Introduction to financial statement; Cash vs. accrual - Segment 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.

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.

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.

Financial statements are used as a tool -- readers use them as a tool in decision-making. 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 that 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.

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.

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.

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.

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