Basis of accounting

In paragraph 3.22 of the report, the Institute says that "accrual is the scientific basis of accounting and has conceptual superiority over the cash basis of accounting. It is, therefore, recommended that all NPOs, including non-company NPOs, maintain their books of account on accrual basis."

It has also been indicated that the Accounting Standards would not apply to an NPO if no part of the activity of such entity is commercial, industrial or business in nature, but would even if a small proportion is.

Where an NPO has followed an accounting method other than accrual, a disclosure in this regard should be made.

The accounting policies that an NPO would need to disclose could be: methods of depreciation; the bases of recognition of major types of expenses and revenue, including grants, donations, subscriptions, and so on; accounting of income from, and expenditure, on specialised activities such as research; conversion or translation of foreign currency (in case of organisations receiving foreign funds); valuation of inventories, fixed assets and investments; and treatment of retirement benefits and contingent liabilities.

There is no gainsaying the fact that the accrual basis of accounting is more scientific, but it may not be possible for small community-based organisations — self-help groups, for instance — to follow this standard. As in the case of small and medium-sized enterprises (SMEs), the Institute can exempt these set-ups too.

Depreciation accounting

The Institute has stated that the purpose of charging depreciation is not to accumulate funds to replace a fixed asset, but to allocate the cost of the fixed asset over its useful life so that periodic net result of operations of the enterprise reflects the use of the fixed asset.

Though the Institute's intention is clear, there is a contradiction in the realm of donated fixed assets. "In the case of donated fixed assets, no depreciation is required to be provided since the assets are treated to be recorded at nominal value."

If the purpose of the depreciation is to allocate the cost of the fixed assets over its useful life, so that the periodic net result of operations of the enterprise reflects the use of fixed asset, then if depreciation is not to be provided for donated assets, the net result of operations will not include the cost.

NPOs prepare statements for:

International and national donors: They do not require `depreciation' as a charge in the statements to be sent to them. These donors give only capital grants and would not want to reimburse depreciation..

Board members and other users: They are interested in knowing what it would actually cost them rather than about other hypothetical costs.

Statutory requirements: The statement to be certified under the Foreign Contribution Regulation Act and the Income-tax Act does not require depreciation to be included as cost.

In the statement normally prepared under the FCR Act, depreciation is not to be included, as utilisation and capital expenditure are allowed as application under income-tax. `Depreciation' as a charge in the statements are not required to be sent.

Any user-friendly financial statement of the NGO sector would want depreciation as a charge and the assets to be reflected on the written-down value.

The Institute has adopted a correct stand in the realm of donated fixed assets and the same may be extended to other assets too.

Revenue recognition

NPOs are expected to follow AS 9 in its entirety for recognition of revenue arising from sale of goods, rendering of services and use by others of enterprises, resources yielding interest, royalties and dividends.

It may be noted only AS 12 is applicable with regard to accounting for government grants, which will also be relevant for donations/grants and/or other subsidies received from private donors and other donor agencies.

According to the principle laid down in AS 12, donations and grants should not be recognised until there is reasonable assurance that i) the NPO will comply with the conditions attached to them; and ii) the ultimate collection of donations and grants will be made.

The Institute has recommended that if there is significant uncertainty as to ultimate collectibility of donations, grants or any part thereof, recognition of such donations/grants should be postponed.

Most of the NPOs are adopting cash basis of accounts only because of these uncertainties. This more or less reverses the Institute's stand on `accrual basis' for accounting of NPO income.

Segment reporting

The Institute has indicated that NPOs operating in different geographical locations or involved in different kinds service delivery programmes/ projects (which meet the definitions of geographical agent and business segment) should disclose segmental information according to the standard. If there are different business segments, that should also be reported. The examples and discussions indicated in the section are oriented only towards "business".

The technical guide deals with more corporate examples and systems of accounting. In the case of NPOs, the systems and procedures adopted are different and the classification as per the standard may not be identifiable.

Consolidated financial statements

The NPO may control another enterprise (which could any form of organisation) either through ownership or more than one-half voting power or through control over the governing body of the enterprise.

In the case of such control, the NPO would be considered as parent and the enterprise that is controlled by NPO, a subsidiary. And the NPO should prepare and present consolidated financial statements as per AS 21 requirements.

It is common with NGOs that members interested in a particular function/activity will be involved in the governance of other associations and vice-versa. For example, a person working on environment in one NGO may also be representing/governing other NGOs doing the similar type of activity with reciprocal arrangements.

This is not actually controlling but a form of governance in which the specialisation is shared, creating thereby a healthy environment. If AS 21 is to be adopted, such organisations have to prepare consolidated financial statements.

The governance pattern of the corporate and NGO sectors will vary widely on this aspect and, hence, necessary exemption should be given from the applicability of this provision.

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