1.0 Introduction 3
2.0 Purpose and Nature of the Financial Reporting Requirements in the Financial Reporting Rules 3
3.0 scope of financial statements for not for profit organizations 4
4.0 Financial position 4
5.0 statement of activities 6
6.0 Financial reporting requirement 6
7.0 Nature of financial statement for not for profit organizations 8
8.0 accounting for Human right internet and AIDS coalition of Nova Scotia 9
8.0.1 Snapshot of Human right internet (HRI) 9
8.0.2 A snapshot of AIDS coalition of Nova Scotia 9
9.0 Does the organizations adhere to financial accounting standards? 10
9.0.1 Human right internet 10
9.0.2 AIDS coalition of Nova Scotia 10
10. Sources of income and expenditure of both companies 11
CanadianInstitute of Chartered Accountants (CICA) is responsible for thedetermining of accounting standard guiding presentation of financialreports of nonprofit making organizations. Under the Canadianbusiness Corporation Act, the CICA is responsible for developingaccounting and auditing standard to improve organization decisionmaking. The act defines Not for Profit entities to comprise entitiesthat operate purely for educational, social, health and charitablepurposes and have a non-transferable ownership (Hsu,Jung & Pourjalali, 2015).Such entities exist outside the public sector accounting and arequired to observe accounting as per the standards set in 6 sectionsof CICA handbook. This essay critically analysis accounting standardsthat guide presentation of financial information for Human rightinternet and AIDs coalition of Nova Scotia.
2.0Purpose and Nature of the Financial Reporting Requirements in theFinancial Reporting Rules
Theprimary purpose of preparing accounting statement for nonprofitmaking firms is to offer important information to stakeholders andother interested parties of members, management donor’s creditorsand other parties interested in the organization. The externalstakeholders are interested in assessing whether the organization isoffering the services the fund and it ability to continues in thefuture. Moreover, it shows how managers and workers discharge theirmandate and other aspect of performance. The purpose of financialstatement is to offer information about the amount and nature ofasset and liability owned by the organization. They also show thenature of transaction and their impact on the circumstance of theasset in the organization. Cheng, Huang and Li (2015) argued thatcash flow statement shows the amount of cash inflow and outflowduring a specified period of time. not for profit organizations alsoprepare accounting statement to shows how the organization has spendmoney either borrowed or donated and any other factor that may affectliquidity. Typically, not for profit organizations prepare financialstatement that provides different information in each statement whichcomplements other financial statements.
3.0scope of financial statements
Accordingto the Canadian Institute of Chartered Accountants (CICA) not forprofit organization are require to prepare accounting statements.This statement must include statement of financial position,statement of activities on the reporting date which shall includenote to financial statements.However, the extent of disclose requirement is not stringent comparedto those of business entities. the information require to bedisclosed in the notes to financial position do not exempt not forprofit entities but require them to apply specialized accounting andreporting principle (Fotache& Păvăloaia, 2015).Take for instance statement of financial statement for not for profitorganization it discloses assets, net asset, expenses gains, lossesand liability. However, these statements do not specify how tomeasure and recognize that element. This information must beprepared in a reasonable manner in such as way that these items ofasset and liability in financial position or expenses in statement ofactivities should be similar to those of business enterprise althoughit does not specifically specify the extent of disclosure requirementfor these statements.
4.0statement of financial position
Themain reason for preparing statement of financial position is toprovide important information about the assets, net asset andliability at each reporting date. This information is used by donorto make decision. The disclosure in the statement of financialposition is used by creditors and grant to assess the ability of theorganization to continue liquidity and financial flexibility. Italso disclose the ability of a firm to meet it obligation as and whenthe fall due. According to the Canadian Institute of CharteredAccountants the statement of financial position must shows theoverall organization activities in terms of assets and liability andis expected to report the total assets, liability and net assets.Bitter (2014) eluded that when reporting assets in the statement ofbalance sheet, they must be classified in order to be relevant.
Astatement of financial position must include note to financialstatement which explains extra ordinary item in the statements. Itprovides important information about financial position, liquidity,flexibility and any kind of relationship that exists between assetsand liability (Albu, Albu & Needles 2015). In the statement offinancial position, this information is provided by finding the totalassets and liability based in similar homogeneous group. Forinstance, charitable organization report items of assets andliability based on similar characteristics such as cash equivalent,inventories and marketable securities. The firm’s liquidityinformation is provided by sequencing assets based on the ability ofto convert asset into cash easily. Assets are classified as eithercurrent of noncurrent working capital- current asset and otherliabilities. Not for profit organizations are required to disclosenote to financial statement which shows relevant information aboutliquidity that also include restriction on the use of certain assets.
Netassets can either be classified as donor restricted or unrestricted.Not for profit firms shall disclose the amount of net assets indifferent categories as either unrestricted, permanent restricted andtemporally restricted assets which is based on the presence orabsence control. Nigrini (2015) noted that this information should bereport in the statement of financial position on separate lines todifferentiate between restricted assets such as land and buildingswhich are offered with specified restrictions. Moreover, it shouldshow asset donated with restriction on the nature of investment theycan be put into to provide a permanent source of income. However,gift and bequest are reported in endowment funds. Similarly, separateline can be used in the statement of financial position to reporttemporarily restricted or as notes to financial position todistinguish between temporal regulated and restricted. In the notesto financial position, it shall be disclosed resources that have beentemporarily restricted by donors on a future date. for instance,donors can temporarily restrict a charitable organization on gift inform of cash or asset to be invested for a specified period of timeto generate income and the income to be used to specified purpose canbe said to be both time and purpose restricted. This gift is referredto as endowments and is reported on endowment fund.
Unrestrictednet asset mostly result from revenues for delivering goods andreceiving unrestricted grant and donation. It can also result fromdividends, raising contribution and interest income from investing nassets. This income is not restricted but may be limited to the broadlimit as a result of environment in which an organization may beoperating. It may also be restricted by the purpose of incorporationwhich might result from contractual agreement with creditors andsupplier especially when the firm has a loan covenant. Thisinformation must be provided in the note to financial statements.
5.0statement of activities
Themain objective of the statement of activities is to offer crucialaccounting information on the impact of transaction and circumstancethat may cause changes in the nature and amount of assets. It alsoestablishes the relationship of net assets and the circumstance andother event on the assets. The statement of activities reports on thevaries program and services offered by the organization (Salterio,2014). This information is also used to assess the organizationservice effort and the liquidity of the firm to offer those servicesin the unforeseeable. Finally, it is used to assess how managers howdischarged and used money given to them and other aspect of executionof duties. Moreover, a statement of activities shall be used tomonitor changes in net asset temporarily restricted, permanentrestricted and unrestricted net assets. It shall also disclose anyincrease or decrease in gains losses of net assets. This alsoincludes disclosers on expiration events that increase net assets dueto donor imposed restrictions.
6.0Financial reporting requirement
Internationalaccounting standards guides firm what should be presented infinancial statements. Nonprofit organization should disclosurematerial information in their financial statement. These reports arecritical to nonprofit organization since they disclose financialhealth of the organization which is required by the board fordecision making. Moreover, these reports will be required by funderswhen applying for grant.
Accountingstandard for nonprofit organization are not static or stand alone.They refer to other standard especially that in part II of thehandbook that address presentation and disclosure requirements (Dye,Glover & Sunder, 2015). Although they are not required todisclosure most of the information presented in public enterprises,they must follow a specified standard as required by the CanadianInstitute of Chartered Accountants. Some nonprofit organizationsusually have few resources which make it difficult to keep up to datewith standards. Thus, as changes in accounting disclosure evolve,AcSB opt to coordinate such changes to ensure compliance. Moreover,they should consider future changes in international accountingstandards that may require more financial disclosures for nonprofitorganizations.
Thefinancial statement prepared by not for profit organizations isusually to ensure if the money has been utilized as per norm and ifthe current money has been availed to stakeholders. However, it mightbe cumbersome to keep track of money for nonprofit organizationswhich also applies to grant and aid. For instance, grants are appliedfor specific purpose which requires specialist preparing financialstatement to be utmost accurate. Moreover, the activities of not forprofit organizations are monitored by the government to ensure it isutilized for the best interest of the country (Albu,Albu & Needles, 2015).
Thereare many reasons why the government of Canada requires not for profitentities to observe accounting practices. For instance, to comparethe operation of the firm with the actual budget approved bymanagement. This enables managers to identify variance at their rootcause which help them in major decision making. It also helps theorganization to assess financial performance of the firm in thecurrent financial year. This will also help the firm to assesscompliance with set rules and accounting laws that guide not forprofit entities. nonprofitable organizations prepare financialstatement in order to evaluate firm’s efficiency in spending donorfunds. Theobjective of not for profit entities is to provide services to thegeneral public without a profit motive. They might be in form ofsport clubs, charitable organization and professional bodies. Some ofthis organization provides services to with the primary objective ofproviding services to members. They gain their income through membersubscription grants and donation.
7.0Nature of financial statement for not for profit organizations
Thispart explore the statements and standards that guide accountingfor not for profit organizations and how they should preparefinancial statement in their external financial statements. Thesestatements include statement of activities, cash flow and financialperformance. Fogarty and Black (2015) posited that inaccounting for not for profit organizations, voluntary welfare andhealth organizations prepare statement of function expense whichshows the amount and extend of expenses incurred by theseorganizations. The statement is vital to the organization since itshows how the organization has spent their expenses. Not for profitorganization prepares financial statement that differs in their formand content (Eng,Sun & Vichitsarawong, 2014).Take for example a trading organization of a charitable organizationwho prepares statement of activities and financialposition which shows the activities of the organization includingincome and expenses to financial position of the firm. However,museums, universities and religious organization are required toprepare financial statements that shows their net assets and alsochanges in financial position during the financial year. In contrary,many of these organizations do not provide this financial statementsand result of the organizationthat shows both income and expense and financial position. Althoughmost of these organizations in Canada do not prepare properaccounting statement, they are required by law and internationalaccounting standard to keep proper books of accounts (Ryack,Mastilak, Hodgdon & Allen, 2015). Take for instance, for Humanright internet and AIDs coalition of Nova Scotia they do not preparestatement of financial position and statement of activities asrequired by Canadian accounting body. This raisessome serious questions regarding compliance with both internationalaccounting standards and Canadian Institute of Chartered Accountants.Since the government require them to prepare this accountingstatement in order to ensure they receive funds and use it for theirintended purpose. It means the government cannot be able to monitornot for profit organizations especially those that receive funds frominternational donors. However, most organization does not adhere tothis standard. It is evident in Human Right Internet that does notprepare statement of cash flow for the year 2012-2013. Nowadays,many charitable firms have begun preparing accounting statement ofcash flow although some do not. Charitable and health organizationsand voluntary organizations prepares accounting report that showsexpenses by functional and classification although most of thisorganization do not follow this rules. thus, we can argues thatconsidering the inconsistency practices in not for profitorganizations, it is imperative for the Canadianinstitute of accountant to review compliance with laid down rules andregulations regarding accounting and reporting principles thatpractices in not for profit entities.
8.0accounting for Human right internet and AIDS coalition of Nova Scotia8.0.1Snapshot of Human right internet (HRI)
Humanright internet is an international NGO in consulting and capacitybuilding nonprofit organization formed in the United States in 1976.Human right internet is a clearinghouse of human right documentationwhich incorporate the internet as the core foundation for itoperation. The development of technology has enabled the company tohuman right education effort and also supports its data basecollection from other human right organizations. It is headquarteredin Ottawa Canada. Accounting standard require nonprofit makingorganizations to be concern about the appropriateness of utilizationand allocation of resources based on the organization (AIDS coalitionof Nova Scotia, 2013). Thus, accounting for nonprofit organizationsis more concern about contribution and utilization of the funds inHRI. The company gets most of their donor funds from stichtingCordaid(Netherlands), USAID and Rockefeller Brother Foundation.
8.0.2A snapshot of AIDS coalitionof Nova Scotia
NovaScotia is a Canadian not for profit organization that deals withpeople with HIV and AIDS. The main aim of Nova Scotia is to promoteknowledge exchange and health promotion forum to people living withHIV in a program known as Ceilidh. In fact, the organization offersthose working in PHAs three days each month to attend to peopleliving with HIV. The organization continues to offer skills to itprofessional and the board in relation to both legal and insurancepolicies. The decisions of the organization are made by the executiveduring the general meeting. They determine the future of theorganization by making strategic decision regarding provision ofservices. The organization annual report 2012-2013 does not adhere tointernational accounting standard.
9.0Does the organizations adhere to financial accounting standards?9.0.1Human right internet
Humanright internet does not adhere to accounting standards that regulatenot for profit making organization. Audited financial statementensures an organization whether charitable or business relatedadheres to accounting standard presentation. These statements arerequired by the board, volunteers and donors to examineaccountability and transparency (Albu,& Albu, 2015).Human right internet has not prepared financial statement and doesnot have its accounts audited. According to the Canadian revenueagency, not for profit organization with more than $250,000 inrevenue must file audited financial statements. In 2012, human rightinternet had revenues amounting to $261,503 but failure to preparefinancial statements and file audited statement. According tocorporation Act (Ontario) all not for profit organization includingcharitable organizations must present audited financial statementswhen revenues level goes above $100,000. However, it should be notedthat this rules varies depending on the locale of organization. Thus,human right internet does not follow accounting standards as requiredby Canadian Institute of Chartered Accountants.
9.0.2AIDS coalition of Nova Scotia
NovaScotia does not adhere to financial accounting standards. First,accounting standard require the firm to prepare proper books ofaccount. AIDS coalition of Nova Scotia has not prepared any of thisstatement. According to Canadian Institute of Chartered Accountants(CICA) all not for profit organizations are required to disclose intheir statement o financial positiontemporarily restricted, permanent and unrestricted net assets. Thismeans that creditor, donors and other stakeholders cannot be able toassess how money is used within the organization. Moreover, theability of donors to assess stewardship and management decisionmaking is impossible. There is high probability that managers willmiss appropriate such funds if they are not held accountable.According to the Canadian revenue agency, not for profit organizationwith more than $250,000 in revenue must file audited financialstatements (AIDScoalition of Nova Scotia, 2013).In 2012, AIDScoalition of Nova Scotia hadrevenues beyond this limit but failure to prepare financialstatements and file audited statement. The firm is also expected toprepare audited financial statements. Audited financial statementensures an organization whether charitable or business relatedadheres to accounting standard presentation. These statements arerequired by the board, volunteers and donors to examineaccountability and transparency. AIDScoalition of Nova Scotia hasnot prepared financial statement and does not have its accountsaudited.
10.Sources of income and expenditure of both companies
Duringthe year 2011-2012, human right internet received money for it agencyand confluent prevention programs from stichtingCordaid fromNetherlands which focus on enhancing equality between men and womenon peace process. It also receives money from USAID (throughTETRATECH ARD) which is responsible for providing handbooks on landand conflict management. Rockefeller Brother Foundation is providingmoney to Human Right Internet to build a strong conflict managementprogram in the Middle East. The firm also earns income from offeringopportunities for internship on multinational companies. The companyearns most of it income from storage of data and document for othernot for profit organization. It has been the main source of incomefor the last 15 years. The firm spends most of it income of conflictprevention program and internship programs in Canada.
AIDScoalition of Nova Scotia
NovaScotia obtains most of their finances from donor fund and grant. Theyinclude NSDepartment of Health & Wellnessand PublicHealth Agency of Canada.The organization also generates income through provision of trainingand counseling services. These services are offered through apositive living program which encourages people to live a health lifeand stay safe. The organization spends most of their income on buyingmedics for patient with HIV. Moreover, the company also spendsconsiderable part of their income on training new staffs and workersto handle HIV patient and counseling.
Theprimary purpose of preparing accounting statement for nonprofitorganizations is to offer important information to stakeholders andother interested parties of members, management donor’s creditorsand other parties interested in the organization. It also establishesthe relationship of net assets and the circumstance and other eventon the assets.These statements are required by the board, volunteers and donors toexamine accountability and transparency. Human right internet has notprepared financial statement and does not have its accounts audited.However, both organizations do not keep proper books of accounts. TheCanadian Institute of Chartered Accountants (CICA) need tore-evaluate accounting standards by ensuring all not for profitorganization adheres to accounting rules and principles.
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