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Accounting system and financial reporting of ng os

  1. 1. European Journal of Developing Country Studies, Vol.13 2012 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.orgAccounting System and Financial Reporting of NGOs: A Case Study on BRAC Micro finance Program Mohammad Shofiqul Islam Department of Accounting and Information Systems Jagannath University, Dhaka A.N.M. Asaduzzamam Fakir Department of Accounting and Information Systems Jagannath University, Dhaka Md. Abdul Mannan Assistant Professor Department of Accounting and Information Systems Jagannath University, Dhaka Abstract NGOs are very old development institution that is contributing towards the development of third world economy. Now-a-days the function of NGOs is not limited to within the same geographical limit of any country. Due to globalization some NGOs operate in the other countries. But their financial reporting inevitably is somewhat specialized in nature. In Bangladesh different NGOs using different method of accounting and reporting system due to lack of accounting and financial reporting standards, hence the comparison among the NGOs isn’t possible. As there is no IAS/IFRS it is very difficult to follow a common standard in generation and presentation of accounting and financial information. This paper tries to demonstrate financial reporting and accounting system of a BRAC’s micro finance program and provide a guideline for constituting suitable financial reporting and accounting systems for NGOs. The article elaborates on basis of preparation of financial statements, some contradictory issues of NGOs in relation to commercial enterprise, reporting procedure and then followed by accounting systems of area office, regional office and head office of that project. The final part of the article discuses issues relating to financial report and financial transparency of the project. Keywords: BRAC, NGO, Micro finance, Accounting System, Financial Statements, Financial Report.1.1 INTRODUCTION NGOs have become major players in the field of international and national development. Since the mid-1970s, the NGO sector in both developed and developing countries has experienced exponential growth. From 1990 to 2000 total development aid disbursed by international NGOs increased ten-fold. In 1992 international NGOs channeled over $7.6 billion of aid to developing countries. (Retrieved from: on 25th February, 2006. Bangladesh has largely failed to assist the poor or reduce poverty because of limited resources and planning, while NGOs have grown dramatically, but it ostensibly fails to fill this gap. There are more and bigger NGOs here than in any other country of equivalent size. The Association of Development Agencies in Bangladesh (ADAB) had a total membership of 886 NGOs/PVDOs (Private Voluntary 23
  2. 2. European Journal of Developing Country Studies, Vol.13 2012 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.orgDevelopment Organizations) in December 1997, of which 231 were central and 655 chapter (local) members(ADAB, 1998). The ADAB Directory lists 1007 NGOs, including 376 nonmembers NGOs. The NGO AffairsBureau of the Government of Bangladesh (GOB), which has to approve all foreign grants to NGOs working inBangladesh, released grants worth about $250 million US dollars in FY 1996-97 to 1,132 NGOs, of which 997are local and 135 are foreign (NGO Affairs Bureau, 1998). NGOs have mainly functioned to service the needs ofthe landless, usually assisted by foreign donor funding as a counterpoint to the states efforts (Lewis, 1993).Besides all these advancement the field of NGO, Financial Reporting process and application of accounting isdisgraceful. NGOs in Bangladesh have increasingly become subject to question and criticism from thegovernment, political parties, intellectuals and the public in genus for misuse of funds, gender discrimination,and nepotism. Absence of proper guidelines in preparing financial statements and reports makes it morecomplex. The government of Bangladesh doesn’t have any unique rules for preparing the financial reports.BRAC is one of the largest NGOs in Bangladesh. It has more than hundreds projects. BRAC maintains books ofaccounts and other record on a program or project basis. And its reporting process is transparent and one of themost structured system in Bangladesh. This report we will discuss about the financial reporting and Accountingsystem of BRAC Micro finance program. BRAC Micro finance program begun experimentally in 1974, it is anindependent program organized and managed by BRAC with the approval of NGO Bureau of the Governmentof Bangladesh. The analysis and discussion of reporting systems of BRAC Micro finance program will giveguidance and support to other NGOs about the generation of accounting systems and reporting procedure, and tomaintain a transparent system of utilizing grants.1.2 STATEMENT OF THE PROBLEMNGO is a very old development institution that is contributing towards the development of any economy. Now-a-days the function of NGOs is not limited to within the same geographical limit of any country. Due toglobalization some NGOs operate in the other countries. BRAC is the oldest NGO in Bangladesh. Theirfinancial reporting inevitably is somewhat specialized in nature.Due to specialized nature of the accounting practice and reporting system of NGOs are not clear to all. A littleresearch is carried out to resolve the accounting and reporting system of NGOs. Numerous complex andexceptional laws are related to the NGOs’ activities. There is no IAS/IFRS to maintain the books of accounts ofNGOs. The accounting system, procedure and policy of NGOs and microfinance are different in relation to somecommercial systems.1.3 LITERATURE REVIEWInternational Accounting Standards (IAS) doesn’t have specific guidelines for NGOs. Regarding applicability ofAccounting Standards to NGOs, the Accounting Standards Board (ASB) has given an opinion in September1995. “The Institute will issue Accounting Standards for use in the presentation of the general purpose financialstatements issued to the public by such commercial, industrial or business enterprises as may be specified by theInstitute from time to time and subject to the attest function of its members”. The reference to commercial,industrial or business enterprises in the aforesaid paragraph is in the context of the nature of activities carried onby an enterprise rather than with reference to its objects. It is quite possible that an enterprise has charitableobjects but it carries on, either wholly or in part, activities of a commercial industrial or business nature infurtherance of its objects. The Board believes that Accounting Standards apply in respect of commercial,industrial or business activities of any enterprise, irrespective of whether it is profit oriented or is established forcharitable or religious purpose. As, will not, however, apply to those activities, which are not of a commercial,industrial or business nature. (E.g. an activity of collecting donations and giving them to flood affected people).It is also clarified that exclusion of an entity from the applicability of Accounting Standards would bepermissible only if no part of the activity of such entity was commercial, industrial or business in nature. For theremoval of doubts, it is clarified that even if a very small proportion of the activities of an entity was consideredto be commercial, industrial or business in nature, then it could not claim exemption from the application ofAccounting Standard. The Accounting standards would apply to all its activities including those which were notcommercial, industrial or business in nature.”It is clear from the above that the Accounting Standards are applicable to NGOs who’s some, or more, of theactivities are commercial or business in nature.However, it is very difficult to determine what the exact meaning of commercial is or business activities withreference to NGOs. NGOs are not meant for earning profit out of their activities. Even if profit is derived fromsome of the activities the profit is ploughed back or returned to the beneficiaries. For example, if one of theobjects of an NGO is to grant loans to micro credit institutions or self-help groups and some interest income isderived from the loans granted, will the activity be constituted as commercial in nature? Similarly, if an NGO 24
  3. 3. European Journal of Developing Country Studies, Vol.13 2012 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.orgprovides its training or conference hall to some other organizations or institutions and charges rent from suchorganizations, which is utilized for other objects of the NGO, will it be constituted as commercial activity?Should Accounting Standards be applicable? To such NGOs who derive income from such small incomegenerating activities, which are not purely commercial in nature?There are some NGO related laws and regulations in Bangladesh. While registration is not mandatory for anyNGOs, 2 types of legal frame work govern NGOs of Bangladesh.a. Laws for Incorporation Acts: There are four such Acts in Bangladesh: the Societies Registration Act, 1861;the Trust ACT, 1882; Co-operative Societies Act, 1952 and the Companies Act of 1994.b. Three laws and ordinances for regulation the relationship of such associations with the Government: TheVoluntary Social Welfare Agencies (Regulation and Control) Ordinance, 1961; the Foreign Donation (VoluntaryActivities) Regulation Ordinance, 1982. This Forms the basis for registration with the NGO Affairs Bureau(NGOAB); the Foreign Contribution (Regulation Ordinance 1982)Government organization, The NGO affairs Bureau, has been carrying out NGOs registration and processing offunds. NGO Bureau examines and evaluates reports submitted by NGOs and the checking of their income andexpenditure accounts. The inspection and audit of accounts kept by NGOs are under section 4 and 5 of theForeign Donation (Voluntary Activities) Regulation Ordinance 1978. As per Bangladesh Chartered AccountantsOrder 1973, the NGO Affairs Bureau will prepare a list of Bangladesh Chartered Accountants for annual auditof NGO accountants. The NGOs prepare their annual program report within three months of ending the financialyear and send copies to NGOAB’s Economic Relation Divisions, Concern Ministries, Concerned DeputyCommissioner and Bangladesh Bank, the following information should be incorporated with it: (a) projectshould be shown separately in the annual report. The main theme of project based report should expenses againstactual target achieved in detail on the proposal, expenses against the Thana & Districts in the project should alsobe shown clearly (b) full list of permanent or liquid assets with vehicles of the organization (c) Sources oforganizations own income & expenditure (d) Details of organization’s foreign travels by its officers &employees (f) Details of organization’s revolving loan fund investment described by sector (f) Details of fundfor projects implemented with fund generated through agreement with Government’s different ministries anddirectors and other sources (g) Details of persons employed by the organization (with monthly salaries of Taka5,000 and above or one time Taka 10,000 or above, their names, designation, qualifications, age, total salaries,allowance and length of services with the organization) should be attached.In preservation of foreign aid accounts NGO Bureau have guidelines for NGOs according to The ForeignDonation (Voluntary Activities) Regulation Ordinance, 1982: (a) all foreign funds or foreign Currency remittedbut received in Bangladeshi Taka (Currency) should be received through only one bank account by each NGO.(b) Bangladesh Bank on receipt of six monthly foreign currency accounts received in July and January each yearfrom NGOs will send it to NGO Affairs Bureau and Economic Relations Division. (c) All expense vouchers will be preserved for 5 years at head office of the NGO. At the field level, they willpreserve copy of expense vouchers at their office for 5 years. (d) NGO will preserve books of accounts: (a) Inthe case of foreign aid material Form, FD-5 (b) In the case of foreign funds through double entry system CashBook.All documents maintained in (d) should be preserved on an annual basis-one from 1st July to 31st December andthe other 1st January to 30th June. The World Bank put emphasis on the reporting practice of NGOs but theexisting laws and regulations has minimal emphasis on the reporting of the NGOs. It would be effective if therecould be a simple and single form of reporting for all NGOs and for all of their activities. But the activities ofthe NGOs’ are too numerous and diverse and the legal interests of the government and the public are too diverseto make this possible. BRAC has consistently maintained high levels of transparency in all its operations; itsextraordinary effort towards financial transparency was recognized in 2005 when it won the CGAP(Consultative Group to Group to Group to Assist the Poor). BRAC follows and prepare the financial reports onthe basis of GAAP and International Accounting Standards (IAS).1.4 SCOPE OF THE STUDYThe research paper has been prepared based on the BRAC microfinance program. The scope of the researchwork is limited to the micro finance program of BRAC. Though other programs of BRAC maintain the sameaccounting policies and systems, but this paper has worked out on the basis of BRAC Microfinance Program. 25
  4. 4. European Journal of Developing Country Studies, Vol.13 2012 ISSN(paper)2668-3385 ISSN(online)2668-3687 1.5 LIMITATION OF THE STUDY: The reporter has faced a few limitations to prepare the report. These are: As BRAC is a non government organization, it does not agree to provide all real reporting system. Large-scale research was not possible due to time constraints. Relevant data and document collection were difficult due to the organization’s confidentiality variety of structure. Non availability of data in a systematic way. Information of this organization is not publicly available. The researcher is new to conduct such type of research. As the organization has a large existence around and over the country and of course a very old one, the researcher could not explain the whole, due to operating complexities and time constraints. The time that was given to prepare the report has not been adequate. 2.1. OBJECTIVE OF THE STUDY The main objective of the study is to provide solutions of some problems of NGO accounting, especially on Microfinance program’s accounting in Bangladesh perspective. The specific objectives of the study cover the following areas:1. To identify and analyze the problems of NGO accounting.2. To show the recording and reporting system of microfinance program of NGO accounting.3. To highlight the quality of NGO accounting information.4. To find out differentiating issues of NGO accounting in relation to general accounting.5. To resolve of the identified problems in according to NGO accounting. 2.2. METHODOLOGY As research approach case study is taken to make an empirical inquiry that investigates a phenomenon within its real life context. Here the accounting system of BRAC Micro finance program is described in a framework within an organizational environment. The events are described in some detail with the main and subsidiary points highlighted. The accounting system is identical in every outlet and for every project. The information used in this case study is both primary (collected from field) and secondary. 2.2.1. Primary data: The information was taken from the Head office (BRAC Center) and from one Regional office (Dhaka Urban Sutrapur) and one Area office (Dhaka Urban Wari) by interviewing the staff and management. 2.2.2. Secondary data: The secondary sources of information used in this case study are• Annual report,• Progress report 26
  5. 5. European Journal of Developing Country Studies, Vol.13 2012 ISSN(paper)2668-3385 ISSN(online)2668-3687• Code of conduct• Statements• Online resources• Relevant research papers• And written principles of BRAC Microfinance Program.3.1 BRAC OVERVIEW BRAC is the world’s largest development organization and is doing tremendous work impacting the lives of millions. BRAC is making a significant contribution to Bangladesh, making huge leaps forward in meeting the Millennium Development Goals.” - Subinay Nandy, Country Director, China, United Nations Development Program Building Resources Across Communities (BRAC) is the new name of former Bangladesh Rural Advancement Committee (BRAC). It one of the largest a development organization dedicated to alleviating poverty by empowering the poor to bring about change in their own lives. BRAC started its operation in Bangladesh in 1972, and over the course of evolution, they have established their selves as a pioneer in recognizing and tackling the many different realities of poverty. 3.1.1. BRAC’s Priorities• Focus on Women – BRAC work with poor women, who are the worst affected by poverty. But if empowered with the right tools, they can play a crucial role in bringing about changes within their families and their communities. Over 98% of BRAC membership is female; and more than 95% of our volunteer cadre - health volunteers, paralegal trainers, agriculture, livestock and poultry extension workers and school teachers - are women.• Organizing the Poor – Organizing the poor is at the heart of BRAC’s work. Their (VOs) each with 30-40 women act as platforms for poor women to come together, access services such as micro finance, exchange information and raise awareness on social, legal and other issues concerning their daily lives. As a group, these women who as individuals have little or no voice in decision-making within their homes or their communities are able to speak out and influence change.• Unleashing Human Potential – BRAC believe in unleashing human potential. BRAC acts as a catalyst presenting a multitude of opportunities - both economic and social - that allows poor families to transform their own lives and futures. Everything they do is in response to the needs of disadvantaged people who are marginalized, and excluded from mainstream development. BRAC is for such people - who are poor for a lack of opportunities, not potential.• Comprehensive Approach – BRAC believe that there are many underlying causes of poverty, and these causes are interred linked. In order for the poor to come out of poverty, they must have the tools to fight it across all fronts. BRAC has, therefore, developed support services in areas of human rights, legal aid, education, health care, social and economic 27
  6. 6. European Journal of Developing Country Studies, Vol.13 2012 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.orgempowerment, finance and enterprise development, agriculture, environmental sustainability and disasterpreparedness.3.2. BRAC MICROFINANCE PROGRAMOne of the oldest initiatives of its kind in Bangladesh and BRAC’s largest program, BRAC microfinanceoperations began in 1974 and covers all 64 districts. BRAC provide access to financial services to the poor, whoare unable to obtain credit from mainstream banks due to lack of necessary assets and referrals. Their borrowers,most of whom are women, use these loans to engage in various income generating activities to improve theirsocio-economic status.Initially limited to encouraging self-employment, BRAC Microfinance Program has progressively movedtowards supporting small enterprise development. This broadening of focus stems from a growing recognition ofthe multiplier effects of enterprises through employment generation, as well as backward and forward linkageswith many economic activities.3.2.1. BRAC’s ApproachBRAC’s approach to microfinance involves providing collateral free credit and savings services at the doorstepsof their target population – the landless poor, marginal farmers and vulnerable small entrepreneurs. BRACrecognize the heterogeneity among the poor and focus on careful targeting and development of customizedfinancial products and services that best meet their varying needs. A distinctive aspect of BRAC microfinanceprogram is the credit-plus approach – in addition to providing loans and training BRAC have developed anintegrated set of services that work to strengthen the supply chains of the enterprises that their members investin, giving them access to quality inputs and support in marketing their products. These services are provided bytheir social enterprises. BRAC microfinance members have access to all of their other developmentinterventions.3.2.2. Village OrganizationsOrganizing the poor is at the heart of BRAC work. BRAC Village Organizations (VOs) - each with 30-40women - act as platforms for poor women to come together, access services such as microfinance, exchangeinformation and raise awareness on social, legal and other issues concerning their daily lives. 4. ANALYSIS OF ACCOUNTING SYSTEM4.1. FINANCIAL ACCOUNTING SYSTEM OF BRAC MICRO FINANCE PROGRAM:BRAC Micro finance program has some principles; these principles guide the Project behavior and help in thedevelopment of policies and procedures for financial activities. The principles are: stewardship or safekeeping ofthe project resources, accountability to explain how funds are being used, transparency to ensure financialinformation is recorded accurately and presented clearly; consistency is maintained over the years so thatcomparisons can be made; non-deficit financing, it represents sufficient funding source, standard documentationguides the system of maintaining financial records and documentation according to internationally acceptedaccounting standards and principles. The procedures and the implications of the accounting standards followedby BRAC Micro finance program for reporting; are adopted depending on the expertise and resources available;the volume and type of transactions; reporting requirements of managers; and obligations to donors.4.1.1. Basis of Preparation of Financial Statements of BRAC Micro finance programAccording to the IAS-1, non-profit, government and other public sector enterprises seeking to apply thisstandard may need to amend the description used for certain line items in the financial statements and for thefinancial statements themselves. BRAC prepare the Micro finance program’s financial statements under thehistorical cost convention on a going concern basis. BRAC Micro finance program generally follows the accrualbasis of accounting or a modified form thereof for key income and expenditure items. The financial statementshave been prepared in accordance with the comprehensive guidelines and policies. The financial statements areexpressed In Bangladeshi Taka. 28
  7. 7. European Journal of Developing Country Studies, Vol.13 2012 ISSN(paper)2668-3385 ISSN(online)2668-3687 BRAC maintains its books of accounts or records on a program basis. The Head Office maintains all treasury, investment and management functions. All cash balances, including those held for programs are held by the Head Office and transferred to programs as required. Balances between projects are eliminated upon combination for the purpose of presentation of the financial statements. These financial statements include the financial statements of BRAC and, on an accounted basis, those of the related undertakings in which BRAC has equity interests through which it exercises control or significance influence. BRAC, being a society under the Societies Registration Act, 1860, is not subject to any requirement to prepare consolidated financial statements. In contrast to the ownership of equity interest in related undertakings, BRAC also extends its gratuitous grants or provides donor liaison assistance to certain organizations that, in some instance may bear names with resemblance to BRAC, viz BRAC University, BRAC Afghanistan, BRAC Sri Lanka, BRAC Tanzania, BRAC Uganda, BRAC Southern Sudan, BRAC Pakistan, BRAC Liberia and BRAC Sierra Leone. However, no equity is held in these entities, and BRAC’s financial statements therefore do not include the financial information of these entities. BRAC’s accounting records and financial statement are maintained and presenting in accordance with the principles of fund accounting. This is the procedure by which resources are classified for accounting and internal reporting into fund established according to their nature and purposes based on the existence or absence of Donor imposed restrictions. In the combined financial statements, funds have been classified within either of two net asset categories – temporarily restricted and unrestricted. Accordingly, the net assets BRAC and changes therein are classified and reported as follows: • Temporarily restricted net assets: net assets subject to Donor- imposed restrictions that permit BRAC to use or expend the asset as specified. • Unrestricted net asset: net asset that are not subject to any Donor – imposed restrictions or which arise from internally funded activities.(Annual Report 2010) 4.1.2. Donors’ Grants BRAC preserve and accumulate foreign grants according to Foreign Donations (Voluntary Activities) Regulation Ordinance,1978. NGOs receive grants from government as well as other national and international agencies. Para 13 of the Accounting Standards (AS) 12 - Accounting for Government Grants provides that Government Grants should not be recognized until there is reasonable assurance that (i) the enterprise will comply with the conditions attached to them, and (ii) the grants will be received. Even if Accounting Standards are not applicable to an NGO, the principles of accounting laid down in AS-12 should be followed. Grants may be of the nature of project based grants, or comprehensive grants not related to a particular project but for the general purposes of the ‘grantee’ organization. At present three practices are widely followed in recognition of grants: Grants recognized as income: Most of the NGOs recognize a grant as income in the year in which it is received. The amount expensed out of this amount is shown as expenditure in the Income and Expenditure Account. While the total amount of grant received is shown as income in the Income and Expenditure account, in a strict sense grants are not income as they are given not to accumulate but to spend for a particular project or the core activities of the organization. Sometimes these grants have to be returned to the funding agency and the overspent balance can be charged from these agencies, if the agreement between the two provides so. The main advantage of recognizing a grant as income is that the whole income and the expenditure incurred out of this income is shown in Income and Expenditure Account which can provide meaningful information to the user of the financial statement about the activities and spending pattern of the organization. However, recognizing a grant as income may result in showing higher surplus for the year, which is actually unspent grant. It may further lead to an impression that the surplus is available to the NGO for spending wherever it wants but that is not the case as the surplus is the unspent grant which is usually project based or earmarked. Further, adoption of this method understates liabilities as the unspent balance of grant become surplus and showed as reserve. The other disadvantage of this method is that there may be surplus in one year and deficit in another year due to effect of unspent and overspent 29
  8. 8. European Journal of Developing Country Studies, Vol.13 2012 ISSN(paper)2668-3385 ISSN(online)2668-3687 grant that makes figures incomparable. If this method is followed the Income and Expenditure account and Balance Sheet will appear as shown on the right. Grants recognized as liability: This is another method of recognition of grants. In correct sense, the grants are money of the donor agencies, which are given to an organization to be spent in a particular manner. This is not the income of the organization, which is freely available for any use. That is why many NGOs recognize grants as liabilities in their balance sheet. The expenditure is deducted directly from the balance of the grant and does not form part of the Income and Expenditure account. The unspent/overspent balance is shown as a liability or asset respectively in the Balance Sheet. If this method is followed, assets and liabilities are fairly shown in the balance sheet and the figures of Income and Expenditure accounts are comparable from year to year as grants and the expenditure incurred out of it does not form part of the Income and Expenditure account. The major disadvantage of using this method is that it results in showing that the NGO is inactive, as the development expenses do not form part of expenditure in Income and Expenditure account. The other disadvantage is that overspent balance of a grant is shown as an asset item that may not always be recoverable from the donor agencies. Grants recognized as income only to the extent of the expenditure incurred: Under this method, grants are recognized as income but only to the extent of expenditure incurred out of it. The unspent or overspent balance is shown as liability or assets in the Balance Sheet and in the Income and Expenditure account the unspent balance is deducted from the grant received. This matches the amount of the grant (income) and the expenditure exactly. However, the unspent balance can be deducted from the total grant in the Income and Expenditure account but if there ism overspent balance it cannot be added to the income. The concept of prudence should always be born in mind whenever accounting for such issues is done. Preferably, it is better not to recognize such income which has not been received or has not become due to be received or until there is reasonable certainty of such receipt. This method has advantages of both the earlier two methods. All assets, liabilities, income and expenditure are fairly stated if this method is followed. Besides, the inherent advantages of this method, it has also got some legal sanctity. The ICAI has also recommended this method in its Technical Guide on Accounting and Auditing in Not-for-Profit Organizations, issued in February 2003. It has been provided that “Since not-for-profit organizations receive a large volume of grants to meet certain revenue expenses, it is recommended that both the grant (to the extent utilized during the period) and the relevant expense should be disclosed separately in the income and expenditure account. Such a disclosure would be useful in appreciating the operations undertaken by the NGO during the period.” (Anand Pagaria, 2006). BRAC Micro finance program recognize grants as income when conditions on which they depend have been met. If the grants are specified for the funding of specific project, then income is recognized equal to expenditure incurred on the project or program. For donors’ grants which involve funding fixed assets, income is recognized as the amount equivalent to depreciation expenses charged on the fixed assets concerned. All donors’ grants received are initially recorded at fair value as liabilities in the “Grants Received in Advance Account”. For grants utilized to purchase fixed assets are transferred to deferred income accounts. Donors’ grants received in-kind through the provision of gift and/ or services, are also recorded in fair value. Income reorganization of such grants follows that of cash based donor and any expenditure yet to be funded but for which funding has been agreed at the end of any specific period is recognized as grant receivable.4.1.3. Revenue Recognition According to ISA-18, revenue should be measured at fair value of consideration received or receivable. NGOs don’t have revenues like the normal business organizations, they recognize grants as revenues. BRAC maintains a bank account for foreign donors (According to: Foreign Donations Regulation Ordinance, 1978 (30) under sub-rule (4) of rule 4) and revenue is recognized as the interest accrued and as per IAS-18, interest revenue is recognized on a time-proportion basis using the effective interest rate. All other incomes are recognized when the right to receive such income has been reasonably determined and all conditions precedent is satisfied.4.1.4. Matching of Expenses BRAC Micro finance program related expenses arise from goods and services being distributed to beneficiaries in accordance with the program related objectives and activities. Head office’s program related expenses are allocated to the program at approximately 5%-10% of their costs, most of the time these allocations are made with the consent of the donors. 30
  9. 9. European Journal of Developing Country Studies, Vol.13 2012 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org4.2. SOME DIFFERENTIATING ISSUES IN RELATION TO COMMERCIAL ACCOUNTING 4.2.1. Assets IAS-1 standards requires certain disclosures on the on the financial statements. Enterprises need to present current and non-current assets and liabilities on the face of the balance sheet as separate classifications considering nature of operation of the enterprises. When an enterprise chooses not to make this classification, assets and liabilities should be presented broadly in order of their liquidation value. As Micro finance is a project of BRAC, it presents the balance sheet according to its operational nature, and it doesn’t classify its assets and liabilities as current and non-current assets. According to IAS-16 and IAS-1, the NGO states its’ fixed assets at cost less accumulated depreciation, depreciation is provided for on a straight line basis over the estimates useful life. Like the profitable business organization, accounts receivables are stated at nominal value and stated net provision for irrecoverable amounts.4.2.2. Provision for loan losses BRAC Micro finance program generally provides for loan losses at 2% to 3% of loan disbursements made. Management regularly assesses the adequacy of the loan loss provision based on the age of the loan portfolio. At the year end, BRAC Micro finance program calculates the required provision for loan classification and provisioning methodology. However the loan loss provisioning rate is quite different from Bangladesh Bank Loan loss provision. Differentiate Rate of Loan loss provision. Loan classification Days in arrears BRAC Micro Bangladesh Bank Loan (BRAC) program loss provision. Standard Current ( no arrears) 3% 1% Watch list 1 -30 5% 1% Substandard 31 – 180 20% 20% Doubtful 181 – 350 75% 50% Bad & Loss Over 350 100% 100% (Source: BRAC Annual report 2010) 4.2.3 Provisions for Liabilities BRAC Micro finance program’s make provisions for liabilities are recognized when there is a present obligation as a result of a past event and it is probable that an overflow of resources embodying economic benefit will be required to settle the obligation and a reliable estimate of the amount can be made. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. If the effect of time value of money is material, the amount of a provision is the present value of the expenditure expected to be required to settle the obligations.4.2.4. Depreciation Depreciation is the proportionate amount which is charged to an asset in a current financial year. It is too difficult to work out proper rate of depreciation because: a) It is required for calculating taxable profit; b) It is compulsory for companies if they want to declare dividend; c) It is recommended by most accounting bodies so that reserve for the replacement of the asset created. The first two reasons are not applied to the NGOs. They get 100% tax write off in the year they purchase an asset. They do not declare dividend either. Moreover, most assets are created out of grants. When the assets become worn out, a fresh grant is sought for replacement. 31
  10. 10. European Journal of Developing Country Studies, Vol.13 2012 ISSN(paper)2668-3385 ISSN(online)2668-3687 For other NGOs, it is up to them whether they charge depreciation or not. If they wish to charge depreciation, they can use the rates given in the ‘Income Tax Ordinance 1984’. Usually, there are two methods that are followed by the NGOs; one is straight line method (SLM) and another is written down value method (WDV). BRAC Micro finance program shows property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. BRAC Micro finance program follows the straight line method (SLM) for calculating depreciation on their fixed assets, though it does not require showing by any law. However the rate of depreciation of BRAC Micro finance program is quite different from Income Tax Ordinance-1984 as follows: Differentiate Rate of Depreciation Item BRAC Micro finance Income Tax Ordinance program 1984 Buildings 4% - 10% General 12% Factory 24% Furniture and fixture 10% - 20% 10% Equipment 15% - 33.3% 20% Computer 20% - 33.3% 30% Vehicles 20% 24% Bicycles 20% 20% Machinery 20% 20% (Source: BRAC Annual report 2010 and Income Tax Ordinance,1984)4.2.5. Taxation Under the income Tax Ordinance 1984 (Amended), in addition to its commercial activities, BRAC is also subject to taxation on income derived from its other non commercial activities unless they are tax exempt. The tax charge is in respect of taxable income arising from Deferred taxation is provided for using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purpose. Deferred taxation benefits are only recognized when their recognition is probable. BRAC Micro finance program is a development program, not commercial program. As per Six Schedules, Part-A, Para- 1A of Income Tax Ordinance, 1984, income from Microfinance activities are tax exempted. That’s why BRAC Micro finance program as a individual program need not pay tax.4.2.6. Impairment of Assets IAS-36 addresses mainly accounting for impairment of goodwill, intangible assets and property plant and equipment. The standard includes requirements for identifying an impaired asset, its recoverable amount, recognizing or revising any resulting impairment loss and disclosing information on impairment losses or reversal of impairment loss. At each balance sheet date, BRAC Micro finance program carried out a review, on the carrying amount of assets to determine whether there is any indication of impairment. If any such indication exists, impairment is measures by comparing the carrying values of the assets with their recoverable amounts. BRAC Micro finance program recognized impairment assets loss is as an expense in the statement of income and expenditure immediately. Impairment losses recognized previous year is revised in the statement of income and expenditure in case of impairment gain. 4.2.7 Contingent liability Any possible obligation that arises from past events and the existence of one of which will be confirmed only by the occurrence or non-occurrence of one or more events not only wholly within the control of the organization; or Any present obligation that arises from past events but is not recognized because; • It is not probable that an outflow of recourses embodying benefits will be required to settle the obligation; or • The amount of obligation cannot be measured with sufficient reliability. 32
  11. 11. European Journal of Developing Country Studies, Vol.13 2012 ISSN(paper)2668-3385 ISSN(online)2668-3687 Contingent liabilities are not recognized but disclosed in the financial statements of BRAC Micro finance program unless the possibility of an outflow of resources embodying economic benefits is reliably estimated. Contingent assets are not recognized in the financial statements of BRAC Micro finance program as this may be results in the recognition of income which may never be realized.4.2.8 Level of details of Information Information to be provided in a transaction is subject to the nature of that transaction. BRAC Micro finance program maintains transparency providing all relevant information on a transaction. They show all items of one type transaction together as a single item. For example, salary is paid twelve times a year. However, they show 12 months entry for salary. It can show just one entry ‘Salary paid’ in the Receipts and Payments account. However, the study found that some items like ‘Rural Development’ is shown details, from where it is funded, where how much it is used, and other relevant information. It is try to give reasonable level of detail. 4.2.9 Surplus or Deficit The word ‘Profit’ is used for commercial organizations. ‘Surplus’ is used for nonprofit organization. Surplus is also sometimes called ‘excess of income over expenditure’. The basic difference between surplus and profit appears to be that organizations are not free to distribute surplus among the members of NGO. Even the profit earned in income generation activities cannot be given to the members of the NGO – it must be used for organization’s objectives. Usually surplus is carried forward to the Balance Sheet for the next year. In most cases, the surplus shows up due to wrong accounting policies. It represents the unspent grants which will be spent next year. BRAC Micro finance project have rarely shows surplus in their annual report. The study found that BRAC Micro finance project transfers its surpluses to other development project expenses. 4.2.10 Financial Instruments According to IAS-32, BRAC Micro finance program recognize and disclosure financial instruments in the balance sheet when the NGO become a party to the contractual provisions of the instrument. Investments in related undertakings are stated at cost less impairment. Receivables are carried at anticipated realizable values. Unlike the profitable organization bad debts are written off when identified and an estimate is made, based on all outstanding amounts of the balance sheet. BRAC Micro finance program state the payables at cost which is the fair value of the consideration to be paid in the future for goods and services received. Cash and cash equivalents for the purpose of the statement of cash flows comprise cash and bank balance, included in cash and bank balances, which are received through donors’ grants. Interest bearing bank loan, overdrafts and securitized financing are recorded at the amount of proceeds received, net of transactions costs. For borrowing made specially for the purpose of acquiring of a qualifying asset, the amount of borrowing costs eligible for capitalization is the actual borrowing costs incurred on that borrowing during the period less any investment income on the temporary investments of funds drawdown from that borrowing facility. All borrowing costs are recognized as an expense in the statement of income and expenditure in the period in which they are incurred. The carrying values of these financial instruments approximate their fair values due to their short term maturities. (Source: BRAC Annual report 2010)4.2. ACCOUNTING SYSTEMS OF THE AREA OFFICE The area office maintains the following books for their daily as well as monthly operation. 4.3.1 Individual Pass Book Pass book is a book of accounts of area office, where the details of client name, account number, branch details and other relevant information are recorded. In this book the amount of loan disbursed, amount of collection and remain unpaid are recorded. It is also called the loan disbursed and collection book. This book is maintained with sufficient documents and voucher. 4.3.2. Receipt & Expenditure account 33
  12. 12. European Journal of Developing Country Studies, Vol.13 2012 ISSN(paper)2668-3385 ISSN(online)2668-3687 Receipt & Expenditure account is an account where receipts (collection of loan) and expenditures (amount of disbursement), and other expenses are recorded. Receipt & Expenditure account is prepared and send to the regional office monthly. Receipt & Expenditure account is like as a trial balance. 4.4 ACCOUNTING SYSTEMS OF THE REGIONAL OFFICE Traditionally, Accounting records fall into two main categories: Supporting Documents and Books of Account. BRAC Micro finance program keep files of the following original documents to support every transaction taking place: Receipt or voucher for money received, receipt or voucher for money paid out, invoices, certified and stamped as paid, paying-in vouchers for money paid into the bank, bank statements, journal vouchers for adjustments and noncash transactions. BRAC Micro finance program maintains several books of accounts as part of a full bookkeeping system: General/Nominal Ledger, Journal or Day Book, Wages book, Assets Register and Bank Reconciliations statements. The management information system of BRAC Micro finance program collects data from 565 area office then these are integrated under 139 regional offices and then send it to head office for analysis. The accounting system of these regional offices is well organized and supported by computer aided accounting software but we will discuss the systems manually. 4.4.1. Charts of Accounts The first step taken by BRAC is to choose an accounting software package which is clear and concise and easy to operate and maintain the NGO accounting. The second step of BRAC was to clarify purpose of organization and reflect that in a clear and concise chart of accounts. It is important that a chart of accounts reflect all the major functions and project operation of the organization in a concise and systematic manner (retrieved from:, retrieved on February 23, 2007). BRAC has more than hundreds projects, it prepares charts of accounts and code them for computer aided soft ware. The coding of the account head represents the specific project, regional office, and lastly the respective income, expenditure, liabilities or assets. 4.4.2. Cash Book Regional office maintains separate cash books according to IAS-7 for different area office under it. The area office maintains petty cash books for the recording of cash. They also maintain collection sheet and loan Disbursement sheet properly. The area office conveys all its accounts (mainly expenditure) at the end of the month to the regional office. The regional office then prepare separate cash book for every area office. The opening balances of these cash book represent the cash on hand of the area office. All expenditure and revenue recorded in the cash book is supported by vouchers. 4.4.3. Ledger Book The format and procedure of preparing the ledger is same as the normal business organization. Different transactions of account heads are accumulated here. After recording the transaction of the last date of the month, balance is drowned. As it is a computerized system, data is typically entered into the system only once. Once the entry has been approved by the user, the software includes the information in all reports in which the relevant account number appears 4.4.4. Receipt and Expenditure Statement The receipts and expenditure statement is one kind of trial balance which is prepared by regional office, which include the balances of the ledger. In computer aided accounting system the receipt and expenditure statement is automatically prepared when ledger is prepared. 4.4.5. Head Office Current Account Breakup Statement The regional office maintains and transfers a ledger account to Head Office it includes transactions like Motorcycle loan, Bonus Provisions, Gratuity Provisions, Provident Fund, Insurance provisions for the employees. The regional office also transfers a Motorcycle Loan Schedule as motorcycle is considered as assets.4.5 ACCOUNTING SYSTEMS OF THE HEAD OFFICE The head office transactions are same like the regional office. Most of the transactions are recorded at cash and the accounts are automatically posted to Receipts and Expenditure statement under different heads. Head office 34
  13. 13. European Journal of Developing Country Studies, Vol.13 2012 ISSN(paper)2668-3385 ISSN(online)2668-3687 maintains two sets of ledger accounts other then the normal account heads. These are “Field Area Current Account breakup” to record transaction with the regional office and Head Office Current Account Break up to maintain correlation with the Regional Offices’ breakups. It provides a provision to reconcile and find out the accounts in transit. 4.5.1. Fund Control The income generating micro finance project transfer money to all projects and at the end of every month and the money transferred is adjusted with Head Office Current Account and it is done to avoid cash payment from the Head Office. The transactions are made by passing journal entries “Fund Control Account” and it is shown on the Head Office Current Account Break up Statement. In the field or regional office when micro finance project transfer money to other project, then the journal is passed like this: Journal in Regional Office Micro Finance ProjectParticulars Debit Tk. Credit Tk.Head office current account Dr. XXXXXXX Cash Cr. XXXXX Journal in Regional Office other Project (where cash is transferred)Particulars Debit Tk. Credit Tk.Cash. Dr. XXXXXXXXXHead office current account Cr. XXXXXXXX Here cash is being transferred from microfinance project to other project. Both projects submit Head Office Breakups to the Head Office. To adjust and prepare the combined financial statements, all the details accounting statements are transferred to head office by Head Office Breakup statement. The head office adjusts the journal like this: Journal in Head Office Debit CreditParticulars Tk. Tk.Fund Control Account Dr. XXXX Regional Office Current Account (Micro Finance Project) Cr. XXXXXRegional Office Current Account (other project where cash is XXXXtransferred )Dr. Fund Control Account Cr. XXXX Head Office Account ultimately becomes: 35
  14. 14. European Journal of Developing Country Studies, Vol.13 2012 ISSN(paper)2668-3385 ISSN(online)2668-3687 Journal in Head Office Particulars Debit Credit Tk. Tk. Regional Office Current Account (other project where cash is XXXX transferred )Dr. Regional Office Current Account (Micro Finance Project) Cr. XXXX The detailed accounts accumulated under Receipt and Expenditure Statement and Head Office Current Account Breakup Statement prepared in the Regional Offices is monthly transferred to the Head Office. The accounting information collected by auto taker (a computer supported device) is then automatically posted to ledger account maintained by the head office. Then finally management prepares the financial statements, which includes Balance Sheet, the Statement of Receipts and Payments, Statement of Changes in Net Assets and Statement of Cash Flows. 4.5.2. Receipts and Payment Account NGOs are required each year to prepare a summary of their cashbook. This summary shows all the money that they received during the year. It also shows the payments that were made. This is called Receipts and Payment account. BRAC Micro finance program prepare monthly their Receipts and Payment account. It is different from two ways:1. It includes capital transactions.2. It show only those transactions where cash or cheque has been given or received during the year. 4.5.3. Income and Expenditure account Income and Expenditure account is like an activity report. It tells about the income earned during one particular year. The difference between the two sides is shown as ‘surpluses or ‘deficit’. If the income is more than expenditure it is surplus, and income is less than expenditure it is deficit. 4.5.4. Balance Sheet The balance sheet is like a status report. It is the total of assets and liabilities. It will show all their assets (buildings, vehicles, investments, cash in hand, bank balance). If the NGO has takes loans these will also be shown here. Usually BRAC Micro finance program received grants from the donor’s. They need not received loan from third party. The Balance Sheet will also show whether the NGO has a Corpus Endowment Fund. 4.5.5. Audit Report The audit report is an important document. It can, and often does, give important information about the organizational health. The audit report contains comments of the auditor regarding the truth and fairness of the financial statements. The audit report is prepared by the independent auditor. BRAC Micro finance project usually audit its financial statements annually, to show the clear and transparent accounting system. 5. REPORTING OF BRAC MICRO FINANCE PROGRAM BRAC submit audit reports for all projects, along with FD-4 certified by the auditors, to the NGO Affair Bureau and to Prime Minister’s Office. 5.1. REPORTING TO THE BOAD BRAC Micro finance program’s reporting for the Board is done quarterly (or as required). This reporting includes a Balance Sheet and a Statement of Receipts and Payments. This entail accounting for all funds (i.e.: including USD funds). A uniform and consistent format is used for reporting to the Board. This is also the report that is provided to auditors and used in the annual report. 36
  15. 15. European Journal of Developing Country Studies, Vol.13 2012 ISSN(paper)2668-3385 ISSN(online)2668-3687 5.2. REPORTING TO THE MANAGEMENT BRAC Micro finance program’s prepares management reports monthly, at the end of every quarter or as required. There are different kinds of reports used by managers of BRAC Micro finance program to take decisions: the Budget Compared to Actual Performance Report, the narrative progress Report (represents the achievements and impact of the project on the beneficiaries), the internal financial report (prepared for 18 months to analysis cost, expenditure and their change), quarterly cash flow projections report (to analysis exchange gains and fund deficits), monitoring report (prepared by the monitoring team of 14members for every unit of the NGO, which lists 20 issues need to be followed up). 5.3. REPORTING TO THE DONORS Donors have their own reporting requirements and specifications and an NGO should attempt to meet these as much as possible. Conversely, if donors are amenable, a generic format may be agreeable. Donor reports are submitted no more than one month after the close of the accounting period being reported upon. A donor tracking schedule is set up to monitor due dates and for work planning purposes.6. FINDINGS AND RECOMMENDATIONS 6.1 FINDINGS The accounting system of BRAC Micro finance program is well planned and contemporary and it is highly eulogized by the donors. It assists the internal control, cash control, internal auditing process, budget formulation and execution, facilities or property management, financial operations and analysis, grants management and information resources management. But there are some weaknesses in this financial Accounting system. Like: 1. The project grassroots links are not efficient enough so the generation of information in that level is weak and sometimes not supported by documents. 2. The field based development expertise sometimes fails to develop innovative measures to support modern financial Management. 3. The project doesn’t give more emphasis on long-term commitment and sustainability; which could assist the progress and accountability of the project. 4. The cost effectiveness of the project is not used uniformly in every outlet 5. For generation of accounting information and reporting the project authority don’t have modern process oriented approach and they failed to increase institutional capacity. 7. There are different rate of depreciation which is maintained other than ITO, 1984. 8. Different loan loss provision is maintained other than Bangladesh Bank loan loss provision. 9. Area office and regional office don’t maintain the full form of accounts book. 11. There are different interest rates among the NGOs. For the above lacking, dissimilarities and some specialties, the accounting system of NGOs is not clear to all. 6.2. RECOMMENDATIONS AND CONCLUSIONS BRAC Micro finance program is one of the largest projects in Bangladesh which is financed by the foreign donors; the accounting system of this project is well organized and transparent. The processes of presenting the financial statements are unique and very systematic. BRAC Micro finance program after all these limitations; could give the other NGOs some guidelines for preparing and installing accounting systems, making assumptions about accounting principles and lastly but not the list to prepare and present financial statements and submit financial reports. In order to make the project accounting process some recommendations could be considered: 1. Policy for uniform accounting standard, internal and external audit, should be introduced for all other NGOs. 2. The project should hire more expertise and modern management technique; 3. The rate of interest among NGOs should be uniform. 4. Income Tax Authority should make bound to maintain same rate of depreciation. 5. Separate accounting standard should be introduced and implemented. 6. It should be more participative and transparent; 37
  16. 16. European Journal of Developing Country Studies, Vol.13 2012 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.org7. The information should be modernized by use of internal network and of process oriented approach and value based management approach should make the accounting process efficient. From the above analysis and findings, it can be concluded that the accounting system and financial reporting of NGOs would be clear to all if there is uniform accounting system and specially separate IAS/IFRS be introduced. 7. REFERENCE SECTION 7.1. REFERENCES1. Ananda, Pagaria.CA. (2006).“NGO’s-Accounting and Legal Intricacies”, The Chartered Accountant, vol.3. no.2. pp.1716-1723.2. Ahmad, Mokbul Morshed( 2005.“The State, Laws and Non-Governmental Organizations (NGOs) in Bangladesh” International Journal of Not-for-Profit Law. Vol.3. Issue. 3.3. BBS. (1998). Statistical Pocketbook of Bangladesh. Dhaka: BBS4. Charities Aid Foundation (CAF) (1989), Charity Trends 11th Edition, Charities Aid Foundation, Tonbridge.5. Ebdon, R. (1995)."NGO Expansion and The Fight to Reach The Poor: Gender Implications of NGO Scaling-up in Bangladesh". IDS Bulletin. vol. 26. no. 3. pp. 4955.6. NGO Affairs Bureau (1998).”Flow of Foreign Grant Fund Through NGO Affairs Bureau at a Glance, Dhaka: NGO Affairs Bureau, PMs Office/GOB.11. Task-Force Report (1992). “Report of the Task-Forces on Bangladesh Development Strategies for the 1990s: Managing the Development Process”, University Press Limited. vol. I & II.12. White, S. (1999). "NGOs, Civil Society, and the State in Bangladesh: The Politics of Representing The Poor" Development and Change. vol. 30. pp. 307-326. APPENDICES Appendix- A BRAC Micro finance program Balance Sheet As at …..200X Particulars Notes June 30. 200X June 30, 200X Taka Taka ASSETS Property Plant and Equipment Motor cycle loans Microfinance loans Grants and accounts receivable Interest receivable Inventories Advance deposits and prepayment Advance deposits and prepayments Cash in hand and at banks TOTAL ASSETS 38
  17. 17. European Journal of Developing Country Studies, Vol.13 2012 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.orgLIABILITIES AND NET ASSETSLiabilities:Deferred incomeSecuritized financingGrants received in advance accountMembers project & current accountLiabilities for expenses and materialsOther current liabilitiesNet Assets:Capital fund-UnrestrictedTemporarily restrictedTOTAL LIABILITIES AND NETASSETS Appendix- B BRAC Micro finance program Statement of Cash Flows For the financial year ended at …..200XParticulars Notes June 30. 200X June 30, Taka 200X TakaCash flows from donors financing activitiesSurplus of income over expenditureAdjustments to reconcile changes in net assets tonet cash provided by operating activities:DepreciationDonor grants- Amortization of investment inproperty, plant and equipmentDonor grants- amortization of motorcycle,replacement of fund.Adjustments for other accounts:Decrease/ increase in inventoriesDecrease/ increase in interest receivableDecrease/ increase in other current LiabilitiesIncrease in deferred incomeNet increase in motorcycle loansNet cash used in operating activitiesCash flows from investing activitiesInterest received on fixed deposits and bankaccountsLess- purchase of property plant and equipmentNet cash used in investing activitiesCash flows from donors financing activitiesGrants received during the year:BRAC’s contribution 39
  18. 18. European Journal of Developing Country Studies, Vol.13 2012 ISSN(paper)2668-3385 ISSN(online)2668-3687 www.BellPress.orgLess- Grants utilized during the yearNet increase in cash and cash equivalentsCash and cash equivalents, begging of the yearcash and cash equivalents, end of the year. Appendix- C BRAC Micro finance program Statement of Income and Expenditure For the financial year ended at …..200XParticulars Notes June 30. 200X June 30, Taka 200X TakaINCOMEDonor grantsBank interest incomeService charge on microfinance loanInterest on microfinance loanEXPENDITURESurplus of income overexpenditure for the year Appendix- D BRAC Micro finance program Statement of changes in Net Assets For the financial year ended at …..200XParticulars Notes Capital fund (temporarily restricted) TakaAt July 1, 200XNet surplus for the yearAt June 30, 200XNet surplus for the yearAt June 30, 2006 40