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Financial Statement of Ngos document sample
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THEME
NGOs’ Financial Facets, Accounting
Calisthenics & Taxation Tableau
stressed upon more in an NGO since it has to
look for voluntary contribution for achieving its
social objectives.
An NGO may receive contributions from
different donors like individuals, corporates,
foundations or trusts supported by corporate
groups, or persons of philanthropic orientation.
NGOs involved in providing micro credit
CA. S. Dehaleesan
approach banks for their financial requirements.
(The author is a member of the Institute. He can be
reached at viveksd@vsnl.com) They can also enter into commercial ventures,
Success of an enterprise depends on how ef- which can make them sustainable enterprises.
fectively and efficiently the financial resourc- Donations: Donations continue to be a major
es are put to use by it. Indeed, NGOs are no source of funding to NGOs to fulfil its mission
exception to this maxim. With NGOs receiv-
ing grants from various donor organisations, objectives. There are no pre-registration
it is their duty to maintain financial discipline formalities for receiving contributions from
and ensure transparency in dealings. More- local sources other than those required under
over, with Governments granting tax exemp-
tions, a sound accounting and financial re- the Income Tax Act, 1961, like when an NGO
porting system needs to be in place in NGOs seeks to avail tax exemptions and the donor
to deal with queries from stakeholders. This too is serious of the tax benefit available to him.
article discusses the financial perspective,
accounting aspects and Income Tax matters However, contribution to NGOs from overseas
concerning the operation of NGOs. is governed by the Foreign Contribution
(Regulation) Act, 1976 (FCRA). The salient
N
features of the governing statute FCRA are as
on-Governmental Organisations (NGOs)
follows:
act as catalysts of social development.
Registration: As per Section 6(1) of the FCRA
Addressing social issues is quintessential
an association with definite cultural, economic,
for creating social harmony. And social harmony
educational, religious or social programme
is the bedrock of a vibrant nation. The business
shall accept foreign contribution after such
community has seized of this fact. Which is why
association registers itself with the Central
we find corporates focusing on social issues, be it
Government. The application for registration
rehabilitation of tsunami victims or AIDS preven-
shall be made in Form FC-8 and shall be as per
tion. The corporate sector has factored societal
Rule 3(3A).
development in their mission statement.
Receipt of Contribution: The NGOs in order
Financial Facets to receive donations shall have to obtain prior
It is obvious that finance is needed for permission from Ministry of Home Affairs. Such
operating any enterprise whether it is applications shall be made in Form FC -1A.
commercially driven or socially inclined. This is Definitions: Section 2(1)(a) defines“association”
June 2006 The Chartered Accountant 1733
to mean association of individuals, whether the closure of the year (i.e. before 31st July).
incorporated or not, having an office in India and 1.02 Loan from Banks/ECBs: NGOs involved
includes a society, whether registered under the in extending micro credit to its programme
Societies Registration Act, 1860 (21 of 1860), or beneficiaries need to avail bank finance for its
not, and any other organisation, by whatever financing activity and capacity building.
name called. l An NGO involved in providing micro finance
Section 2(1)(c) defines “foreign contribution” credit is allowed to avail External Commercial
to mean donation, delivery or transfer made by Borrowings provided that it complies with
any foreign source- Reserve Bank of India Circular A.P. (DIR
(i) of any article, not being an article given to Series) Circular No. 5 dated August 1, 2005.
a person as a gift for his personal use, if the l Reserve Bank of India has released a Master
market value, in India, of such article, on
the date of such gift, does not exceed one Where the NGO avails tax exemp-
thousand rupees, tion under Section 11 or under
(ii) of any currency, whether Indian or foreign; Section 12 on its income, it shall
(iii) of any foreign security as defined in clause obtain certificate of non-deduction
of tax from the assessing officer.
(i) of Section 2 of the Foreign Exchange The terms and conditions to be
Regulation Act, 1973 (46 of 1973). adhered to for seeking the certifi-
It has further explained that donation, cate of non-deduction are set out
delivery or transfer of any article, currency in Rule 28AB.
or foreign security by any person, who has
received it from any foreign source, either circular on Micro credit No. RPCD. No. Plan.
directly or through one or more persons, shall BC.24/04.09.22/2005-06 dated July 30,
also be deemed to be foreign contribution 2005.
within the meaning of this clause. Section Snapshot of RBI circulars:
2(1)(d) an inclusive definition defines “foreign l NGOs engaged in micro finance activities
source” which contains an exhaustive list and it are eligible to avail ECB. Such NGOs should
is an inclusive definition. have a satisfactory borrowing relationship
Maintenance of Accounts: Section 13 of for at least 3 years with a scheduled
FCRA and Rule 8(1) of Foreign Contribution commercial bank.
Regulation rules requires the NGO to maintain: l NGOs engaged in micro finance activities
(a) an account of any foreign contribution can raise ECB up to USD 5 million during a
received by it, and financial year.
(b) a record as to the manner in which such l NGOs engaged in micro finance activities
contribution has been utilised by it. may utilise ECB proceeds for lending to
Submission of Accounts: The accounts of self-help groups or for micro-credit or for
NGOs shall be duly certified by a Chartered bonafide micro finance activities, including
Accountant [in Form FC-3 along with a balance capacity building.
sheet and statement of receipt and payment] l All other ECB parameters such as minimum
shall be furnished in duplicate, to the Secretary average maturity, all-in-cost ceilings,
to the Government of India, in the Ministry of restrictions on issuance of guarantee,
Home Affairs, New Delhi, within four months of choice of security, parking of ECB proceeds,
1734 The Chartered Accountant June 2006
prepayment and refinancing of ECB under It is strongly suggested that NGOs adopt
the Automatic Route, should be complied accrual basis of accounting since this brings
with. about uniformity in reporting and a true and
Moreover, RBI has released Frequently Asked fair representation of financial information to
Questions on 19th October 2005 on micro the stakeholders.
finance credit. Applicability of Accounting Standards: It
“1.03 Commercial ventures: Increase in is the lack of awareness among NGOs about
competition to share limited source of donations the accounting functions due to which they
compels the NGOs to generate revenue on their are yet to adopt the Accounting Standards
own for supporting their mission. Commercial propounded by ICAI.
ventures by NGOs, irrespective of their size As per paragraph 3.3 of the Preface to
of operation, would supplement the funding Applicability of Accounting Standards,
requirement.“
The NGOs operating in specific areas like The accounts of NGOs shall be
women empowerment, tribal development, duly certified by a Chartered
forest conservation, etc. can use their expertise Accountant [in Form FC-3
and distribution channels to create wealth along with a balance sheet
and statement of receipt and
for the programme beneficiaries instead of
payment] shall be furnished in
merely acting as distributors of donations. duplicate to the Secretary to
However, establishing a sustainable business, the Government of India, in the
particularly by NGOs with societal commitment, Ministry of Home Affairs, New
is no easy task. They face several challenges like Delhi, within four months of the
closure of the year (i.e. before
requirement of capital, brand building, etc. This 31st July).
is where a partnership with corporates would
help the NGOs learn from their expertise. Ideally,
an NGO-Corporate partnership, in developing “…Accounting Standards apply in respect
the commercial arm of an NGO, would help in of any enterprise… irrespective of whether it is
supporting the social cause on a sustainable profit oriented or it is established for charitable
basis. or religious purposes. Accounting Standards will
The statutory compliance requirements as not, however, apply to enterprises only carrying
applicable to a commercial enterprise would on the activities, which are not of commercial,
automatically follow once the NGOs embark on industrial or business nature, (e.g., an activity of
commercial ventures. collecting donations and giving them to flood
affected people). Exclusion of an enterprise from
Accounting Calisthenics the applicability of the Accounting Standards
Basis of accounting: NGOs may be Trusts, would be permissible only if no part of the activity
Societies or Section 25 Companies. Section 25 of such enterprise is commercial, industrial or
companies are under compulsion to follow an business in nature. Even if a very small proportion
accrual basis of accounting as per Section 209 of the activities, Standards would apply to
(3)(b) of the Companies Act, 1956. The trusts all its activities including those which are not
and societies continue to maintain books of commercial, industrial or business in nature”.
accounts on cash basis or hybrid basis. All the Accounting Standards applicable
June 2006 The Chartered Accountant 1735
to Level III enterprises would be applicable to in turn translates into a higher comfort level for
NGOs. the stakeholders.
There are a number of NGOs which are The NGOs shall maintain a separate set
devoid of commercial content in their dealings. of accounts for contributions received from
However, it would be prudent to follow the overseas and those received from local
sources, revenue from commercial ventures,
AS Title project specific grants received, etc. as these
Number are needed for reporting under the Foreign
AS 1 Disclosure of Accounting Policies Contribution (Regulation) Act, Income Tax Act,
AS 2 Valuation of Inventories and perhaps to the stakeholders and funding
AS 4 Contingencies and events agencies as well. It would be more appropriate
occurring after the Balance Sheet to have different bank accounts too for proper
date recording of transactions.
AS 5 Net profit or loss for the period, Format of Audit Report & Financial Statements:
prior period items and change in No standard format has so far been prescribed
accounting policies under law for financial reporting. ICAI’s “Technical
AS 6 Depreciation accounting Guide on Accounting and Auditing in Not-For-
AS 7 Construction contracts Profit Organisations” has given an indicative
AS 9 Revenue recognition format, which may be adopted with suitable
AS 10 Accounting for fixed assets modifications, depending on the nature of
AS 11 The effects for changes in foreign services carried on, volume of operations, etc.
exchange rates Taxation Tableau
AS 12 Accounting for government grants Definition of an NGO: As per sub-section
AS 13 Accounting for investments 15 of Section 2 of the Income Tax Act, 1961,
AS 14 Accounting for amalgamations “charitable purpose” includes relief to the poor,
AS 15 Accounting for retirement benefits education, medical relief, and advancement of
in the financial statements of any other object of general utility.
employers The above definition is an inclusive definition
AS 16 Borrowing costs and NGOs are well covered under this.
AS 19 Leases Registration: Section 12A and Section
AS 22 Accounting for taxes on income 12AA of the Income Tax Act, 1961 sets out the
AS 24 Discontinuing operations conditions and procedures for registration
of trusts. And Rule 17A of the Income Tax
AS 26 Intangible assets
Rules 1962, lays down the form and manner
AS 28 Impairment of assets
in which the application shall be made to the
AS 29 Provision, contingent liabilities and
Commissioner for seeking registration.
contingent assets
The trust shall make said application in
Accounting Standards laid down by ICAI, which duplicate in Form 10A within one year from the
would help the NGOs to maintain uniformity creation of trust or formation of the charitable
in presentation of financial statements, proper institution accompanied by the following
disclosure and transparency. And transparency documents.
1736 The Chartered Accountant June 2006
The following Accounting Standards, though not mandatory,
may be adopted for reasons mentioned hereunder.
AS Number & Title Reasons for Adoption
AS 3 – Cash Flow Statements To analyse the movement of financial resources.
AS 17 – Segmental Reporting In cases where the NGO carries out diverse service functions
(business segment) or operates in different geographical
limits (geographical segment).
AS 18 – Related Party Disclosure For instance, when an NGO floats a business arm (as referred
to in paragraph 1.03 above) partnering with a corporate
entity that has direct/indirect influence on the functioning of
the NGO.
AS 23 – Accounting for Relevant when an NGO promotes an independent business
Investments arm or supports another NGO.
AS 27 – Financial reporting of Here again reference is made to an independent commercial
Interests in Joint Ventures venture of an NGO, as referred to above, which is floated
collaborating with a corporate entity or another NGO.
l Trust deed or instrument evidencing l Photocopy of the latest certificate issued
formation of the charitable institution – under Section 80G, in case of renewal.
both in original and one copy or l True copies of assessment orders of the 3
l If trust or charitable institution is not preceding years.
created under an instrument, the document Form 56D, as referred to above shall be
evidencing the creation of such trust/ accompanied by the following documents:
charitable institution l Copy of the trust deed/bye laws/
If there is a delay in seeking registration, the Memorandum & Articles of Association.
Commissioner may condone the delay if he l List of major office bearers together with
is satisfied that there were sufficient reasons settler/members of the governing body.
for the delay in making the application for l Photocopy of the latest certificate issued
registration. Else, the necessary tax exemptions under Section 80G, in case of renewal.
would be applicable from the first day of the l True copies of assessment orders of 3
financial year in which the application is made. preceding years.
Tax Benefits to NGOs: An NGO shall apply to l Photocopy of communication received
the Income Tax authorities in such a manner from the Commissioner with reference
as may be prescribed to avail tax exemption in to application made by it for registration
respect of its income. under Section 12A.
Form 56, as referred to above shall be An NGO may claim exemption of income
accompanied by the following documents: from a property held in trust as per Section 11 of
l Copy of the trust deed/bye laws/ the Income Tax Act, 1956, subject to following
Memorandum & Articles of Association. conditions:
l List of Trustees together with settler/ l That the NGO complies with Sections 11(1)
members of the governing council. and 11(1B) regarding application of income.
June 2006 The Chartered Accountant 1737
Section NGO Relevant Income Form
Other Aspects
Reference Description Tax Rule No.
Scientific research association
10(21) approved under Section Please refer under paragraph 3.04
35(1)(ii)
10(23C)(iiiab) Educational institutions - -
These are wholly
or substantially
10(23C)(iiiac) Medical institutions - -
financed by
Government.
10(23C)(iiiad) Educational institutions 2BC Applicable where
the annual receipts
of such institution is
10(23C)(iiiae) Medical institutions 2BC
Rupees One Crore.
Application to be
Fund/Institution established
10(23C)(iv) 2C 56 made to Director
for charitable purposes
General (Income
tax, Exemptions)
through the
Commissioner of
Trust/Institution established Income Tax.
10(23C)(v) for public religious/charitable 2C 56
purposes
Application to
Educational institutions (other
be made to Chief
10(23C)(vi) than those covered under 2CA 56D
Commissioner or
Section 10(23C) (iiib) & (iiid))
Director General
through the
Medical institutions (other Commissioner
10(23C) (via) than those covered under 2CA 56D of Income Tax or
Section 10(23C) (iiic) & (iiie)) Director of Income
Tax
June 2006 The Chartered Accountant 1741
l That in the event of accumulation of income year audited accounts together with
it shall be in accordance with Sections 11(2), Balance Sheet and Income & Expenditure
11(3), and 11(3A), and mode of investment accounts.
of such accumulated income shall be as per l Have the auditor of the NGO specifically
Section 11(5). certify that the amount has been expended
Section 13 of the Income Tax Act, 1961 lays for scientific purposes.
down circumstances under which exemptions, Reference may be made to Rule 11L, which
under Section 11 or Section 12, would not be has mentioned the documents to be attached
made available to an NGO. For instance, where to the application seeking approval of schemes
property is held under trust for private religious under Section 35AC. An NGO that has been
purposes, the NGO is created for a particular approved under Section 35AC shall furnish
religious community, etc. certificates in Form 58A or 58B as applicable for
Tax Benefits to Donors: The donors shall be expenditure by way of payment in respect of
eligible for deductions in respect of payments eligible projects or schemes.
to NGOs provided the NGOs have made Form 10G for seeking Section 80G exemption
applications to the necessary authorities and for donors shall be made by the NGO in triplicate
obtained express sanction that donations/ accompanied by;
payments to such NGO are eligible for tax l Copy of registration granted under Section
deduction. 12A or copy of notification issued under
An NGO having Sections 35(1) (ii) & 35 (1) (iii) Section 10(23) or Section 10(23C).
exemptions shall: l Notes on the activities of the NGO since its
l Maintain separate accounts for sums inception.
received and expended for scientific l Copies of the accounts of the NGO since
research. its inception or during the last three years,
l Submit to the Central Government every whichever is less.
Section Expenditure Relevant Income Form Other Aspects
Reference Description Tax Rule No.
35(1)(ii) & (iii) Scientific 6(2) 3CF Application to be made to
research Commissioner of Income Tax. The
donor gets 125% of the amount
paid as deduction.
35AC On eligible 11(F) to 11(O) Application to be made to
projects or the Secretary to the National
schemes Committee for promotion of
Social and Economic Welfare,
New Delhi.
80G(2)(a)(iv) Donations to 11AA 10G Application to be made to the
certain funds, Commissioner of Income Tax. The
charitable donor gets a maximum of 50% of
institutions, etc the amount paid as deduction.
1742 The Chartered Accountant June 2006
Accounts and Audit: The Income Tax Act
requires the accounts of the NGO to be audited.
In cases where the total income of the NGO
before giving effect to Section 11 and Section
12 is audited, the auditor issues a report as
prescribed under Rule 17B. The audit report
shall be in Form 10B.
Income Tax Deduction: Where the NGO
avails tax exemption under Section 11 or
under Section 12 on its income, it shall obtain
a certificate of non-deduction of tax from the
assessing officer. The terms and conditions to
be adhered to for seeking the certificate of non-
deduction of tax are set out in Rule 28AB.
Income Tax Filing: The NGO shall file its
Income Tax return in Form 3A and shall be in
accordance with Section 139(4). It shall be filed
on or before the due dates mentioned under
Section 139(1).
Documents to accompany return of income;
l Balance Sheet
l Income and Expenditure Account
l Audit report in Form 10B
l Copy of the registration certificate
l Form 10 in where the NGO seeks to accumulate
the income (under Section 11(2))
Before closing let us recall what Mahatma
Gandhi said: “It is my settled conviction that
no deserving institution ever dies for want of
support. Institutions that have died have done
so either because there was nothing in them
to commend them to the public or because
those in control lost faith or which perhaps
the same thing, lost stamina” [Young India
15-10-1925]. Mahatma’s statement is relevant
even today. An NGO to be successful must be
sincere in its endeavour, scrupulous in legal
compliance, transparent in dealings and true
in reporting. r
June 2006 The Chartered Accountant 1743
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