At the risk of losing you right at the beginning, the story requires me to first tell you about something called a ‘chart of accounts’. The heart of an accounting system is the ledger, a collection of accounts (not to be confused with bank accounts), each a record of transactions about an expense, revenue, asset, liability or equity (the so-called ‘elements’ of financial statements). The list of accounts that can be used to record these transactions is called the chart of accounts. The international club of accountants (the IFA) says it nicely: ‘basically, a map of the locations available for storage of transaction details’[i].
The best charts are accompanied by, for each location, a little description of what goes in that location. (And for today’s piece of nice-to-know information, that’s called a ‘data dictionary’.)
The chart of accounts will dictate the format and contents of your financial reports. A critical step then.
Now to the story. A few years ago the Queensland University of Technology (QUT) developed a chart of accounts for Australian governments to use when asking for information from NFPs. The National Standard Chart of Accounts. In June last year they gifted it to your regulator, the ACNC. And now the ACNC has published it on their website. And this is where you come in, especially, according to the ACNC, if you are running a small to medium not-for-profit without ‘an accounting department or a sophisticated accounting system” (the June announcement), or ‘without the benefit of professional participation’ (the announcement this week). For the NSCOA, they say, is ‘a tool for you’, that is, this is something that professional accountants do, but that, contrary to the voice from the box before something dangerous is shown, you are encouraged to ‘try this at home’.
Maybe, maybe not.
Dummies.com says setting up a chart of accounts is simple: “just make a list of the accounts that apply to your business.” So presumably it’s even easier with the NSCOA: just go through the list and select those accounts that apply to you. So let’s try it.
The element that first comes to mind for most non-accountants is expenses (expenditure). So let’s look at selecting your expense accounts. We do this from the list here.
The description for the account name ‘Expenses’ starts by telling you that ‘This is a heading within the structure of accounts within the accountings (sic) software’. Implicit in this is the distinction between two types of accounts: headers and posting accounts. But what the ACNC listing doesn’t tell you here is that you can have more than one level of header. For instance, in the WA Government’s The National Standard Chart of Accounts for Not for Profit Organisations Recommended Guide for the grouping of accounting for reporting and acquittals they recommend three levels of headers above the account that actually records the transaction. For instance, Expenses/Personnel/Salaries & Wages. But only the first and third headers are included in the NSCOA.
So immediately we can see that it’s not quite as simple as we implied above when we said that accounts were places where we record transactions. Some are, but there can be a number of others that add together the information in a number of locations. And to get a report on expenses that is internally consistent and is easy to read it is essential to get this hierarchical structure right.
The second sentence says “Expenses are outflows or depletions of assets or occurrences of liabilities that result in decreases in equity other than those relating to equity.” What?! That’s not writing for non-accountants. Indeed not – It is the technical definition of expenses, something that even bookkeepers will not need to refer to very often.
Then there is an explanation of accounting for ‘in kind’ transactions. It says that ‘Organisations may elect to record “in kind” transactions…’ No, not always the case, for instance if you are signatory to the Australian Council For International Development’s Code of Conduct, or you are heading for that. See here. Plus see what’s proposed as a future Accounting Standard for NFPs.
It goes on to say that ‘Generally small to medium organisations do not recognise these items in their accounts.” Can you decide whether you should or shouldn’t include them without professional help?
The final item on the first page – there are twenty three more pages on expenses – is a note on accounting for cost recovery. Yes, there are options. Professional advice again may be needed.
Once we turn the page, we strike an issue that not even many (most?) accountants will notice. In fact even the WA Government guide mentioned above perpetuates the mistake. It is the contravention of the long accepted practice (codified in the Australian Accounting Standards if you have to follow them) that expenses have to be classified in a financial statement by either their function or their nature. Either or, not a mixture[ii].
Although the Standard doesn’t define either ‘nature’ or ‘function’, its examples are similar to standard practice taught in bookkeeping[iii]:
Changes in inventories of finished goods and work in progress
Raw materials and consumables used
Employee benefits expense
Depreciation and amortisation expense
Profit before tax
Cost of sales
Profit before tax (emphasis mine)
The difference is between showing the expenses themselves (the ‘is’ of the expense), versus showing the purpose of the expense (the ‘why’ of the expense). So you can see why it doesn’t make sense to mix the two classifications.
Unfortunately, the NSCOA not only fails to alert the user to this important and long-held distinction, but then presents in its single alphabetical listing of expenses a mixture of both classifications. For instance, this is the listing on pages 4-5:
6-0080 Bad Debts
6-0085 Board/Governance Expenses
6-0090 Business Planning, Reporting and Evaluation Costs
6-0100 Cleaning & Pest Control
6-0110 to 6-0200Client Support Services
Although these accounts are at a lower level in the account hierarchy than the examples in the Accounting Standard (above), I hope you can see that the first and the fourth accounts fit better with the idea of the nature of something, while the others fit better with the idea of a function of the organisation.
I could continue to go through the NSCOA in a similar fashion, but I think you can see why, despite the intent of the NSCOA, you should seek professional accounting advice before making up a chart of accounts yourself based on the NSCOA. And given that I have only covered a situation where you are starting from scratch, and the task is greatly complicated if you are changing a current chart into one using the NSCOA, I suggest that you follow the magician’s warning and ‘Please don’t try this at home’.
[i]Guide to Practice Management for Small- and Medium-Sized Practices, International Federation of Accountants, 201, Module 7, page 38].
[ii]Presentation of Financial Statements, For Not-for-Profit (NFP) Entities Only, AASB 101, AASB, October 2013, paragraph 99.
[iii] AASB 101, paragraph 102-103