54 Accounting

8/10/2019 54 Accounting

1/15


2/15

,ood accounting practices are an important cornerstone in building a successful

microfinance pro#ect. ccounting records are the starting point for measuring

performance- revising your budget- and reporting progress. n effective accounting

system allo!s for clear'sighted management rather than guess!or+. Moreover- good

financial reporting !ill inspire confidence from donors or other sources of loan capital.

ccounting is simply the process of recording financial transactions- grouping them by

category- and summarizing the results for a certain time period. The boo++eeper !ill be

responsible for recording all financial transactions in a transaction #ournal on a day'to'

day basis. This process is described belo! using eamples of typical transactions.

2. Basic accounting principles for MFOs

It is obvious that it is not possible for all microfinance organizations to use the sameaccounting standards because they are frequently dedicated by local practices and internal

needs. %ut !e can define general accounting principles for microfinance organizations"

The /&ouble entry0 principle means that assets are equal to the sum of

liabilities and equity. ny given transaction !ill affect a minimum of t!o accounts

!ithin assets- liabilities- or equity. If the accounting equation is to remain in balance-

any change in the assets must be accompanied by an equal change in the liabilities or

equity- or by an equal but opposite change (increase or decrease in another asset

account. 1evenue or epense items record non'stoc+ (or flo! transactions. 2on'

stoc+ transactions begin !ithin a reporting period and epire at the end of the period.

3ltimately- the revenue and epense accounts are netted out to result in a final profit

or loss. This profit or loss is then transferred to the balance sheet as equity- thereby

ensuring that the balance sheet balances.

The /*onservatism and prudence0 principle means recording financial

transactions such that assets, revenues, and gains are not overstated and liabilities,

expenses and losses are not understated.It is intended to result in the fair presentation

of financial results.

The /Materiality0 principle requires that each material item should be

presented separately in the financial statements. Material items are those that may

influence the economic decision of a user.

4


3/15

The /1ealization0 principle requires that revenue be recognized in the

accounting period it is earned- rather than !hen it is collected in cash. It defines the

point at !hich revenue is recognized.

The /Matching0 principle means that organizations incur epenses to earn

revenues. $penses should be reported on the Income )tatement during the same

period as the revenues they generate.

3. Financial stateents

If the transactions are properly described and the amounts are accurate- an outside

ccountant can use them to prepare professional reports. The ccountant !ill classify

inflo!s and outflo!s and summarize the activity in a financial statement. t a minimum

for microfinance organizations- financial statement should include both a balance sheet

and an income (profit and loss statement5. %ut according to the more stringent

requirements of International ccounting )tandards- MFO financial statement also should

include a cash'flo! statement (sources and uses of funds and include ledgers that report

on the status of the loan portfolio. Financial statement should be presented in local

currency and also sho! financial information for both the current year and at least the

previous year.

3.1. Balance Sheet

!alance sheet is a summary of the financial position at a specific point in time. It

presents the economic resources of an organization and the claims against those

resources. balance sheet also sho!s the net !orth of MFO at the present moment. To

have a clear eample let us imagine some fictitious firm /Microloan0 that has financial

data for three years of its activity in the microfinance mar+et (see table 5.

5)ee some very interesting eamples in" /&isclosure ,uidelines for Financial 1eporting by MicrofinanceInstitutions0. *onsultative ,roup to ssist the 6oorest. 7ashington- &.*- 8anuary 4995 (provisional

version- pending results of field testing. :http";;!!!.cgap.org;assets;images;F),uidelines'final.pdf


4/15


5/15

nvestentsare liquid assets that do bear interest- such as national savings certificates-

treasury bills and other different certificate of deposits.

The gross loan portfoliois the principal balance of all of the MFOEs outstanding loans

including performing and non'performing loans that have not yet been !ritten off. The

gross loan portfolio is frequently referred to as the loan portfolioor loans outstanding-

both of !hich creates confusion as to !hether they refer to a gross or a net value. The

gross loan portfolio should not be confused !ith the value of the loans disbursed=. s the

last means the value of all loans disbursed during the period- regardless of !hether they

are performing- non'performing or !ritten off- it is important to note that the value

disbursed can be several times more than gross loan portfolio.

The (reserve account sho!s the portion of the gross loan portfolio that has been

epensed (provisioned for in anticipation of losses due to default. This item should

eactly demonstrate the level of ris+ in the portfolio.

Fi"ed Assetsinclude the purchase value of all equipment. This item may also include

intangible assets,!hich have no physical properties but represent a future economic

benefit to the given microfinance organization- such as MFOEs good!ill.

The (depreciation account is a cumulative reserve for the replacement of fied assets.

-ropertyincludes all real estate holdings.

Total Assets include all asset accounts minus the (reserve account and accumulated

depreciation.

+ia!ilitiesrepresent !hat is o!ed by the organization to others.

$oansrepresent all borro!ed funds the MFO must repay.

.epositsare the savings deposits captured by the MFO. This item may include any

current- chec+ing or savings account that are payable on demand.

,-uit# represents the capital or net !orth of the organization and includes capital

contributions of members- investors or donors- retained earnings (donations for operating

and non'operating epenses- and the current year surplus.

Capitalized ,arningsare retained earnings capitalized from previous fiscal periods.

=For details see" &efinitions of )elected Financial Terms- 1atios and d#ustments for Microfinance. 6rinted

by" Micro- )mall and Medium $nterprise &ivision )ustainable &evelopment &epartment Inter'merican&evelopment %an+. ugust- 4994.

?


6/15

Accuulated ,arningssho!s the net income for the present fiscal period.

3.2. The Income Statement

This part of the financial statement is a report of financial activity during a particular time

period such as a month or a year. It is also +no!n as the profit and loss statement. It

summarizes revenues (!hat you earned and epenses (!hat you spent to arrive at net

surplus or deficit (!hats left from your earnings after subtracting !hat you spent. If the

period results in a net surplus- this is added to retained surplus and your net !orth is

increased. Coo+ at the outline belo! to see ho! categories are grouped together and

summarized in a Financial )tatement (see table 5.

n incoe stateent reports the organizationEs financial performance over a specifiedperiod of time (see table 5. It summarizes all revenue earned and epenses incurred

during a specified accounting period. n institution prepares an income statement so that

it can determine its net profit or loss (the difference bet!een revenue and epenses.

7e have to note the terms revenue and income are often intersubstitutable as are the

terms income and profit>.

ncoerefers to money earned by an organization for goods sold and services rendered

during an accounting period- including interest earned on loans to clients- fees earned on

loans to clients- interest earned on deposits !ith a ban+- etc.

Credit ncoeis comprised from all interest- commission and fees- !hich the MFO

derived from lending operations.

nvestent ncoeis all income earned on all invested funds including income from

foreign echange transaction.

*onationsare all funds received from local and international donors.

,"pensesrepresent costs incurred for goods and services used in the process of earning

revenue.

5ersonnel e"pensesare salaries and staff epanses. It may also include all other

payments made to or for employees of MFO such as bonuses and benefits.

>In details see" &efinitions of )elected Financial Terms- 1atios and d#ustments for Microfinance. 6rinted

by" Micro- )mall and Medium $nterprise &ivision )ustainable &evelopment &epartment Inter'merican

&evelopment %an+. ugust- 4994.

@


7/15

Adinistrative e"pensesare non personnel'related costs directly related to the provision

of financial services or other services that form the MFOs financial services relationship

!ith its clients.

*epreciationrepresents the value of fied assets !ritten'off each year.

-rovisionssho! the costs incurred in the current fiscal period for creating a reserve for

/bad0 loans.

,"traordinar# Write6off(or a charge6off sho!s the value of /bad0 loans in the current

period. This item is necessary to distinguish these epenses from provisions against

future losses.

Financial costs are all interests- fees and commissions incurred on all liabilities of MFO.

n income statement relates to a balance sheetthrough the transfer of cash donations and

net profit (loss as !ell as depreciation- and in the relationship bet!een the loan loss

provision and the reserve. n income statement also relates to a cash flo! statement

through the net profit; loss as a starting point on the cash flo! (indirect method. 3nli+e a

%alance )heet an income statement starts at zero for each period.

3.3. Cash Flow Statement

cash flo7 stateent sho!s !here an institutionEs cash is coming from and ho! it isbeing used over a period of time. It classifies the cash flo!s into operating- investing and

financing activities.

Operating activities" services provided (income' earning activities.

Investing activities" ependitures that have been made for resources intended to generate

future income and cash flo!s.

Financing activities" resources obtained from and resources returned to the o!ners-

resources obtained through borro!ings (short' term or long' term as !ell as donor funds.

The direct method- by !hich ma#or classes of gross cash receipts and gross cash

payments- sho!n to arrive at net cash flo! (recommended by International ccounting

)tandards.

D


8/15

The indirect method- !or+s bac+ from net profit or loss- adding or deducting non'cash

transactions- deferrals or accruals- and items of income or epense associated !ith

investing and financing cash flo!s to arrive at net cash flo!.

3.4. Portfolio Report

portfolio reportprovides information about the lending and savings operations of an

MFO. It provides timely and accurate data about the quality of the portfolio. It usually

also includes other +ey portfolio performance indicators (e. g.- outreach.

portfolio report should represent the scale of late payment on loans of the end of the

current reporting period- and any measurement of late payment should be thoroughly

eplained?

.Information at a portfolio report usually includes"

2umber and value of loans outstanding at the end of the period

Total value and number of loans disbursed during the period

verage outstanding balance of loans

Galue of outstanding loan balances in arrears- value of payments in arrears

Galue of loans !ritten off during period

6ortfolio aging analysis

Information on loan terms- loan officers- savings accounts and balances- etc.

6ortfolio quality ratios can be calculated from portfolio information. This information

together !ith the aging analysis can give a picture of the health of the portfolio and can

also give valuable insight into an MFOs sustainability. This relates to the income

statement in that it is the portfolio that generates the income for the MFO. This relates to

the balance sheet in that it provides information on the value of the outstanding loan

portfolio and value of loans !ritten off during the period.

?)ee in details" /&isclosure ,uidelines for Financial 1eporting by Microfinance Institutions0. *onsultative

,roup to ssist the 6oorest. 7ashington- &.*- 8anuary 4995 (provisional version- pending results of field

testing.

B


9/15

This relates to the balance sheet and income statement in that the portfolio data is used as

an input to calculate the loan loss reserve on the balance sheet- from !hich the amount of

loan loss provision on the income statement is calculated.

For good evaluation of the portfolioEs value used to measure the level ris+ of loan default

that is assessed by t!o indicators"

5 The arrears ratesho!s the value of past'due principal payments as a

percentage of outstanding principal balance of the portfolio"

-ortfolioin'ipalding)uts

pay(entsprin'ipalduepastof/alan'erateArrears

=

6rtan

4 The portfolio at ris8 ratiomeasures the total outstanding principalbalance of all loans that have any payment in arrears as a percentage of the

outstanding principal portfolio.

-ortfolioin'ipalding)uts

loansdelin%uentof-ortfolioin'ipalding)utsratioriskat-ortfolio

=

6rtan

6rtan

%oth of these indicators have some disadvantages. The first of them underestimates the

amount of the portfolio at ris+- but the second eaggerates the actual ris+ of portfolio.

Cets return to our hypothetical firm /Microloan0. Table 4 sho!s the arrears analysis as

presented our firm /Microloan0. The value payments past'due is equal to 5=.D?H of their

portfolio.

Ta!le 2

5ast6due pa#ents 9principal: at end of )ear 3

(hare of total 5ercentage of

A


10/15

5ortfolio

Portfolio 800000 100!

5'=9 days late >9-999 ?H

=5'@9 days late =9-999 =.D?H

@5'A9 days late 5?-999 5.BD?H

More than A9 days

late

4?-999 =.54?H

Total 110000 13."#!

%ut if !e consider portfolio according to the balance of doubtful or uncollectible loans-

the potential effect of loan default is more significant. Table = points to =D.?H of

/Microloan0Es portfolio at ris+.

Ta!le 3

Outstanding of delin-uent +oans 9principal: at end of )ear 3

(hare of total 5ercentage of 5ortfolio

6ortfolio B99-999 599H

5'=9 days late 549-99 5?H

=5'@9 days late B9-999 59H

@5'A9 days late @?-999 B.54?H

More than A9 days

late

=?-999 >.=D?H

Total 3, 3!051

Further !e should test ho! accurately our indicators reflect the value and the level of ris+

in the collectible portfolio. Coans belong to uncollectible if they are removed from the

portfolio asset account and !ritten'off to the extraordinary riteoff or a 'hargeoff04

3sually- microfinance organization ma+es the decision to classify a loan as uncollectible

at its o!n discretion. %ut it is generally accepted that delinquent loans !ith payments

more than A9 days past'due are classified as uncollectible and should be !ritten'off the

boo+s.

The ad#usted portfolio analysis indicates that /Microloan0 is carrying ?9-999 in

delinquent loans of more than A9 days and the ad#usted portfolio is D?9-999 at the end of

ear =. This balance should be !ritten'off. %ut it is necessary to allocate this !rite'off to

the appropriate accounting period. There are t!o basic methods of allocating the !rite'

59


11/15

off" in the year in !hich the loan became more than A9 days delinquent or in the year it

!as originated. In table > !e use the first method because it is most accurate due to the

dates that are available for us in the case of JMicroloanJ.

Ta!le ;

Allocation of 7rite6off for h#pothetical fir $Microloan%

)ear 1 )ear 2 )ear 3

$traordinary !rite'offs

(annual

59-999 5?-999 4?-999

(cumulative 59-999 4?-999 ?9-999

3nad#usted 6ortfolio 5B9-999 ?99-999 B99-999

$%&'ste% Portfolio 1"0000 4"#000 "#0000

There is another category of loans to reflect the level of ris+. This is the category of a

doubtful loan. 3nli+e uncollectible loans- doubtful loans are +ept in the boo+ but a

reserve is established in the event that the loan becomes uncollectible. The calculation at

the table ? sho!s that at the end ear = /Microloan0 should have @>-?99 in reserves to

cover the actual level of ris+ in the ad#usted portfolio.

Ta!le

Calculation of reserve for loan loss at the end of #ear 3

5ercentage

re-uired for

reserve

Balance of

*elin-uent

+oans

Aount

re-uired for

reserve

5'=9 days

late

59H 549-99 54-999

=5'@9 days

late

4?H B9-999 49-999

@5'A9 days

late

?9H @?-999 =4-?99

Total K 4@?-999 @>-?99

Ci+e the etraordinary !rite'off- the provision epenses incurred in establishing the

reserve account must be allocated over the past three years. The most accurate !ay to

allocate the epenses is to classify the portfolios at the end of years 5and 4 and ad#ust the

reserve accounts accordingly. If the arrears information is not available- !e can assume

that the reserve account- as a percentage of the portfolio- should have been constant (and

55


12/15

equal to the current level in all three years. For our firm /Microloan0 the @>-?99 reserve

calculated is equal to B.@H of the D?9-999 ad#usted portfolio. Table @ sho!s the

distribution of this B.@H across years 5 through =.

Ta!le 4

Allocation of provision e"penses for loan6loss reserve

)ear 1 )ear 2 )ear 3

d#usted 6ortfolio 5D9-999 >D?-999 D?9-999

1eserve for bad debt (B-@H (5>-@49 (>9-B?9 (@>-?99

nnual 6rovision epenses 5>-@49 4@-4=9 4=-@?9

Finally !e should compare the results of these calculations to the provisions and !rite'offs that appear on the unad#usted financial statement and ma+e all ad#ustments. Table D

sho!s the relevant lines from the unad#usted %alance sheet of /Microloan0.

Ta!le -999 per ear.

In the end !e can introduce our calculated changes to the financial statements. nd of

course the net income and accumulated earnings accounts have other values due to the

ad#ustments and some additions. Thus !e have a possibility to construct the d#usted

Financial )tatement presented (see table A.

Ta!le >

The e"aple of !alance sheet and incoe stateent

of the h#pothetical fir $Microloan%

Ad'usted Financial (tateents )ear 1 )ear 2 )ear 3

Balance (heet as of 31 *ece!er of each #ear

5=


14/15

Assets

*ash 59-999 >9-999 599-999

Investments 5?-999 @9-999 A9-999

6ortfolio 5D9-999 >D?-999 D?9-999

(reserve (5>-@49 (>9-B?9 (@>-?99

Fied ssets 9 49-999 49-999

(depreciation 9 (>-999 (B-999

6roperty 549-999 549-999 549-999

Total Assets 3,3+ !,"5 ",!,5

+ia!ilities

Coans 9 4D9-999 >B9-999

&eposits 9 599-999 459-999

,-uit#

*apitalized $arnings =5?-999 =99-=B9 =59-5?9

ccumulated $arnings (5>-@49 A-DD9 D-=?9

Total $iabilities and E%uity 3,3+ !,"5 ",!,5

ncoe (tateent For 1 /anuar# To 31 *ece!er of each #ear

ncoe*redit Income 49-999 549-999 4?9-999

Investments ?-999 59-999 4?-999

&onations A9-999 A9-999 >9-999

Total &n'o(e ""5, 22, 3"5,

,"penses

6ersonnel B9-999 549-999 5??-999

dministration 4?-999 >?-999 @9-999

&epreciation 9 >-999 >-999

6rovisions 5>-@49 4@-4=9 4=-@?9

$traordinary 7rite'offs 59-999 5?-999 4?-999

Total )perational *osts "2#,2 2",23 2!,5

Financial *osts 9 5?-999 >9-999

Total Expenses "2#,2 225,23 3!,5

0et ncoe 91;42: 23


15/15

Bi!liograph#

5. ,uideboo+ for Microfinance Institutions. *ambridge- M" ccion International-5AAD.

4. ,roup to ssist the 6oorest- 4995. vailable at"

http";;!!!.cgap.org;html;pKtechnifsg.html=. ccounting )tandards 4995. 2e! or+" 8ohn 7iley and )ons- 4995. vailable at"

http";;!!!.ids.ac.u+;cgap;static;49>=.htm

>. $ternal udits of Microfinance Institutions" Landboo+. Technical Tool )eries2o. =. Golume 5- For udit *lients" %oards- Managers- &onors- *reditors- and

Investors. 7ashington- &*" *onsultative ,roup to ssist the 6oorest- (5AAB.

vailable at http";;!!!.cgap.org;html;pKtechnicalKguides9=v5.html

?. $ternal udits of Microfinance Institutions" Landboo+. Technical Tool )eries2o. =. Golume 4- For $ternal uditors. 7ashington- &*" *onsultative ,roup to

ssist the 6oorest- 5AAB. vailable at"

http";;!!!.cgap.org;html;pKtechnicalKguides9=v4.html

@. &isclosure ,uidelines for Financial 1eporting by Microfinance Institutions.*onsultative ,roup to ssist the 6oorest. 7ashington- &.*- 8anuary 4995

(provisional version- pending results of field testing. vailable at"http";;!!!.cgap.org;assets;images;F),uidelines'final.pdf

D. Technical ,uide for the nalysis of Microenterprise Financial Institutions. Inter'

merican &evelopment %an+ Microenterprise 3nit. 2ovember- 5AA?.B. &efinitions of )elected Financial Terms- 1atios and d#ustments for

Microfinance. 6rinted by" Micro- )mall and Medium $nterprise &ivision

)ustainable &evelopment &epartment Inter'merican &evelopment %an+.

ugust- 4994.

5?
http://www.cgap.org/html/p_technifsg.htmlhttp://www.ids.ac.uk/cgap/static/2043.htmhttp://www.cgap.org/html/p_technical_guides03v1.htmlhttp://www.cgap.org/html/p_technical_guides03v2.htmlhttp://www.cgap.org/assets/images/FSGuidelines-final.pdfhttp://www.cgap.org/html/p_technifsg.htmlhttp://www.ids.ac.uk/cgap/static/2043.htmhttp://www.cgap.org/html/p_technical_guides03v1.htmlhttp://www.cgap.org/html/p_technical_guides03v2.htmlhttp://www.cgap.org/assets/images/FSGuidelines-final.pdf

54 Accounting

Documents

Transcript of 54 Accounting