Non-governmental organisations: Contributions and accounting specifics
Last year, we brought you an article on non-governmental organisations that focused on what aspects to consider when choosing the legal form of a newly established non-governmental organisation. In this article, we will deal with recognising contributions made to a non-governmental non-profit organisation (NGO/NPO) in the founder's accounting and selected specifics of the accounting of NGOs/NPOs in comparison to the accounting of entrepreneurs.
Contribution to a non-governmental organisation
You might think that, within the context of a contribution to a company, a contribution to a NGO/NPO should be reported within non-current financial assets similarly to contributions to any other company. Looking at the accounting regulations for entrepreneurs that perform their accounting in accordance to Decree 500/2002 Coll., we find in Section 8 that non-current financial assets are shares in commercial corporations, debt securities, bills, or precious metals and stones or objects made of them. A contribution to a NGO/NPO is therefore not included in the above list. In 2021, the National Financial Accounting Standards Board issued the Interpretation of the National Accounting Council I-44: How to Report a Contribution to a non-governmental organisation, which specifies the conditions under which a contribution to a non-governmental organisation may be reported as non-current financial assets as follows: the established non-governmental organisation is under the control of the contributor and, at the same time, the contributor expects future reliably-valued economic benefits from the contribution. However, the fulfilment of these two conditions in practice is expected rather in exceptional cases, although economic benefits may occur, for example, only when a not-for-profit entity is liquidated through the sale of its assets, etc. In such cases, the contribution to a NPO/NGO is usually reported as an expense in the period to which it is materially and temporally related. By the nature of a not-for-profit entity, in most cases the founder does not expect to receive future income in respect of its contribution and should therefore report the expense when incurred in accounting group 54 – Other operating expenses. A similar procedure applies to both the initial deposit and other contributions to the operation or investment of a NGO/NPO, regardless of whether the donation is monetary or non-monetary in the form of, for example, fixed assets.
In practice, we have also encountered a case where the founder of an NGO/NPO is another NGO/NPO. In this case, non-current financial assets are defined in Section 9 of Decree 504/2002 Coll. as assets with a maturity of more than one year or assets held to maturity that are purchased or owned by the entity for the purpose of an equity investment (an interest in a commercial corporation) or for trading or the long-term placement of available cash with the intention of appreciation in the form of future income, which a contribution to a NGO/NPO typically does not represent and therefore should be reported at cost in a manner similar to the above described option for a contribution by a business entity.
Selected specifics of accounting for non-governmental non-profit companies
Let us now focus on the main specifics of the accounting of a NGO/NPO and the differences from the accounting of entrepreneurs. The highest legal norm regulating accounting is Act No. 563/1991 Coll., on Accounting, which is further elaborated for this type of reporting entities in Decree No. 504/2002 Coll., and the Czech Accounting Standards No. 401-414 for double-entry accounting, or the implementing Decree No. 325/2015 Coll. for single-entry accounting.
1. Financial statements and annual report
The financial statements of a NGO/NPO include a balance sheet, a profit and loss statement and notes to the financial statements. Unlike business entities, NGOs/NPOs are not obliged to prepare a statement of changes in equity or a cash flow statement.
The balance sheet differs in particular in that it has only 2 columns. The first column shows the balance as of the first day of the financial year and the second column shows the balance as of the last day of the financial year for which the financial statements are prepared. Items for provisions and accumulated amortisation/depreciation are therefore not shown in a column but on separate lines.
The profit and loss statement is structured in such a way that the individual lines show first the expenses, then the income and at the end the profit or loss. The columns show separately the amounts of expenses, income and result for the main activity in the first column (all the activities for which the entity was established or set up), in the second column for the economic activity (the activity provided for by special legislation or provided for in the memorandum, articles of association, instrument of incorporation or registered in the relevant register, in particular ancillary, incidental, entrepreneurial or other activities) and in the third and final column the sum of the previous two columns. Information for the previous reporting period is not presented here.
The amounts shown in both the balance sheet and the profit and loss statement represent the closing balance of the assigned synthetic accounts (e.g. the Repairs and maintenance line contains the closing balance of account 511), which does not apply for entrepreneurs.
There are also differences in the information disclosed in the Notes to the Financial Statements; the specific scope of this information is specified in Section 30 of Decree 504/2002 Coll.
As regards the obligation to compile an annual report and the scope of information to be published, NGOs/NPOs are governed not only by the Accounting Act, but also by specific legal regulations relevant to the specific legal form of NGOs/NPOs. Associations, churches and religious societies, interest associations of legal entities, endowment funds of property owners’ associations and educational legal entities are obliged to prepare an annual report only in the case of a mandatory audit and in the scope of the Accounting Act. This obligation pertains to all the remaining legal forms, including additional information according to special legal regulations beyond the scope of the Accounting Act. An example is a public benefit company, for which these are defined in Section 21 of Act 248/1995 Coll., as it regards information on all activities carried out in the reporting period within the scope of the charitable services and additional activities and their evaluation, human resources, income broken down by funds, the development and state of the funds of the public benefit company as of the balance sheet date, about the state of the assets and liabilities of the public benefit company as of the balance sheet date and about their structure, the total amount of expenses broken down into the costs incurred for the performance of the charitable services, for the performance of the ancillary activities and for the public benefit company’s own activities, including the amount of expenses for the remuneration of the director and for the remuneration of the members of the board of directors and the members of the supervisory board, and the change in the articles of incorporation and the change in the composition of the board of directors and the supervisory board and the change in the person of the director that occurred during the reporting period.
2. Own funding
Own funding of NGOs/NPOs is represented by equity, funds, profit or loss and gains or losses from the revaluation of assets and liabilities. The equity includes the founders’ deposit recorded in the relevant register, but there are also other items such as subsidies and special-purpose donations received as a source of financing of fixed assets, the value of fixed assets acquired gratuitously and used for the main activity of the NGO/NPO, reduced by accumulated depreciation/amortisation or funding transferred from funds.
A specific feature of NGOs/NPOs are funds, which represent special-purpose sources of financing for the activities of NGOs/NPOs. These resources are, for example, profits from previous periods, donations and contributions received, proceeds from public collections or stocks received free of charge.
3. Donations and contributions received
In accounting for gifts or other gratuitous benefits received, various aspects need to be considered, e.g.whether the gift is an investment or operating gift, monetary or non-monetary, special-purpose or non-purpose, with or without time limitation, a gift for personal use or a gift to be forwarded to a third party. Depending on these aspects, the recognition of the receipt of a donation differs either in the balance sheet through equity (e.g. a cash donation for the acquisition of fixed assets for the main activity), or through funds (e.g. a donation received to be forwarded to a third party or an operating cash donation), or in the income statement (e.g. a non-purpose cash donation without time limitation or a fixed asset received gratuitously that is not earmarked for the main activity of the NGO/NPO).
4. Provisions and reserves
Pursuant to Section 15 of Decree 504/2002 Coll., NGOs/NPOs should make provisions for individual receivables that relate to the activities of an entity subject to income tax, in accordance with the law governing reserves for determining the income tax base. When a NGO/NPO applies this approach, it reports receivables that do not fall into this category at face value, regardless of the likelihood that the receivables will be recovered or not. Therefore, we cannot help but wonder whether this value is consistent with one of the fundamental principles of a true and fair view of accounting. This also applies to the reported value of fixed assets and inventories, as the creation of provisions for other assets is not explicitly specified in the Decree and many NGOs/NPOs do not create provisions for fixed assets or inventories and do not even consider them, although they should.
Similarly, the creation of reserves for NGOs/NPOs is limited by the law regulating reserves for the determination of the income tax base, and therefore the principle of a true and fair view can be questioned here as well – should there really be no reserve created by a NGO/NPO that is involved in a lawsuit on the defendant’s side and is likely to lose the lawsuit and have to pay a significant amount to the plaintiff?
How to proceed?
The above stated shows that the founder/business entity should, in the vast majority of cases, recognise the initial contribution as a current period expense in its accounts when setting up a non-governmental non-profit company and proceed in a similar manner when making further contributions for the operation of the non-profit company. And in order to properly understand the financial statements and annual report, they should at least be aware of the aforementioned specifics and differences from the common practices in their industry.