July 19, 2018

Time to reveal EOFY results. Sort of.

Currently, not for profit CEOs and finance staff are preparing their financial reports for the July board meetings. Where organisations’ financial year concludes on 30 June, these reports are anticipated by boards because they tell the financial story of the organisation for a full year. As such, board members and CEOs are interested in seeing financial performance against budgets, and there is even more anticipation to see whether funded programs are over- or under-spent.

The implications can be serious for not for profits that report significant variations in these reports. Where a funded program is underspent, there is a high likelihood that the funder will seek the return of unspent funds, if the funding agreement permits this. The greater the underspend, the higher the impact of a return of funds so this financial report is critical to prepare for this variation on the final results. Where there is a risk of the return of funds, the treasurer and the CEO need to highlight the impact of this transfer by raising a liability in the Balance Sheet and a corresponding decrease in grant income.

Furthermore, the treasurer needs to be reassured that the true costs of delivering the program have been allocated through the cost centres in the accounting software and that some misallocation is in fact not the cause of the underspend. If this is realised too late, funds may well be returned, which in fact have been spent in the program but not recognised.

These actions require some serious consideration by the treasurer in conjunction with the board and the CEO, with significant implications in all situations.

There are many other decisions and corresponding transactions which will influence the end of year results, but will not necessarily make it into the finance report for the July Board report. Has depreciation been calculated correctly? Will some debts owed to the organisation be written off? Will some invoices for services provided not reach the organisation until well after the board meeting and be missed in the report?

In fact, the financial situation at the end of the financial year may not be known with a high degree of confidence until after the auditor’s report, which typically won’t be delivered until many months after the July meeting. Furthermore, the board may make decisions in budgeting and spending in the new financial year based on an end of year result which changes significantly a quarter of the way into the new year.

The treasurer needs to caution the board that the results are realistically going to change and that there is a risk that the auditor’s report may be very different to the report for the past financial year.

It is very much the case that the better the information, the better the decisions. A treasurer and finance team which is on the ball might not head off every catastrophe, but they can certainly minimise the risks of delivering a wildly inaccurate end-of-year result in July.

Read more not for profit accounting articles.