1.28     Query

Accounting in a not-for-profit organisation

 1. A charitable society has the principal object of spreading the teachings of Sri Aurobindo and the Mother, particularly their system of integral Yoga and to establish a spiritualised society.

2. The balance sheet of the Society shows ‘Capital Fund’ and ‘General Fund’. The society has recently revised these terms in the light of standard accounting practices and conflicting views on reclassification of existing items have emerged.

3. Under the head ‘Capital Fund’, are shown, ‘Land and property received as gift’; ‘Donation to corpus’ and ‘life member ship fees’.

4. ‘General fund’ includes the following:

(i) The excess of income over expenditure transferred from the income and expenditure account every year.

(ii) Amounts transferred from specific funds on fulfilment of the object of the fund. For example, if a specific donation is received for a particular project, say construction of building, then the amount is kept under a specific fund with suitable nomenclature like- “Building Fund” and when the building is completed then the Building Fund Account is debited and General Fund Account is credited with the amount utilised.

5. The querists have mentioned that International Accounting Standard-4, states that the expression “Fund” should be used in respect of those reserves only, an equal amount in respect of which is invested in outside securities. In the view of the Society, judged by this criterion, the Society should retain under “Capital Fund” only the donations received for corpus in cash and life membership fees. At present the Society is keeping such money in fixed deposit. But it is possible to utilise the donations received for the corpus for acquiring capital assets like a buildings. In that event, the amount should be transferred, in the view of the Society, from “Capital Fund” to “Capital Reserve”. However, there is no legal bar for the amount received for corpus being used for revenue expenses also. In that event the amount should be transferred from ‘Capital Fund’ to “Capital Account” or to “General Reserve”.

6. The land and building received by way of donation on the same basis should be classified, in the view of the Society, under either “Capital Reserve” or “Capital Account” or “General Reserve”. In support of this it is mentioned that if an asset is received as gift and the corresponding amount is kept as a Capital Account, after several years the depreciated value of the asset may be nil or negligible but the Capital Account will still show the original amount. The depreciation charged will go to the income and expenditure account and from there to general reserve. If, on the other hand, the value received as gift is shown under General Reserve, the value of this will decrease by way of depreciation transferred from income and expenditure account to the extent the value of asset decrease in the asset side of the balance sheet. It is also mentioned in support that when sinking funds are utilised for meeting a liability, the liability account is closed by the amount realised out of investment. The Sinking Fund Account remaining, as per the International Accounting Standard, is transferred to general reserve. The other view is that the amount standing under capital fund could be extinguished when the corresponding asset ceases to exist by transferring the depreciation amount annually to the Capital Account.

7. The excess of expenditure over income is usually transferred to a separate head called “excess of income over expenditure” and the amounts could be transferred therefrom to “General Fund” or “General Reserve” depending upon whether an amount equal to the fund account is kept in outside securities or not.

8. About the treatment of specific fund, one view is that after the amount received has been utilised for the purpose for which it was received, it should be taken to General Reserve and another view is that it should be taken to Capital Account. In favour of the former it is argued that this is a standard practice followed by charitable organisations. There could be specific funds like ‘scientific research fund’ for which utilisation could be in the form of both revenue and capital expenditure. In such cases it is opined by some that the expenditure on utilisation of fund should be debited to the specific fund in the first instance and thence the asset acquired may be transferred to asset account which could be identified. The annual depreciation to the assets could be debited to the specific fund account. However, in such cases, the Specific Fund Account will be renamed as ‘Specific Reserve Account’.

9. The querists have sought the opinion of the Expert Advisory Committee as to:

(a) How many heads should be opened instead of the present heads ‘Capital Fund’, ‘General Fund’, ‘Specific Funds’? The possible heads can be

(i) Capital Fund

(ii) Capital Reserve

(iii) Capital Account

(iv) General Fund

(v) General Reserve

(vi) Specified Fund

(vii) Specific Reserve.

(b) Whether amounts should be transferred from capital fund to capital reserve and vice versa; from general fund to general reserve and vice versa; and from specific fund to specific reserve and vice versa.

(c) Whether amounts equivalent to the value of land and building received by way of gift should be shown in the liability side of the balance sheet under “Capital Reserve” or “Capital Account” or “General Reserve”. What will be the treatment of these accounts when the corresponding land and/or buildings ceases to exist? Will they remain or be transferred to “General Reserve”?

(d) If a specific fund is created, to which head should the account be transferred after the amount is utilised for the purpose for which it is received?

(e) If the utilisation from specific fund is for acquiring capital assets or partly for capital asset and partly for revenue expenses, then should the portion of the specific fund representing capital asset acquired be converted as specific reserve and allowed to remain in the liability side till the asset exists and if so, should the annual depreciation to the concerned asset be debited to the specific reserve account?

                                                                      Opinion                                           October 13,1987

1. The Committee notes that the term ‘Fund’ has been defined as “an account usually of the nature of reserve or a provision which is represented by specifically earmarked assets”.* The Committee also notes that international Accounting Standard 4 does not contain any definition of the said term. The Committee is therefore of the view that the term ‘fund’ should be used only where a reserve is represented by earmarked assets. The Committee notes that, generally, earmarked assets relate to specific funds having specific objectives, e.g., construction of building, providing education etc. Thus the expressions ‘Capital Fund’ and ‘General Fund’ should not be used since they are not represented by earmarked assets but may be, for instance, used for acquiring/constructing general purpose assets. The Committee is therefore of the view that instead of ‘Capital Fund’ the expression ‘Capital Reserve’/ ‘Capital Account’ should be used. The Committee prefers the former expression where the contributions received from the members do not represent the ownership interest in the organisation, e.g., these are paid by way of membership fees rather than payments to acquire shares as may be the case in a cooperative society or a company. Where, however, the contributions from members are of the nature of acquisition of ownership rights in the affairs of the organisation, the expression ‘Capital Account’ should be used to represent such receipts. The term ‘Capital Reserve’, in this situation, should be used for reserves of capital nature. The Committee is also of the view that instead of ‘General Fund’, ‘General Reserve’ should be used. Regarding ‘Specific Funds’ expression generally used will signify the purposes for which such funds can be used, e.g., Building Fund, Education Fund, Research Fund etc. and the corresponding earmarked assets are similarly classified. Specific corresponding reserves can be created to indicate utilization of specific funds, e.g., if out of Education Fund, a building is acquired for educational purposes, the relevant amount may be transferred to Education Reserve and shown separately under the head ‘Capital Reserves’. Alternatively, such transfers may not be separately disclosed but clubbed with other capital reserves. Expenditures of revenue nature met out of specific funds are debited to Income and Expenditure Account and the corresponding amount transferred from specific funds is credited to that account.

2. The Committee notes that para 12 of ‘Guidance Note on Accounting For Capital Based Grants’, issued by the Research Committee of the Institute of Chartered Accountants of India, recommends as below.

            “In the case of voluntary organisations, such as societies registered under the Societies Registration Act and other organisations having similar characteristics, it is the usual practice to treat the capital grant received including gifts and donations of capital nature as a part of the reserve and not to transfer any part thereof to the Income and Expenditure Account.

3. On the basis of the above, the opinion of the Expert Advisory Committee, in respect of the issues raised by the querist in para 9 of the query is as below:

(a) the following heads may be there in the circumstances of the query:

(i) Capital reserve and/or Capital Account

(ii) General Reserve

(iii) Specific Fund

(iv) Specific Reserve (in limited cases, e.g., an asset created out of specific fund). This would however be of capital nature and therefore shown as a Capital Reserve. Alternatively, this head may be dispensed with and the said transfer may be clubbed with Capital Reserve.

(b) In the circumstances of the query, the amounts now appearing in Capital Fund and General Fund should be transferred to Capital Reserve and General Reserve respectively, in view of (a) above.

(c) The value of land and building received by way of gift should be shown on the liability side as Capital Reserve, preferably with a separate disclosure under that head. In case the corresponding land and /or building ceases to exist they should continued to be shown as Capital Reserve. However, separate disclosure in respect thereof should not be made. Any gain or loss on disposal should be adjusted in the Income and Expenditure Account.

(d) In case the  utilization  of the  specific  funds  results  into  acquisitions

        and (e) of a fixed asset, the relevant amount should be transferred to Capital Reserve. Alternatively, the amount so spent may be shown a specific reserve under ‘Capital Reserves.’ Annual depreciation in respect of the assets so created should not be charged to the specific reserve. The specific reserve should be merged with other Capital Reserves once the asset ceases to exist. Where the utilization of specific funds is of revenue nature, the relevant amount should be adjusted in the Income and Expenditure Account.

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