It is not unusual to find fixed assets recorded at a nominal amount of Re 1 in the balance-sheets of NPOs (not-for-profit organisations). The assets may have been received free of cost as donation or grant. From an accounting angle, there is no harm with such low nominal values, but it is necessary for the auditor to be extra careful with regard to these assets, because "there is a greater possibility of their misappropriation," cautions the Research Committee of the Institute of Chartered Accountants of India (www.icai.org) in a recent publication titled Technical Guide on Accounting and Auditing in Not-for-Profit Organisations (NPOs)/Non-Governmental Organisations (NGOs).
The Institute advises auditors to review the assumptions and procedures in the computation of fair value of the assets. "The auditor should also verify quantitative details from the reconciliation statement between the assets existing at the beginning of the period and at the end of the period."
A major problem in the accounting for fixed assets can arise when the NPOs switch over to accrual basis. "Many assets, e.g. those received by way of donations or endowments may not have been recorded at the time they were acquired. It would be necessary to identify such assets and account for them appropriately," taking into consideration factors such as `adverse possession, defects in title, etc.'
Tracing the history of NPOs in India, the book informs that soon after Independence many followers of Gandhiji established voluntary agencies to work closely with the governmental programmes on social and economic issues. "The second stage of growth of NPOs in India was around the year 1960 when many individuals noticed that the governmental programmes appeared to be inadequate to deal with the deprived sections."
The `Technical Guide' recommends `a standardised framework for the preparation and presentation of financial statements of NPOs'. Accounting Standards issued by the ICAI do not apply to an NPO `if no part of the activity of such entity is commercial, industrial, or business in nature'. As a corollary, therefore, the Standards will apply even if a very small proportion of activities is considered to be commercial, as for example, `where an NPO is engaged in the commercial activity of granting loans/credit to small entrepreneurs at nominal rates of interest.'
How to apply AS-2 (on inventories) in an NPO that manufactures or purchases items for distributing free of cost to beneficiaries? Since these items are not held for the purpose of sale or in the process of production for such sale, we need not consider the same to be inventories within the meaning of AS-2; value them at lower of cost or replacement cost, if available, advises the ICAI.
During these days of rupee appreciation, NPOs that benefit from dollar inflows may be a worried lot. Be that as it may, it helps to remember that AS-11 requires forex transactions to be accounted for at the exchange rate prevalent on the date of the transaction. "Exchange differences related to amounts receivable arising on account of change in exchange rates should be recognised in the income and expenditure account."