The Need for Fund Accounting
Fund Accounting as an accounting methodology for NGO’s has its prime focus on accountability of funds, rather than profitability to ensure that money’s received for specific purposes are used only for that notwithstanding the very nature of fungibility of monies in a common bank account. Unlike a customer in a for-profit organization, who pays to buy goods or services, here it is a Donor who receives no consideration in exchange. Donors expect that the Governing Board discharges their duty of trusteeship and sets aside and uses monies as per the mandate of the Donor/s. Therefore, the Donor group of an NGO becomes a very important stakeholder, unlike a customer. Many Institutional Donors stipulate a Grant Report, conduct audit reviews etc for re-assurances. Donations received with strings attached so as to speak are broadly referred to as Restricted Funds. The Financial Statements of an NGO on Fund based accounting would be transparent as to how much monies were received from whom, how utilized etc. It is like each fund is a Balance Sheet within a Balance Sheet and many Income Statements as a collection, akin to a Segmental Reporting Statement in a commercial enterprise.
6 Fund Types
Donations, Charity, gifts, etc are common parlance but from a Fund Accounting standpoint, Funds have clear responsibility and Trusteeship characteristics’ and are of 6 types. They are :
Refers to a large sum of capital donated to be invested usually in perpetuity and the income derived thereof utilized by the NGO for example to award Scholarships’, Awards etc. The NGO management is expected to not only preserve the endowment received but also invest the same wisely to yield a risk-free yield on the sums invested.
Typically refers to the initial donation made by the Author of a Trust or Members to kick start the operations of an NGO akin to seed capital. Also, Corpus donations may be received during the lifetime of an NGO usually to meet long-term applications or to dip into if unable to meet operational expenditure as per the best judgment of the management.
Building / Asset Funds:
As an illustration, refers to funds raised for building a cancer ward in a hospital or funds collected to buy say 100 No of sewing machines for the purposes of training women in tailoring.
These are typically where a Foundation or a Corporate under CSR espouse a project and make a grant to an NGO for the same. Usually, they come entailed with Grant Agreement and a variety of terms and conditions. This would be a case of a donor driven restriction. In India say under FCRA, a separate set of books are required to be maintained which can be achieved through Fund Accounting, which is an illustration of a Compliance driven restriction. This is an example of a Regulatory based restriction.
Board Designated Funds:
Where the Board based on their collective wisdom wishes to spell out it’s financial outlays of allocation for specific purposes although the donors have not stipulated any and have confidence in the Board to do so on their behalf. An illustration is where the NGO has many distributed operations as Branches and unrestricted funds collected into a common pool, which based on local needs does an allocation whereby earmarking funds would be an example of Board Designated Funds.
These typically are donations from individuals who believe in the cause and the management of the NGO and these funds could be utilized by the management as per their discretion.
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6 Key Benefits of Fund Accounting
Transparency in Financial Statements:
Due to the fungibility of monies, it is Fund Accounting systems which can generate Financial Statements based on each Fund Type and consequently all stakeholders have insight into the financial functioning of the NGO.
A measure of Financial position:
The financial worth of an NGO on a Balance Sheet date is reflected in its Net Assets. Unlike, a for-profit enterprise, the Net Asset measure is more nuanced and what the reader is looking for is mainly the Unrestricted Net Assets as all other Fund types have some conditionality attached to it. These Unrestricted Net Assets is an accurate measure of the real financial strength of an NGO.
A measure of Operations:
With Fund based accounting, it is easier to have a financial Statement of Activities, apart from a natural classification of the Income Statement and have the ability to benchmark against Non-Profit Operational norms of measure as a percentage of Programme, Fund Raising and General & Administrative Expenditures as also for any trend analysis for efficiencies.
Safeguard against Fund misappropriation:
This risk is more real than understood by many on the Governing Boards of NGO where the alternative is a mish-mash of the endowment, Corpus, restricted and unrestricted funds flowing through one Bank account and willy-nilly end up with an incorrect application of funds, all with the best of intent and faith.
Better Fund planning:
The specific fund application and balances give a far clearer picture to the management in planning the usage of funds and it’s a social impact.
Management of NGO’s have literally TWO wheels of momentum to manage and optimize as TWO of their most important stakeholders receive no consideration for their involvement/participation. These two are the Donor Community and the Volunteer community. One gives monies and the other give their time and skills. By definition, these two groups are a fluid one which has different formations of its constituents and differing momentum levels across any timelines. Managing and optimizing these two bodies concurrently is perhaps the most serious challenge that any Governing Board of an NGO faces. Insightful information on the Financial Position, Statement of Activities and Social measures, which can only be possible through Fund Accounting and social impact measurement is perhaps the most important information tools to grow, maintain and optimize an appropriate balance as a continuous process is the real measure of success in NGO leadership.
4 Challenges of implementing Fund Based Accounting System
Some Typical Apprehensions:
Once aware of the merits of the Fund based Accounting system, many a Governing Board is yet apprehensive with questions of whether it is really required, would it make accounting more complex for them to manage, is there a cost-benefit, can the new system be sustained with changes in Accounting staff and at times their unwillingness to provide full transparency etc.
Without the doubt, Fund based accounting is more complex as every transaction has FOUR dimensions, unlike a conventional accounting entry in a For Profit organization. The FOUR dimensions are Debit entry, Credit entry, Debit a Fund and Credit a Fund for each and every transaction. Unless, the Accounting team has a good grasp of Fund Accounting and the organization activities and applies itself, a single erroneous capture of an entry can have unintended consequences.
Non Availability of Specialised Accounting talent:
Most Book-Keepers and Accountants are trained for the For-Profit world due to its relative demand, the infancy of this sector, lower wage levels, and inadequate regulatory mandate to follow fund based accounting and Financial Reporting standards, especially for Trusts and Societies.
Non-Availability of Non-Profit Accounting Software:
Either there are very expensive Non-Profit global ERP brands or the common ones available to for-profits, which are at affordable costs like ubiquitous accounting software like Tally and Quickbooks. Deploying the common available software’s requires adaptation which again becomes dependent on Specialised Accounting talent not only of Fund based Accounting, the NGO operations as also proficiency in the configuration and usage of the software.
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The voluntary sector in India, based on Government statistics is estimated at about 3.2 million. Traditionally, most NGO’s are either Trusts or Societies with limited Financial Reporting demands, apart from Tax Audit which they do with the intent to safeguard and keep renewal of their Tax exemptions. In recent years there is a professional set of volunteers who have forayed into this sector and formed Sec 8 companies and have a higher Financial Reporting obligation under the Companies Act. However, the number of Sec 8 companies is minuscule in the universe of Indian NGO’s dominated by Trusts and Societies.
The Institute of Chartered Accountants of India has published a Technical Guide for NGO Accounting Standards, which is advisory and recommends Fund Accounting. Due to the lack of compulsion on the Accounting standards’, non-availability of Non-Profit accounting software, lack of management awareness and specialized Accounting talent, fund accounting methodology is some distance away.
At the same time, there is a wider acceptance that the State or it’s agencies cannot solely deliver public goods/ services to its citizens and there is a massive role that NGO’s can step in and bridge the gap. There is increasing levels of economic growth, a larger number of the wealthy, higher levels of public consciousness, drawing many professionals into this sector. We are witnessing a huge growth in Non Profit units not only in India but across the world including China, which ironically is a highly centralized state. Thanks to the CSR mandate, the Corporate world has in a sense got compelled to engage with the NGO world and bring with it professionals, Managers who are willing to make grants but keen on ensuring that these funds are well utilized and they have indeed made some social impact and got good outcomes.
These Non Profit’s are indeed public bodies, dealing with public funds and those on the Governing Board are Public Servants. This definition has already found its way into our legislative framework of the Lok Pal Act declaring that Trustees of NGO’s are public servants and are obliged to disclose their’s and their family assets before a designated Authority. This is similar to how Boards of Private Banks are also considered as Public servants. However, the operation of the Lok Pal Act has been rendered toothless by the Government shying away from notifying who the Designated Authority is.
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With this growth of Non Profits in numbers, funds, the involvement of Corporates, legislative acknowledgment of they being public bodies, the time has come for some changes :
Financial Reporting Standards:
Akin to FASB 117, the Institute of Chartered Accountants of India to review it’s Technical Guide for NGO accounting and come up with a Financial Reporting Standards for Not For Profits, which includes all types of legal forms, be it Trusts, Societies or Sec 8 Companies.
Mandate Fund Based Accounting:
The new Financial Reporting Standards to mandate that Fund based Accounting to be followed and not mere advisory. Perhaps, exempt small and simple Non Profits, based on revenue thresholds of Rs 1 Crore or lower or cover all who receive Grants either from Central, State, CSR funds or from Foreign Sources.
NGO Darpan & FCRA:
NGO Darpan, which is attempting to be a Government directory of the Voluntary sector have an additional classification of their registered NGO’s as to whether they are following Fund based Accounting methodology and Financial Reporting Standards. Likewise, FCRA makes disclosure of their FCRA Registered Units Financial Statements of the entire NGO.
Income Tax Department:
In as much as there is an RTI, the Income Tax Department publish online the Tax Returns, Tax Audit Reports and Audited Financial Statements of all NGO’s who enjoy Tax Exemption status so that financial information is available to the public.
Other Directories and Certifying Bodies:
Guidestar India, Credibility Alliance or NGO Fund Raising distributors/Foundations/Crowd Sources like Give India, Dasra, Let’s Endorse, Milaap etc onboard NGO’s seeking funds to comply with good Financial Reporting Standards.
Affordable Non-Profit Software with Fund based Accounting:
Accounting software companies like Tally, Quickbooks who in any case have been providing it’s software to this sector at concessional rates be encouraged to come up with a Non Profit version which incorporates Fund based methodology and make it simple for Non-Profits to deploy and use.
Authored by Mr. Sudev Rao, with three decades of professional experience in Non Profits in India and US. He is also a founder of www.goodkarmaforngo.com, a SaaS suite for NGO’s. Your comments and suggestions can be addressed to him at email@example.com.