December 2015 Newsletter
Merry Christmas from All at CCA
Building Capacity? – Make sure you’re addressing the right stuff.
Working with PayPal – Accepting cards without an expensive bank facility.
The Road to 2016 – ‘Controlling’ another entity now has accounting consequences.
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Capacity Building – Is it Working?
Over the last year we have seen a number of organisations’ accounts showing sometimes quite large amounts received for ‘capacity building’ projects. Typically, these payments were grants from the Ministry of Social Development in the tens of thousands, with $150,000 over two years the biggest I have seen.
The matching expenditure typically went to consultants – individuals or firms – running workshops, assessments or sometimes coaching sessions, and sometimes some kind of written plan was produced. I became a little curious about these projects as I could not see any improvement or changes in the financial systems of the organisations involved and I started asking some of the recipients of such grants what they got out of it. The lukewarm responses gave me the impression that the organisations carried on as before, and any new ideas that may have come out of the projects haven’t been put in practice.
For an organisation to work better, grow, improve services or do anything else along those lines it needs to have at its core financial systems that deliver accurate information when it is needed, and that is understood by decision-makers. A ‘financial system’ is not just your accounting software: it includes the abilities to come up with accurate costings for new projects, keeping track of cash flow and overall financial position of the organisation as a whole, having an accounts set-up that gives you the information you need, and underlying it all is the mundane skill of making accurate cashbook entries.
This is so fundamental to the success of any organisation that I believe financial systems, including the skill sets of administrators, managers and key Board members, are the first thing that need to be looked at in any capacity-building project. Organisations then need to be given hands-on help in implementing any changes; it is not enough to just identify the need to do so.
Small voluntary organisations can afford a relaxed approach to money, as they may be able to just suspend what they are doing for a while if they run out. Once an organisation grows to provide ongoing services, especially through paid staff, investing in suitable financial systems becomes a survival issue. Unlike a business, which can often borrow against future cash flow, once the money has run out for a not-for-profit they usually have to close their doors. CCA has dealt with a few cases in the last two years or so where organisations had to wind up because of poor financial management, usually based on poor financial information and/or insufficient financial literacy by members of the governance body. In two cases where organisations got into serious financial difficulties this occurred in the year after a significant capability project….
The problem frequently arises when financial systems do not grow with the organisation. In all the excitement of growth managers and governance boards do not pay attention to this area, and are reluctant to spend money on financial administration or training.
I believe capacity building must start with financial literacy and capability to be of any use at all. As you know, CCA is here to help.
If you ever make any purchases via the internet you will at least have heard of PayPal. PayPal allows a business or other organisation to accept online payments via credit or debit card, or through the payer’s own PayPal account.
Having a credit card or eftpos facility with your bank can be too costly for a small organisation. There are usually ongoing ‘maintenance’ fees, regardless of whether any money is coming in, plus a commission and/or transaction-based merchant fees. Ab on-site eftpos terminal may also need to be purchased or hired, and for online payments a web developer may need to be hired to make your web site secure.
One alternative option is to sign up with PayPal for free, although you’ll pay a quite high commission on each incoming payment (5% or so). It is reasonably easy to link to your web site and start accepting payments, such as membership fees, donations, or stuff you might be selling.
The money is received into your PayPal account, and from there you can transfer it into your own bank account, or leave it there for online purchases your organisation may want to make. In accounting terms it is important to treat this PayPal account like any other bank account, i.e. record all transactions in your cashbook or accounting software and have policies regulating individual people’s access to that money. Just like with any other payments received, there may be GST payable for some or all of them.
A common mistake when using PayPal facilities is to only account for the money when it is transferred into one of your bank accounts, and then often treating it like a single payment. All PayPal transactions need to be accounted for in the usual way, whether or not they are transferred to your bank account.
To learn more about PayPal see here: https://www.paypal.com/nz/webapps/mpp/home
The Road to 2016
Monthly feature to prepare for the new Financial Reporting Standards for Charities.
Are You Controlling Another Entity?
The new financial reporting standards introduce the concept of ‘control’ to Charities. This is bound to become an area of much confusion and inconsistencies as the definition of ‘control’ is taken from financial reporting standards for businesses without much change.
In the business world control is fairly easily determined through ownership shares, and bands exist to identify different levels of control based on the shareholding of the controlling company. Allowances are made for situations where the level of control can exceed what would be expected from share ownership alone.
Where a not-for-profit owns or controls a business the same bands can be used without any problems. But control relationships between not-for-profits are not easily determined and there aren’t any precedents as yet. The problem is that Societies and Charitable Trusts cannot own each other, but these two are the main forms of incorporation for Charities.
For control to exist in financial reporting terms there must be financial benefit to the controlling entity. The ability to influence or even prescribe decisions of another entity by itself does not mean control in this sense. ‘Helping out’ another entity by doing all their management and administration for them also does not constitute control, if there’s nothing in it for you.
The case is fairly clear where there is a clear structure of national and local bodies, and local bodies pay levies or there is a ‘national’ portion to their membership fees. There is financial benefit here, and the national body would be considered to control the local ones.
Most cases would be far from clear, however. And to confuse things further, controlling another entity does not necessarily mean you have to produce a consolidated set of financial statements. If the controlling entity by itself reports under the new Tier 4 it does not have to produce consolidated statements, regardless of the size of the controlled entity, and adding the transactions of the controlled entity will not push it into a higher tier.
Having to produce consolidated financial statements can be a potentially very costly exercise. It is not just a matter of adding up two or more sets of accounts; the accounting behind it is quite complex. If you think this may apply to you, there is really no alternative to seeking professional advice on whether ‘control’ exists, and possibly even a second opinion. As always, make sure that the person you ask to provide one actually knows the sector and the issues.
The authoritative guide issued by the External Reporting Board for control relationships is here:https://www.xrb.govt.nz/includes/download.aspx?ID=136806