Query 1. In most major contracts, contractors negotiate for advance payments, which ordinarily range from thirty to fifty per cent of the contract value. This poses the risk for the buyer. To address this risk on advance payment to supplier, RTE should ask for repayment or advance payment guarantee assuring the repayment of the down-payment in the vent of non-performance. They are issued for the full amount of advances. The specific risk covered by repayment guarantee is ordinarily described in general terms, namely non-performance. Accordingly, the text of most repayment guarantees does not indicate whether the beneficiary can only call the guarantee in the event that the supplier has failed to apply the advance payment to certain specific activities to be carried out in the early stages of execution, such as the purchase or manufacture of equipments, the preparing of drawings and designs or supply of materials and equipments, or whether the guarantee can be called if the supplier has failed to carry out the contract up to the amount for which the supplier received advance payment, or whether the beneficiary is justified in calling the guarantee if the contract has not been completed.
In such event,
the repayment guarantee operates as a variant of a performance guarantee and might run simultaneously since a performance guarantee does not secure repayment of the down-payment. it is worth noting that a repayment guarantee can be called for the full amount and for the same reasons as in the case of a performance guarantee, namely non-performance of the principal contract, and without any restriction save those which are explicitly mentioned in the text of the guarantee. This proposition accords with the basic rule of guarantees that they can be called, provided that the terms and conditions as specified in the text are met. It also accords with the fact that buyers are ordinarily not interested in the manner the down-payment is applied as long as the contract is properly performed.
Repayment guarantees often contain a reduction clause. Reduction clause typically provide for a reduction of the maximum amount upon evidence of progressive performance. The maximum amount is ordinarily reduced to zero when goods have been supplied or when works have been carried out to the value of the advance payment. The repayment guarantee then ceases to have effect, and completion of the entire transaction will, thereafter be secured by a performance guarantee. Insertion of a reduction mechanism clearly reveals that parties intended the repayment guarantee to ensure execution of the initial stages or parts of the contract only.
The object of repayment guarantee is broader than that of a performance guarantee. I can also be called, for example, when the contract is cancelled by mutual consent, if the contract can’t be executed because of force majeure or if the contract turns out to be void, invalid or unenforceable. This is because repayment guarantees envisage primarily a refund of advance payments which have been made in anticipation of execution of the contract and which can be viewed as a loan, whereas performance guarantees secure compensation for losses other than the advance payment which results from breach of contract.
It is advisable that the repayment guarantee explicitly stipulates that it does not take effect until the down-payment has been received.
Query 2: The filing of financial statement and reporting is required only of organizations whose annual turnover exceed $100,000. Annual reports are most common among nonprofit organizations, foundations and charities which, from a financial viewpoint, produce them to answer the questions most often posed by donors and would-be donors. The donors are always interested in knowing that how their donated money is spent by the charity, hence filing and publishing annual report is necessary for the charity organization.
While the circumstances receiving public attention relate primarily to public companies, charity organizations are not immune to the misapplication of accounting principles. Boards of directors, management and independent auditors must be vigilant to ensure that accounting principles used are appropriate and are appropriately applied (Hopkins and Gross, 2009). In addition to meeting the “letter of the Law” as found in various accounting standards, not for profit organizations must ensure that the applications of generally accepted accounting principles to their financial statements results in statements that truly do present fairly the activities and financial position of the organization.
RTE is a big charity organization with an annual turnover of $2.5 mn and is required by law and regulations of the state in which they are located to have their financial statements audited each year and hence, it should establish audit committee to oversee this obligation. Generally, the audit committee member represents a subgroup of the members of the board of directors, although sometimes non-board members are invited to join audit committees.
Audit committees generally concern themselves with ensuring the integrity of the financial reporting process for charity organization by understanding and overseeing the organizations’ internal control, internal audit functions, financial reporting process, and engaging the independent certified public accountant that will audit the financial statements.
The financial section such reports usually includes, at most, audited financial statement which comprises of a balance sheet and income statement, an opinion letter from the auditor and any accompanying footnotes and as with public company reports, nonprofit versions usually include a listing and the addresses of the organization’s directors and officers (Larkin and DiTommaso, 2011). The narrative contents for an annual report include:
Letter from the Chairman, President or CEO.
A description of the organization and summary of operations.
Narrative: depending on the charity’s work profile, in includes personnel or operational features, reports from other managers, operational highlights, new products or services, historical facts or advocacy or public interest message. A few organizations have even included advertising for their divisions and products.
Balance sheet which tells what obligations would be due in near future and what assets will be available to satisfy them.
Income statement informs the revenue and expenses for the financial year.
The cash flows statement informs the inflow and outflow of cash during the financial year.
The notes which provide essential detail about the company’s accounting policies and other key factors that affect its financial condition and performance.
The primary objective of financial reporting is to provide economic information to permit users of the information to make informed decisions. Users include both the management of the company that is the fundraisers and the external users like donors in charity organizations (Porter and Norton, 2010). Charity organizations like RTE which provide services, do try and match income and expenditure such as costs of and revenues from renting the room and fees from educational courses. However, the format of traditional income and expenditure account that lists separately the income and expenditure does not work efficiently for charity organizations since it merely lists all revenues such as donations and also fee income and then deducts all revenue expenditure. Consequently, no direct matching is possible and inevitably, it is required to link these by the method of notes of revenue and costs where they are directly attributable. This practice demonstrates the surplus or deficit on every particular activity.
The annual report should be filed in the form of Trustees Annual report for the charities with £25,000 as gross income. The size and length of report is dependent on the size of charity and information which is mandatory for all the Trustees annual report. The account of charity can be prepared on the basis of payment and receipts or on the basis of accrual. The receipts and payment method is suitable for the charity with gross income of £2.5 mn or less. The annual report comprises of the accounting of the money paid and received by the charity in the present financial year, along with the statement providing details of the liabilities and assets at the year end. Accrual based method is suitable for companies with the turnover of £2.5 mn above. The contents of the annual report as discussed above are mandatory. The annual report of the Trustees should contain:
Review of main and significant activities undertaken by charity to expand its charitable purpose for the benefit of public.
Statement by the trustees of charity regarding the conformation to the charities act as applicable.
Query 3: One of the principal differences between charity organization and company is that they have different reasons for their existence. The ultimate objective of company is to realize net profit for its owners through the provision of some product or service required by people whereas ultimate objective of charity organization is to meet some
socially desirable needs of the community or its members. The differences between the reporting requirement of the charity and company arise out of their purpose of existence and have significant implication over the financial reporting. A key objective of financial reporting is to provide information about an entity’s financial performance during a specified period. The main objective of a typical company operated business is to earn profit – to ensure that over the life of enterprise, its owners are returned more cash then they contributed. Accordingly, financial statements that focus on net income are consistent with the entity’s main objective. Specifically, an income statement is a report on how well the entity achieved its goals. Contrary to company goals, charity organization have objectives that further from the bottom line and may seek to promote the welfare of their employees and executives, improve the community in which they are located, and purchase good that will enhance the quality of life.
Financial accounting and reporting, however, are concerned almost exclusively with the goal of maximizing either profits or some variant of it, such as cash flows. The financial reports of charity organizations provide information about the inflows (revenues) and outflows (expenditure) of cash and other resources. The company’s financial reporting is based on the revenue earned and the cost of goods sold along with identifying the causes of loss of revenue or increase in the profit so as to inform the external users (shareholders) on the financial performance of business. The charity’s financial reporting is based on the information provision by matching receipts with purchases and to inform the donors on the efficient usage of their donations.
The financial reporting of the company is to inform its shareholders on the continuation of business and the growth in the business along with capture of marketplace to ensure efficient return on money invested. On the contrary, charity financial reporting is governed by their budgets and not by the marketplace. Through their budgetary process, charity’s control their revenue and expenditure and also exhibits transparency in their transactions to their users. Moreover, the charity’s function at minimal cost level to decrease the process of their services to community to ensure their usage and hence, function on matching the income or proceeds from the charity to their expenditure.
The chairman’s statement in annual report of the charities comprises of the charity acts conducted by the organization in the financial year and is dependent on community well-being, however the company annual report’s chairman address comprises of business performance and significant steps taken by business to ensure profitability and increase the net worth of company in the financial year.
The income statement and balance sheet of the company are complex entries, along with notes provide sufficient information to the stakeholders to carry out financial report analysis to analyze the performance of the company, whereas the income statement and balance sheet of the charity divulges the information related to receipt and purchase and expenditure like maintenance of the classrooms for RTE.
References
Bruce R. Hopkins and Virginia R. Gross. (2009). Nonprofit Governance: Law, Practices, and Trends. John Wiley and Sons.
Gary A. Porter and Curtis L. Norton. (2010). Financial Accounting: The Impact on Decision Makers. Mason: Cengage Learning.
Richard F. Larkin and M. DiTommaso. (2011). Wiley Not-for-Profit GAAP 2011: Interpretation and Application of Generally Accepted Accounting Principles. John Wiley & Sons.
Tan, W. (2007). Principles of Project and Infrastructure Finance. New York: Taylor & Francis.
What information must go into Trustees' Annual Reports? (2008, May). Retrieved January 12, 2012, from Charity Commission: http://www.charitycommission.gov.uk/Charity_requirements_guidance/Accounting_and_reporting/Preparing_annual_reports/What_information_index.aspx
