and hence, identification of such assets and its
appropriate valuation would be necessary.
AS 11-Effects of changes in rates of Foreign
Exchanges
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NPOs may receive donations etc. in foreign currency.
Such transactions should be initially recorded at the
exchange prevalent on the date of the transaction.
However, the differences in rates shall have impact on
assets being carried over as at year end, where the
difference should be accounted in accordance with AS 11.
Such balances may be assets held in foreign currency,
receivables, investments etc.
AS 12-Accounting for Government Grants
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Accounting for government grants should be followed as
per AS 12 by NPOs.
The principles of accounting enunciated in AS 12 should
be applied even in a case where donations and grants are
received from donor agencies, individual donors and/or
corporate bodies.
These should not be recognised as at year end until there
is reasonable assurance that the NPO will comply with the
conditions attached to them and the donations or grants
will be received.
It is recommended that non-monetary grants and
monetary grants should be disclosed separately in the
Income and Expenditure Account.
AS 13-Accounting for Investments
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Investment is one of the major function of any NPO.
This accounting standard should be complied in entirety
by every NPO.
AS 14-Accounting for Amalgamations
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Amalgamations and mergers are not common feature
among NPOs.
As such, applicability of AS 14 would be limited.
However, state laws on charity also cover merger of one
trust with another and in such eventuality, the standard
should be applied appropriately.
AS 15-Retirement Benefits accounting
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This standard should be followed in cases of an NPO
having employees with appropriate disclosures.
AS 16-Borrowing Costs
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NPOs normally do not borrow funds for carrying out their
operations or for acquisition, construction or production of
other assets and therefore, do not incur any borrowing
costs.
However, in cases where any project is undertaken with
borrowing costs, this standard should be followed
appropriately.
AS 17-Segment Reporting
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NPOs operating in different geographical locations or
involved in different kinds of service delivery
programmes/projects, which meet the definitions of
‘geographical segment’ and ‘business segment’ should
disclose segmental information according to the
requirements of this standard.
Different programmes/projects carried on by an NPO
would normally constitute different business segment
for the purpose of this standard, if they meet the
definition of ‘business segment’ as per AS17.
AS 18-Related party disclosure
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NPOs should disclose the related party relationships and
transactions in accordance with the requirements of AS18.
For the purpose of AS18, a trustee of an NPO would be
considered as key management personnel and
accordingly, trustee and his/her relatives would be treated
as related parties in terms of AS 18.
AS 19-Leases
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The requirements of this standard should be followed in
their entirety by all the NPOs in respect of applicable
transactions.
AS 20-Earnings per Share
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Since NPOs are not profit oriented organisations, the
standard is not likely to be relevant for the NPOs.
AS 21-Consolidated Financial Statements
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An NPO may control another enterprise(which could be
in any form of organisation) either through ownership of
more than one-half of voting power or through control
over governing body of the enterprise.
In case such a control exists, the NPO would be
considered as parent and the enterprise that is controlled
by the NPO would be considered as ‘subsidiary’.
The AS 21 would be applicable and would call for its
compliance in entirety.
AS 22-Taxes on Income
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The requirements of this standard should be followed by
the NPO in its entirety.
Exemptions which have a permanent characteristics
should be considered as permanent differences for the
purpose of AS 22.
Other differences which are time based should be
considered as per AS 22.
AS 23 – Accounting for Investments in
associates in consolidated financial
statements
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Where AS 21 is applicable, all such NPOs should
account for investments in associates in the
consolidated financial statements, according to
equity method as per the requirement of AS 21.
AS 24-Discontinuing Operations
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The information about discontinuing operations would
enhance the utility of the information presented in the
financial statements.
NPOs should present information about discontinuing
operations in accordance with the requirements of this
standard.
Each major programme/project carried by an NPO may
be considered as a separate major line of business.
AS 25-Interim Financial Reporting
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This standard shall be applicable in cases where an
NPO presents any interim financial reports, in terms of
the requirements of donors or others or voluntarily.
AS 26-Intangible Assets
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This standard lays down recognition, measurement and
disclosure criteria for various intangible assets, such as
computer software, website development costs, research
and development expenditure etc.
The requirements of this standard should be complied by
all NPOs in their entirety.
AS 27-Financial Reporting of Interest in
Joint Venture
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There may be instances where two or more NPOs
jointly undertake or fund a certain project or activity
which is considered as a jointly controlled operation.
Similarly two or more NPOs may jointly own or control
an asset..
NPOs should report their interest in such joint ventures
separately as well as in their consolidated financial
statements in accordance with this standard.
Such situation may see frequent applicability with CSR
being mandated for companies under new Companies
Act, 2013.
AS 28-Impairment of Assets
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The requirements of this standard should be followed in
their entirety by NPOs.
Issues
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Application of accounting standards
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Accounting policies are still not disclosed in many cases and
insufficiently or improperly disclosed in certain other cases.
Interest accounting inconsistent from year to year.
Depreciation accounting and capitalisation of costs for fixed
assets still differ from year to year.
Cash v Accrual.
Accounting for Govt. Grants is not in compliance with AS 12.
Improper disclosure of donations received in kind for
distribution to poor segment of society and undistributed
stock of such items.
Valuation of foreign exchange assets as on date of Balance
Sheet or surplus/deficit due to fluctuation in currency rates
not accounted satisfactorily.
Issues
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Charitable Organisation related issues –
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Insufficient manpower
Casual approach towards objects of the entity
Insufficient resources
Non awareness in respect of changes in accounting and auditing
compliances and government regulations
Differences in members of Management
Lack of awareness in respect of tax laws and their compliance
NPOs may be exempt from tax but not from laws like FCRA, PMLA
and Income Tax Act in KYC and such matters. Hence, improper
accounting may pose problems to management and auditor as well.
In view of lack of proper internal control, employees take advantage
by resorting to malpractices and organisations face music.
The list is growing and issues rising lest timely proper action is
taken. . . .
Implementation of Standards
Prepare a checklist
 Update checklist regularly
Hold group meeting
Attend study circle meetings
Read literature
 Record compliance in respect of each
client
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Time Management
Time Recording
 Matching actual
time spent with
budgeted time
 Holding meetings
with client after
completion of audit
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Concluding Observations
Apply Professional Judgment
 Technical knowledge, skill and experience
 Intuitive skills – To deal with any situation
 Nose for Truth
 Auditor Responds – Auditee reciprocates
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Final Thoughts….
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