Financial Statements and Books and Records - March 2010

Transcript

Slide 1:

Welcome to Canada Revenue Agency's Financial Statements and Books and Records webcast. This webcast is a recording of a webinar that occurred in March 2010. This session is no longer live, so if you have any questions, please call our client service at 1-800-267-2384 and an agent will be happy to help you. Thank you very much and we hope you enjoy this webcast.

Slide 2:

We just have a quick breakdown of the presentation and in this case we're just covering off two topics today: financial statements and books and records.

Slide 3:

So, financial statements are used by the charities directorate primarily as a monitoring tool to ensure compliance with the Income Tax Act. The financial and statements provide additional information to the reader on items related to your program expenditures and your sources of revenue. Financial statements must be filed with your T3010 registered charity information return to make it a complete filing. So if you don't file your financial statements, then your annual return filing is considered incomplete, at which point you could risk losing your registered status. Charities can lose their registered status for filing incomplete returns.
 
Unlike to T3010, financial statements are not posted on the website. However, they are public documents. So, if someone from the public were to request a copy of your financial statements, we do provide those to the individual that has requested it. And as such we do recommend that you remove any confidential information that might be on the statements themselves. Some of the smaller organizations we've seen have included things such as bank numbers, bank account numbers, S.I.N. numbers, recording your salaries in such a way that it becomes quite apparent who is receiving that salary, if you put a name attached to it. So we do recommend that you remove all of that information from the financial statements before you send them in to us, just to prevent us from releasing any information that could be considered confidential.
 
Another question that comes up quite often with financial statements is the issue of auditing. The CRA has no official requirement that you have audited financial statements. If you do not have audited financial statements, we ask that you have them signed by your treasurer before you submit to us, before you mail them to us. However, if your revenues are over $250,000, we do strongly recommend an audited financial statement at that point. And I will make one more caution; there could be a provincial obligation that you have your financial statements audited. So, just to clarify, CRA has no requirement, and if not, sign them by your treasurer, have them signed by your treasurer, but do check with your province if you are incorporated, if you have an obligation with them to have them audited.

Slide 4:

Financial statements are used as a tool -- readers use them as a tool in decision making. So they essentially have to have four characteristics to make these financial statements useful to the reader, so they can help them in making decisions about your organization. There are four key characteristics. We have understandable, relevant, reliable and comparable.

What we mean by understandable, you must describe the information on the financial statement in such a way that it means something to the reader. So the categories that you use, those descriptive categories help the reader understand how you spent your money and how you received your money. If you put everything in a miscellaneous expense account, for example, the reader will have no understanding of how that revenue was actually expended on programs.

What we mean by relevant, it needs to be current and timely. So, current means that it's related to the current fiscal year and timely means that it's provided to the reader in a timely fashion. So we ask financial statements be provided six months following the fiscal period end. And this ensures that when the reader reads the information, it is the most up to date.
 
Reliable. What we mean by reliable is that the information that's included in the financial statements, the events that it represents, actually occurred, that it's verifiable by source documents. That your estimates, if you're making any sort of estimates in your financial statements, that they're conservative.
 
And the final characteristic is comparability. What we mean by comparability, charities should endeavour to use the same accounting principles and methods from year to year so that when a reader looks at one year and then compares it to the next year; they're comparing apples and apples. If you were to use a cash accounting basis in one year and then move to an accrual in the next, those numbers are no longer comparable. In such case, if you do switch accounting methods, you would indicate that in your notes to allow the reader to understand why one year to the next show differences, and explain those differences.

Slide 5:

I briefly talked about this on the previous slide, the cash versus accrual accounting method. Charities can prepare their financial statements in one of two ways: either cash or accrual. I will note at this point, though, a number of fields on the T3010 in the Schedule 6 ask for information -- ask for the financial information on the cash basis. So if you are preparing your financial statements on the accrual basis, just be aware that the numbers that you put on the T3010 may not necessarily be the same, and that's okay. If there's certain figures that you represent using the accrual basis on your financial statement, you'll just represent them slightly different on the T3010 and that's perfectly acceptable.

So back now to the accounting methods. Cash is used when you're recording your revenues and expenses when the money actually changes hands. So when you have received a funding or you've paid an expense and you've recorded it, at that point you're working on the cash basis. The accrual basis is you record your revenues when they're earned and your expenses when they're incurred.

So if you're using the accrual basis, you'll likely set up a receivable account and a payable account. Those accounts are used to represent the amounts owing and the amounts owed by the charity. Accounts receivables are used to represent the amounts owing to the charity on a specific date for services rendered or goods sold. Some examples would be if you're operating a daycare, for example, and you have rendered the service. You've provided the daycare services for the month. But the person pays you at the end of the month, so at the beginning of the month, it's a receivable, it's an amount owing to the charity until such time that they've paid you. Another example would be GST Refunds. While you're waiting for those refunds, the period of time where you have not yet received the cash, it's a receivable at that point. Accounts payable, on the other hand, are what the charity owes to a specific individual or organization on a specific date. So, for example, any salaries that you owe to your employees, occupancy costs, mortgage payments, utilities, rent, all of those types of expenditures would be found in your accounts payable.

You're going to identify cash or accrual on your T3010. So you'll make that known at the top of the financial section, and if you choose to switch between methods, we ask that you notify the Charities Directorate in writing. You would contact our client service section at the address that is provided at the end of this session and just notify us that you've changed your accounting method. That speaks to the comparability aspect that I talked about on the previous slide. It helps us when reading your financial statements so that we understand what method you've used.

Slide 6:

There are two minimum financial statements that must be provided with the T3010 to the CRA. And that is a Statement of Assets and Liabilities, we commonly call that a Balance Sheet, and a Statement of Revenues and Expenditures, known as the Income Statement. Of course, there are other elements that could form part of your financial statements. There could be Cash Flow Statements, Statements of Retained Earnings. If you have audited financial statements, you'll likely have additional schedules attached to the back, and you would submit those to us, if, in fact, you have them. But the bare minimum is the Balance Sheet and Income Statement, and those are the two that we'll be discussing for the remainder of the financial statements portion of the presentation. In addition, you may have Notes, so Notes to the statements, and if you have those, we do ask that you send them in as well with your T3010.

Slide 7:

We're touching on the balance sheet, the first of our two statements. The balance sheet is a summary of your financial information at a specific point in time, the last day of the fiscal period. So if your fiscal period is January 1 to December 31, on your balance sheet you will represent the figures as of December 31st of that year. The balance sheet tells the reader about what the charity owns and what is owing to it, what the charity owes in terms of liabilities, and then an accumulated surplus or deficit, so the difference between your assets and liabilities.

Assets are objects, rights, claims, owned by the charity that have value and they're recorded on your financial statements at their dollar value. So you are to record those in the asset section at their dollar value. Generally, assets are separated into two categories. We have current and fixed. Current assets are readily convertible to cash, and the timeline that we use to differentiate between current and fixed is one year. So, if your short-term investments, for example, are maturing within one year, so one year or less, they are considered a current asset. Your bank accounts, of course, are very readily convertible to cash, so they are also considered a current asset, and any of your accounts receivables or inventories, because you're expecting within accounts receivable to be paid in a short period of time.

Fixed assets are your more long-term assets such as buildings, land. Long-term investments, things that are maturing in a time that exceeds one year. And those would be categorized under fixed assets. Remember if you are using credit to acquire an item, so if you buy something on credit, it's still considered an asset. So the charity still owns that item. You would record that item on the asset side under either current or long term or fixed, rather, depending on what the item is. And then you would show a liability for that on the other side of the balance sheet. Just keep in mind if you're using credit, it is still considered an asset.

And lastly, a quick note about the T3010B. Your capital assets are recorded at cost unless they're donated. If they're donated, they're recorded at fair market value. The reason why I bring up this distinction is that in your financial statements, in your balance sheet, you're going to record the asset in its dollar value. But in the T3010, you may reflect a slightly different value depending on whether or not the item was acquired by the charity or whether it was donated.

Slide 8:

We talk about the other side of the balance sheet, which is your liabilities. Liabilities are your obligations to another organization or individual. For example, a bank loan, very straightforward liability. You borrowed money from the bank, you owe that back to the bank, and that's an obligation you have and it's considered a liability.

Liabilities, like assets, are separated into two general categories. We have current, so that's your short-term liabilities and long-term liabilities. Current liabilities are, like assets, paid off within one year. We still use that one year threshold to distinguish between current and long-term. So your accounts payable, anything that you owe to a vendor, for example, would be considered a current liability. Your deferred revenue, deferred revenue is where you've received a payment but you haven't yet provided the service. An example of this would be if your charity operates workshops, for example, and they pay you in advance for these workshops, so book your time and pay you to come. But you haven't yet actually delivered the workshop to the individuals. That's deferred revenue.

Long-term liabilities. A straightforward example of long-term liabilities is your mortgage. Most mortgages will not be paid off within one year, so they are categorized as long-term. The one exception of this is the portion of the mortgage due in the next year. So say you have a 25-year mortgage and you put that in the long-term liabilities, the amount that you owe, the portion you owe in the next year is considered the current portion of the long-term debt. So that actually sits in the current liabilities section.
And then your difference between assets and liabilities is the net surplus or deficit. We hope that the assets are larger than the liabilities and that you have a surplus on that side.

Slide 9:

We touched on the income statement, which is your second statement that must be submitted with your T3010. The balance sheet represents a snapshot of a period of time, as I mentioned. It shows all of the figures on that last day of the fiscal period. The income statement, on the other hand, shows a picture of the whole year. So it shows all of the revenues that came in and how those revenues were spent based on the expenditure categories that will be listed on the income statement.

The revenue categories, some common ones we have are your cash or gifts in kind that you've received as donations. Maybe you'll have anonymous donations as a separate line. If you receive any government grants or funding, you would have that as another line. Any revenue that you've earned but not yet collected that, again, would show up in the revenue section. Your expenditure category will reflect your activities, so it will be -- it will identify certain categories that will reflect the type of activities you are engaged in and it will also have some general categories, I'm sure, such as salaries, rent, mortgage and you may have travel. If you're a foundation, you may have a line for gifting to qualified donees. That is considered an expense and certainly specific to foundations, so that might be a separate expenditure category. The difference between revenues and expense is your net income or net loss. So if you have a net income, it's your surplus for that year.

Slide 10:

We touched on the notes to the financial statements. So I talked a little bit earlier about the notes and that the notes provide context to the reader. When you read the balance sheet and the income statement, it truly is a summary of your financial position for that year. And what the notes to the financial statements do is provide additional context and explanation about different entries that have shown up in those statements. They assist the reader in gaining a better understanding of what your financial statements are reflecting.

There's considerable flexibility in the types of accounting methods that you can choose, so the notes provide you an opportunity to explain to the reader what accounting methods you have chosen and some of the decisions that the board have made. The accounting methods chosen should always appear as the first note to reader, so you'll list the accounting methods. But some of the other common notes that appear are the depreciation methods and the rates you're using to depreciate assets, any interest rates on investments.

Maturity dates are also a good place to put those are in the notes. Any potential liabilities. So, for example, say you had a lawsuit pending and all of your assets were frozen. So you would look -- until the outcome of the lawsuit is resolved, your assets are frozen. Then it will appear, obviously, in your expenses that you have no expenditures, so it will show as if you made no expenditures on your programs. The notes is the place to explain that. You would show this potential liability or this situation in the notes to your financial statements.

Another great note is 10-year gifts. If you've received a large gift that you must hold for a period of time, a minimum of 10 years, but maybe the gift has direction that you must hold it in perpetuity, that's another note. So it will show in revenue as a large donation, and then in the notes it will explain this donation actually must be held for a period of time. Essentially, you will include anything in the notes that will provide additional information to the reader to help them understand your financial statements.

Slide 11:

So we move now to slide 11 and we reach our first question break.

So I have a note from the individual that is screening the questions that there are a number of questions related to the T3010. I know that the financial statements are so closely linked to the T3010 that we try to -- or we often ask a number of questions about the T3010 in this session. Unfortunately, this session is geared to financial statements, so we won't be answering any questions about the T3010. However, I invite you to watch the webcast that we have on the website about the T3010, or sign up for a future T3010 webinar and relay those questions to the presenter at that time.

If you need an answer right away, you can always call the 1-800 number that is at the end of the session and one of our client service agents would be happy to provide you with an answer to your question.

Okay, so question number one:

In my income statement, I listed the opening bank balance at January 1, 2009. Where on the information return do I record this?

So in this case, you wouldn't record the opening balance on the T3010. You only include your financial position at the end of the fiscal period for your bank account balance.

Do registered charities require a year-end audit?

I touched on this, but I'll reiterate, no. There's no requirement by the CRA to have your statements audited at the year end. We do recommend if your revenues are over $250,000 that you do get an audit. If you do not have an audit, we ask that the treasurer sign your financial statements before you send them in.

You mention that the public can request a charities financial statement from the CRA and you will provide them. Is the charity obligated to provide financial statements to the public if they are asked directly?

No. You have no obligation to provide financial statements to the public. But it is in the charity's best interest to be open and transparent with its donors. It helps you maintain a healthy donor base. You can always refer that donor to us or the individual who has asked you, and we will go through the exercise of providing those documents to them.

Slide 12:

Okay. So we'll move now to slide 12, and you'll note on your slide that we've moved to the second element of the presentation, which is books and records. Keeping adequate books and records is an essential requirement for a registered charity to maintain its status -- its registered status. Financial statements, as we just discussed, form part of your books and records. So those are expected to be found in your books and records, but there are other documents you need to have on file. And that's what we're going to look at through the next few slides. So let's turn now to slide 13.

Slide 13:

So the obligation. Every charity is obligated under the Income Tax Act to keep books and records at a physical location in Canada. So that physical location, the address as identified in the T3010 at section F1, so you'll provide us that address there. For anybody interested in looking at these requirements in detail, you can look in section 232 of the Income Tax Act, and that outlines the requirement to keep adequate books and records.

If a charity is engaging activities out of Canada, so you might be carrying on some foreign programs, you still must keep books and records and they must be kept in Canada. You can keep copies or documentation in the country that you're operating, but you must keep your official books and records in Canada, even if your activities are abroad. CRA officials are authorized to inspect, audit and examine charities' records. They're also authorized to have copies made, including any copies of any of your electronic records. Because of this requirement, and because of this authorization, books and records must be kept at a permanent address in Canada for which a CRA official could gain access. So it needs to be a physical location. A P.O. Box is not acceptable; it needs to be a place where a CRA auditor could visit.

Slide 14:

The CRA does not specify what must be kept in your books and records. We have examples of what we expect to see, but we don't have a specific list, so it really does relate to the organization. It's organization specific. So, you will include records to support your transactions and your activities. Some examples of documents are included on this slide here. So you'll see things such as your bank statements, vouchers, purchase vouchers, inventories, any contracts, fundraising contracts, your governing documents, your by-laws, your meeting minutes, your financial statements, all of those types of documents that support your activities should be included in your books and records.

If the charity fails to keep their books and records and we perform an audit, let's say, and we determine that the books and records weren't kept in an adequate manner, we can specify at that point what books and records you must keep. So, while we don't specifically recommend what -- we do recommend, but we don't specifically outline what you must keep. We can, and reserve the right to specify at a later date what you should keep.

Slide 15:

Why are books and records so important? Well, they're important for the obvious reasons in that they allow the CRA to verify your revenues. They allow us to verify the charitable donations that you've received. They allow the CRA to verify the expenditures and that those expenditures were on charitable programs. They allow us to confirm your activities and purposes remain charitable as your books and records provide additional context and information about your activities.

Slide 16:

In addition to the reasons for CRA, the reasons why we consider them to be important, it also makes good business sense to have adequate books and records. As your volunteers and board members change, keeping complete books and records will help manage that change, will help keep your charity organized, will help with your succession planning in terms of training up new people that come in. If you have those books and records there, it helps them learn about the organization and learn about the decisions that have been taken. It helps maintain your corporate history. It helps justify activities that you've undertaken. It helps explain particular courses of action that the board may have chosen to take in a particular year.

The books and records explain, in detail, your operations. They give context to the reader about what the charity is undertaking. They help you be organized. If you're applying for financial assistance, having books and records won't necessarily guarantee you a loan but showing that you're organized and understanding your financial position will help you secure that financial assistance. So it's in your best interest to maintain those books and records and understand where your charity is at that particular time. You might have a provincial obligation to maintain books and records outside of the CRA's obligation. Keeping your charity in good standing by having -- in good standing with the province, in good standing with CRA, will also help to maintain a good donor base. So it's in your charity's best interest to keep books and records up to date and accurate.

Slide 17:

We're going to talk a little bit about some best practices. Now, just a word of caution on this slide; none of these are requirements by the CRA. So no bullet here “CRA Requires,” but it is information that we've collected over the years while we do these sessions and speak to the sector, and so we've collected these best practices and I wanted to share them with you. So, first is keeping your books and records in one place. It sounds simple, but if you're audited and your volunteers are asked to collect information or your treasurer is asked to collect information, if all of your books and records are in one place, it just makes it that much easier for everybody to find what they're looking for.

The charity is ultimately responsible for maintaining their books and records, so we recommend that you keep a backup of those documents and that you keep that backup at a separate location. So you can buy those large hard drives and you can back up all of your documents and then store that somewhere else, just in case.

Your financial statements and your books and records must be supported by source documents. So make sure, if you're entering transactions or you're reflecting activities in your books and records or financial statements, that you have the source documents there to support those. Source documents are things such as receipts, invoices, contracts that you've signed with fundraising companies or anything of that nature. Employee contracts, for example.

If the charity hires a third party, it's still responsible, ultimately responsible, for its books and records. So we do recommend that you do a little research on who you're hiring. Ensure that that person has experience and that understands what needs to be included in your books and records and understands how to properly report your financial information. Third parties could be anyone from a bookkeeper to an accountant, to application service providers, so anybody of that nature could be considered a third party.

Service clubs and fraternal societies. Some charities are the charitable arm of a service club or a fraternal lodge -- or fraternal society, rather. It's important that the charitable arm, so the charity, so the registered charity, understands that they need to keep separate books and records from that other organization. So you must maintain your own, and have documentation for all of the donations received and all of the activities that you've undertaken and associated expenditures.

Slide 18:

We talk about how long records must be kept, your retention periods. There's specific retention periods for each document and they're outlined in our Income Tax Regulations, as well as in I.C.78-10R4, books and records retention destruction. So, those two documents outline all of the retention periods for all of the various documents. What we've included on this slide is some of the common ones that we do get regular questions about.

Duplications of donation receipts is usually asked quite frequently. That only -- those documents only need to be retained for two years following -- a minimum of two years following the calendar year for which the receipt was issued. So this is the one exception. Normally, the retention periods follow the fiscal period, so it's the number of years after the fiscal period end. With donation receipts it's two years following the calendar year. So, for example, if you issued a receipt February 28, 2005, they must be retained until December 31, 2007.

Other documents have to be retained for the lifetime of the charity plus an additional period of time after the charity ceases to operate or dissolves. Some examples of this, 10-year gifts. If you receive 10-year gifts, documentation of those need to be kept for the lifetime of the charity. Your meeting minutes. So you need to make sure you keep your meeting minutes for the lifetime of the charity as well as your governing documents and any by-laws. Those need to be kept for the lifetime of the charity. If, for some reason, you wish to destroy books and records prior to the retention period, you can ask for permission by requesting this from the Minister. So you would write in and ask for permission to destroy and that permission would be granted or not granted. If it's granted, then you could proceed, at that point, with destroying the information earlier than stated in the Income Tax Regulations.

Slide 19:

We talk about electronic record keeping. In addition to the traditional paper format, the CRA also recognizes books and records that are kept in electronic format. Books and records that are kept in electronic format must be kept in electronically readable format. So what we mean by this is that the document must be able to be produced again for a CRA auditor to be taken back to the CRA and read on our systems. That's what we mean by readable. You must keep all of your documents. If you choose to go the electronic route, it must be continued to be kept in electronic format even if you printed hard copies. So you must maintain that electronic formats.

Books and records that are kept -- sorry. Books and records that are accessible, if they're kept outside of Canada, but are accessible electronically from Canada, are not considered kept in Canada. So what we mean by this is that the server has to be in Canada. If you're storing your documents, they need to be within Canada. So even if you can access them from a remote server or something of that nature, that does not meet the requirements. So, do make sure they're kept here. We have an additional IC, IC05-1 that talks about electronic record keeping and you can look to that for more information.

If you're on our website, under the tool box for directors, on the main page, you'll find there's a lot of documents there where you can get information about books and records, about these IC's that I'm referencing. If you don't have time to jot down the numbers, you can use our website. All of those resources are there and filed in such a way that it will be fairly easy for you to track those down.

Slide 20:

So in terms of consequences should you not keep your adequate books and records, we generally have four courses of action.

The first is an education letter. So if the CRA determines that your books and records weren't kept in accordance with our regulations, we can send a letter that educates you on the rules and regulations and what must be kept in the future. That's number one.

Number two is a compliance agreement. It's more formal. It's a negotiated contract between the charity and the CRA. It outlines what the issue is, the corrective measures that will be undertaken by the charity, the time frame in which you will do so and the consequences, should it not be achieved within that time frame.

In addition to that, we can also suspend the charity's receipting privileges. This is reserved for more serious cases of failure to keep books and records, but it is a course that we have available to us.

And lastly there's the revocation of a charity status. That is, of course, our last resort and certainly is reserved for serious cases of non-compliance.

Slide 21:

We have our question -- our last question break. I have a few questions here.

What information must one have on a receipt? Is an interact receipt for a meal sufficient?

So, the interact receipt, I'm assuming, is the one that comes out of the interact machine once you've paid. That wouldn't be acceptable. You would need the itemized receipt from either the restaurant, in this case because it's a meal, that actually itemizes what it was that was purchased in order to support that transaction.

Could you please detail specifically what we, as the charity, need to receive to prove receipt of an expense payment for a missionary project?

Okay, so if you're engaged in activities outside of Canada and you're going on a mission, we would expect documentation for all activities performed by that particular individual on the project. So, if they've gone there to perform work, you could have pictures of the project completion, you could have receipts for the airline travel, receipts for meals, receipts for lodging, reports on progress, all of those types of documentation would support expenditures on this project.

Do the books and records need to be kept as physical documents, or can they be kept as digital media? (Computer files and CD Records)

Okay, so I talked about this. I don't know, perhaps this question came in before the electronic records slide. The electronic records are subject to the same rules and retention periods as traditional paper formats and, yes, it's perfectly acceptable to keep your records in a digital format.

One last question here:

Duplicates of official donation receipts. Does an electronic copy qualify as a duplicate?

Yes, it's part of our electronic record keeping guidelines. You'll see that under the IC05-1 it's perfectly acceptable to keep electronic duplicates of donation receipts, and you would keep them for the retention periods, as specified.

Slide 22:

This wraps up our session today.

Thank you, and we hope you enjoyed this webcast. The Charities Directorate will continue to offer webinars. Visit our Charity Webinars website for more information.

Also, if you haven't already signed up for the electronic mailing list, we invite you to register on the Charities and Giving website. You will receive one to two e-mails a month with new information and updates affecting registered charities. The electronic mailing list is also one of the means we use to let you know when the next Charities Information Webinars will take place and how to register.

If you would like more information on this topic, please contact our client service at 1-800-267-2384.