Managing Funds in Advance: An Accounting Perspective for New Zealand Charities

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Managing Funds in Advance: An Accounting Perspective for New Zealand Charities

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When working in the Not-for-Profit / Charity sector in a finance or governance role, it is critical that your organisation has robust systems and processes to record and manage grants, and other funds received in advance.

When reviewing the legislation, it is very clear that these funds are provided to the organisation for the purpose approved in the application. As such these are not the funds of the organisation, unless spent on the agreed items.

It is recommended that these funds are recognised in the income and expenditure statement as they are spent. This ensures that the board and/or governing body has an accurate view of the financial position of the organisation.

Understanding Funds in Advance

Funds in Advance refer to grants, donations, contracts or membership fees that are paid in advance to the organisation.

For example, when applying for grants, the organisation submits an application, usually with a budget asking for a particular project to be funded. If approved and granted, the organisation will receive the full amount of the application. The project may run for a period of months and may even run over the end of a financial year. As such these funds should not be recognised in the income and expenditure statement at the time of receipt as the organisation has incurred no costs at this time.

Accounting Practices for Funds in Advance

The following is our recommendation on how to account for these funds in your accounting software.

These funds should be recorded as liabilities in the balance sheet until the charity meets the conditions of the grant or delivers the services/project as per the grant application. We strongly recommend that upon receipt of the funds you attach the following to the transaction in your software:

• Application confirmation (to advise purpose of funds, timing of project, GST application and so forth)
• Use tracking categories for both Funder (to simplify your accountability process) and project/department to simplify budgeting for future projects/departments)

As the funds are spent, we recommend tracking these expense items in your accounting software using the tracking categories mentioned above. Then once a month you or your accountant can process a journal recognizing the income spent in that period.

If the expenditure is correctly tracked, it is simple running an income and expenditure report for the tracking category. You will then use this report to process the journal to reduce income in advance in the balance sheet and recognize this income in the income and expenditure statement.

By processing this monthly the board and/or governing body have an accurate record of the financial position of the organisation.

If your organisation holds umbrella funds on behalf of other organisations, please see our article on Umbrella Funds.

Best Practices for Managing Funds in Advance

We recommend that the organisation have a robust documented process for the management of funds in advance.

As part of this process, we cannot overlook the importance of preparing annual budgets and cashflow forecasts for the organisation. The annual budgets are critical for the future planning of the financial stability of the organisation.

We recommend that the budgets include an annual budget for the entire organisation, along with supporting budgets for each department / project. These supporting budgets MUST form part of the entire organisation budget. So often we see supporting budgets that are not included in the full budget and therefore the governing body who are signing off the final budget are not actually being provided accurate information.

By ensuring that your budgets are realistic, it provides certainty and peace of mind that the funding you have coming in will cover the operational costs of the organisation. We have found that realistic comprehensive budgets provide organisations with a strong negotiating platform to apply for future funding.

Strong Internal controls and robust systems and processes ensure that both the application process and the accountability process are easier and simpler. And as we all know, the better managed these processes, the more likely we are to receive future grants.

Internal controls should be in place to safeguard the funds for the purposes they were provided and protect the governing body from unnecessary risks.

Challenges and Solutions

The common challenges we see when working with charities is that the accounting practices for funds in advance are not sufficient to ensure that the financial statements reflect the accurate position of the organisation.

It can differ from some organisations treating all grants and other funds as income when received, hence showing surpluses in some years and large losses in other years. Alternatively, some organisations forget to recognise the income and therefore their balance sheet shows that they owe more money than they have on hand.

The simplest way to overcome these challenges, is to implement a robust system and process for the treatment and recognition of all funds in advance. And to prepare and monitor regular financial management reports.

Conclusion

We recommend that all governing bodies within the sector ensure that you have robust internal controls and systems and processes to manage the application, treatment and accountability of all sources of income.

It is important that the accounting software that your organisation uses has the functionality to track all income and expenditure using tracking categories (not just general ledger accounts) to simplify the application and accountability processes.

We challenge the reader to take action to review their current processes and improve these as necessary to ensure the financial health of the organisation.

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If you would like help, please contact us

Phone: 09 869 2200

Email: carolb@tael.co.nz

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