November/December 2014 Newsletter

” Merry Christmas from All at CCA ”

This Issue

Money Talks– But it isn’t talking ‘not-for-profitish’.

Get smart with admin in 2015 – A reminder about our NFP admin course at Hagley.

The Road to 2016 – No need to panic yet about the new reporting rules.

Bank Reconciliations – Not an optional task.

 Time to Change the Lingo of Money

One of the more regrettable things about the new Financial Reporting Standards for smaller (Tier 3 and 4) Charities is the language used. The new reports name is ‘Performance Report’ and it contains a ‘Statement of Financial Performance’ and a ‘Statement of Service Performance’. As a result, the Standards contain the word ‘performance’ 109 times (Tier 4) and 215 times (Tier 3) respectively. By comparison, all 30+ Tier 2 standards combined only mention the word ‘performance’ 20 times.

This may have an unfortunate psychological side-effect. The not-for-profit sector is really the place where people get away from the stresses of an increasingly performance and efficiency-driven working world through sports and hobby clubs, getting together within your own ethnic group, working with your neighbours, or immerse yourself in arts, music or writing. Social service charities often enough exist to help those left behind by the ever more complex demands of the ‘performance’-focused world. Those that are difficult to help may find that they drag down the ‘performance’ of the helpers and perhaps in the future will not be welcome anymore even in the not-for-profit sector.

CCA tries to use more appropriate language in financial statements that we prepare, or help to prepare. This is most notable in the commonly called ‘Statement of Financial Performance’ which we prefer to call ‘Statement of Funding’ to emphasise the distinction between the drive to achieve surpluses suggested by the phrase ‘Financial Performance’ and the not-for-profit way to apply the funds being given to them for a purpose. ‘Income’ becomes ‘Funds Received’, and ‘Expenses’ turn into ‘Funds Applied’ that way.

We are also trying to avoid the connotations associated with the words surplus (good) and deficit (bad!). In not-for-profit terms, a ‘surplus’ is money accumulated for later use (‘reserves’), and a ‘deficit’ simply means that some of the previously accumulated funds have been applied in this year. We therefore call them ‘reserves accumulated’ and ‘reserves applied’. Unlike in a business situation, where a surplus can never be high enough, not-for-profits have to balance out their accounts in the long run.

The new financial reporting standards allow such re-naming of your Financial Statements, and I would encourage every charity to find alternative phrases for ‘Statement of Service Performance’ or ‘Performance Report’. ‘Service Performance’ could be replaced by ‘Service Activity’, or just ‘Activity’, or maybe ‘Statement of Outputs and Outcomes’ to emphasise that it gives only a highly selective account of what the organisation has been up to.

Personally, I particularly dislike reading the phrase ‘financial result’ in some previous audit reports, denoting the profit or loss made in a business sense. Whether a not-for-profit has applied more or less funds than it has received in any given year cannot reasonably be called the ‘result’ of its operations. More than anything this denies the organisation any other reasonable purpose than turning over money.

Have a great Christmas break

Harald

Reduced Opening Hours through December

Our ‘public’ office hours are normally Monday-Friday 10-3. Through December the office will be closed on Fridays.

We will be closed for Christmas from 20 December – 11 January. Rhys and/or Harald can be reached by email from 5 January.

Wise up on Compliance in 2015

Winging your way through the financial stuff is becoming increasingly hard for registered Charities. Lucky that CCA has teamed up with Hagley to bring you a full-year (37 session) course on not-for-profit admin and management. The four learning objectives of this course are:

1. Understanding and administering the legal requirements of not-for-profits
2. Funding not-for-profit activities
3. Comply with financial accountability and generate mandatory end-of-year statements.
4. Design procedures to monitor and manage your not-for-profit

The cost is a one-off enrolment fee of $40. See here for Hagley’s whole after-3 programme and to enrol.

The Road to 2016

Some groups have sought our advice on whether they should remain registered as Charities in light of the somewhat daunting new financial reporting rules. One group had already de-registered.

We are talking with other groups that support the not-for-profit sector to try to come up with some consistent recommendations about this issue as well as some others (such as which Tier to choose) and to develop a plan on how we can best support the sector during this time.

It is very difficult for us to obtain additional funding to help community groups with this, as at least some funders take the view that the implementation of these new rules, including any support and training, is the job of Charities Services (DIA), not ours. While we do not disagree, it is unlikely that the government will increase DIA’s resources to meet this demand, especially since Cabinet had accepted the view that the new rules will make compliance easier for Charities.

At this stage we would advise not to panic. The first reports under the new format are due in in September 2016, or later for organisations that do not have a financial year ending in March, and there is no immediate need for action.

CCA will try to provide some guidance through this newsletter, and from next year on ‘The Road to 2016’ will be a regular heading followed by some concrete tips on how to tackle specific issues around the new reports.

Reconciling Your Bank Account

To an accountant the word ‘ reconciliation’ is an everyday phrase, but as we keep finding out not everyone has a clear idea what it actually means when it comes to money (let alone why it should be done).

In money terms, a reconciliation is done between two account balances that should be identical. If they are not, some sort of explanation is necessary. The balance on your bank statement should be identical to the balance in your bank ledger (your cashbook, Xero, MYOB or whatever you are using to keep track of your transactions) on the same date. If it isn’t, the information in your financial reports is missing something and is therefore wrong. If your bank statement says you have $11,500 in your account on 31 March, but your financial statements claim it is $ 13,800 you clearly have a problem!

Out-of-balance bank ledgers create some of the biggest headaches when the end-of-year financial statements are prepared. Finding the error(s) is always very time-intensive and usually involves sifting through a large amount of individual transactions. They also have a detrimental effect on the organisation’s administration: once a bank ledger is out of kilter, further mistakes are not spotted and the people looking after the cashbook tend to get more careless. After a while the standard explanation becomes: ‘it has never balanced’.

All accounting software have functionality that help you to reconcile your bank ledger and keep things in order. The reconciling function gives you a list of transactions that have been entered since the last reconciled balance, and you are asked to tick them off one-by-one in the software as you go through the bank statement. If there are any items in your software that are not on the bank statement, or vice versa, you have to take action.

If you are using your own spreadsheet, you should follow the same process once you get your bank statement in the mail: go through your bank statement line by line and ‘tick off’ the items in your spreadsheet. CCA spreadsheets have a reconciliation column called ‘banked’, where you indicate by entering a ‘c’ (if it is your main cheque account you are reconciling) that you have found the transaction on the bank statement.

At the end of all this, the bank ledger balance should equal the balance on your bank statement on that date.

Many organisations enter an invoice as ‘paid’ in their cashbook when a cheque is written out (not when it is drawn), and this is quite common (although incorrect) practice even amongst accountants. This leads to a difference between your cashbook/bank ledger and your bank statement. If this happens you need to produce a “reconciliation statement” showing:

Your bank ledger/cashbook balance

Add unpresented cheques

= balance on bank statement

Mistakes often happen on ‘peripheral’ accounts such as savings accounts or term deposits, as administrators focus on the main transaction account and omit to record interest or sometimes other transactions in these accounts. A bank reconciliation should always involve reconciling all bank accounts, not just your main transaction account.