Effectively Presenting Financial Statements An Introduction to the Basics February 10, 2005 David Brighten CAFM CGA

1. Effectively Presenting Financial StatementsAn Introduction to the BasicsFebruary 10, 2005David BrightenCAFM CGA

2. WHO WE ARE�

3. WHO WE ARE CONT�D� David Brighten CAFM, CGA 18 years in the accounting profession 15 years working with First Nations Advisor to the Waskaganish First Nation National Management Committee of Porter Hetu International

4. LETS KEEP THIS FUN! BEGINNER SERIES PLEASE ASK QUESTIONS

5. PLAN FOR TODAY Why explain? What financial statements are What financial statements are not Why is presentation important? Financial statement concepts Presenting financial statements

6. WHY EXPLAIN? This information is important! Non-Accountants don�t understand Lack of understanding can lead to misconceptions Decision making and the ultimate health of a community or organization requires good information

7. WHY EXPLAIN? It is not a good sign when the wrong conclusions are drawn It is not a good sign when no decisions are made It is not a good sign when the audience snores

8. WHAT STATEMENTS ARE�. Financial Statements are a written report which quantitatively describe the financial health of an organization. The major statements are: Balance sheet Revenue and Expenditure Changes in Fund balance Cash Flows Notes to the Financial Statements

9. WHAT STATEMENTS ARE�. Issued periodically i.e. monthly, quarterly or annually Internal or external Audited or unaudited Often will include a report or opinion External accountant may Review or Audit

10. WHAT STATEMENTS ARE�. Responsibility of Management and approved by Chief and Council Prepared by the Band/Organization even if audited

11. WHAT STATEMENTS ARE�. Historical Report Balance sheet is at a point in time �A Picture� Income and Expenditure is over a period of time �A Movie�

12. WHAT STATEMENTS ARE�. Prepared using an acceptable standard Generally Accepted Accounting Principles GAAP Other standards may be acceptable

13. WHAT STATEMENTS ARE�. Financial statements are based upon GAAP. GAAP may not always reflect today�s reality � i.e. historical cost concept Include estimates Flawed � but still best method we have

14. WHAT STATEMENTS ARE�. Financial Statements are the single most important tool management has in making decisions

15. WHAT STATEMENTS ARE NOT.. Financial Statements are not perfect Do not predict the future Not prepared by auditors � auditor reports on the statements May not include �immaterial� items

16. WHAT STATEMENTS ARE NOT.. Financial Statements are not on a cash basis and therefore do not specifically report cash flows or predict cash flows.

17. QUESTIONS? QUESTIONS?

18. Why is presentation important? In this section, we will discuss who uses financial information and why the presentation is critical.

19. Why is presentation important? Who are the users of financial information? Who are the decision makers? How will the financial information be interpreted? Will the reader understand? Don�t make assumptions!

20. Why is presentation important? When preparing the presentation, identify the users and decision makers and determine what information is critical to them. Ensure the presentation is written in a manner the audience will understand Use non-numerical tools such as graphs, charts, etc.

21. Why is presentation important? Presentation of information can influence the reader For example, a business has a loss of $1 million, this can either be terrible news, or great news depending on the presentation �We have lost $1 million and we must lay-off employees� �We only lost $1 million due to our aggressive efforts to reduce costs�

22. Why is presentation important? How much detail is required? Too much detail can distract the reader from the message you are trying to convey

23. Why is presentation important? Example Financial Statements tell us that we have a crises in the Rental Housing Fund that requires immediate action Statements include too much detail showing the repair expense to each house Minor arguments start about the repairs, and who got the �new flooring� What happens � the true issue of the crises gets ignored!

24. Why is presentation important? Simply handing out financial statements without explanation or presentation can lead to unexpected results

25. Why is presentation important? Example Financial statements include accrual of expenses. Salaries have been accrued to a special project in order to justify spending the funding so none must be repaid The employee whose salary was accrued suddenly stands up and demands to be immediately paid because �I didn�t make that much!� Result � misunderstanding and delay

26. Why is presentation important? Tailor the presentation to the needs of the user If a decision is required, ensure that all the information required is clearly presented and is understandable Omit from your presentation unnecessary details and issues that distract from the message

27. QUESTIONS? QUESTIONS?

28. Financial Statement Concepts To properly present financial information you must understand the concepts first Explain to your audience these same concepts so they understand Watch out for accounting concepts that can cause confusion � i.e. Deferred Revenue

29. Financial Statement Concepts The Report If an external accountant is issuing the statements, it should have a report attached. There are 3 kinds of reports: Notice to Reader Review Engagement Audit Explain to the audience which report it is and what the report means

30. Financial Statement Concepts A Notice to Reader provides no assurance at all. Not audited May not be Generally Accepted Accounting Principles May not be accurate Lowest type of statement

31. Financial Statement Concepts Review Engagement Provides moderate assurance that the statements are in accordance with GAAP Not intended to detect fraud Not audited Middle level of assurance

32. Financial Statement Concepts Audited Statements Accountant gives an opinion if the financial statements are fairly presented and which standard applied � usually GAAP Accountant has applied verification procedures Highest assurance

33. Financial Statement Concepts Generally Accepted Accounting Principles are rules set by the Institute of Chartered Accountants (CICA) and are contained in the CICA Handbook

34. Financial Statement Concepts Internally prepared financial statements do not usually have a report attached Are unaudited Usually interim � i.e. for the 6 months ended September 30 Often informal

35. Financial Statement Concepts MATERIALITY Materiality means only presenting numbers or information that is useful and meaningful. Errors and omissions may exist and are acceptable if they are not useful and meaningful

36. Financial Statement Concepts EXAMPLE If someone forgets to record a purchase of photocopy paper in the amount of $500 out of a budget of $10 million, this omission will not affect the overall statements � it is not material If a purchase of a $50,000 truck is omitted, it might be important, depending on the budget and circumstances � judgment is required If $500 has been stolen, it is likely very material because no theft can be ignored

37. Presenting Financial Statements Auditor�s Report to the First Nation We have audited the balance sheet of�.as at�..These financial statements are the responsibility of the First Nation�.Our responsibility is to express an opinion�. An audit includes assessing the accounting principles used and significant estimates made by management� In our opinion�in accordance with generally accepted accounting principles in Canada�.

38. Financial Statement Concepts The Balance Sheet The balance sheet is at a point in time. It is like taking a �picture� of the financial information. It could look completely different just 1 day later.

39. Financial Statement Concepts The Balance Sheet displays what is owned by the entity and what is owed by the entity The total owned (assets) must equal the total owed (liabilities plus fund balance) The fund balance represents the assets not owed to third parties

40. Financial Statement Concepts Current Assets Current Assets are financial property that is either cash or can be turned into cash in less than a year Usually includes cash, accounts receivable, inventories, funds held in trust, prepaid expenses

41. Financial Statement Concepts Other Assets are usually amounts that are receivable or property that cannot be turned into cash in less than a year and includes Long-term loans receivable, investments in subsidiaries, capital assets etc.

42. Financial Statement Concepts Capital Assets include equipment, houses and buildings, water sanitation facilities, furniture and fixtures, roads etc. Capital assets shown net of amortization (depreciation) Amortization now required and charged directly to the fund balance

43. Presenting Financial Statements FIRST NATION BALANCE SHEET Year Ended March 31, 2003 ASSETS Current Assets Accounts Receivable $1,000,000 Rents receivable 525,000 Total current assets 1,525,000 Capital Assets 1,000,000 Due from subsidiary 60,000 Funds held in trust by DIAND 67,729 2,652,729

44. Presenting Financial Statements

45. Financial Statement Concepts Current liabilities are amounts owed within 1 year and typically include items such as bank overdraft, lines of credit, accounts payable, deferred revenue and current portion of long-term debt Must explain that this is a future obligation

46. Financial Statement Concepts Deferred Revenue Cash has been received and must be spent on a specific program, project or purpose A liability Often misunderstood by readers

47. Financial Statement Concepts Long-Term Debt Housing Mortgages Term Loans Other debt

48. Financial Statement Concepts Do users understand debt? Some cultures have no concept or word for debt Many members believe houses are provided for free � not borrowed money Must explain that this is a future obligation

49. Financial Statement Concepts The Fund Balance Restricted and Unrestricted Represents the cumulative surplus/deficit of operations since the beginning of record keeping Does not mean dollars are available to spend or distribute

50. Presenting Financial Statements FIRST NATION BALANCE SHEET Year Ended March 31, 2003 LIABILITIES Current Liabilities Bank Indebtedness $ 500,000 Accounts Payable 47,000 Mortgages payable 1,440,000 1,987,000 FUND BALANCES Restricted Funds 51,029 General Fund 540,000 Capital Fund 74,700 665,729 $2,652,729

51. Presenting Financial Statements

52. Financial Statement Concepts Balance sheet presentation method should at a minimum: Explain that cash, term deposits and receivables are usually committed to liabilities Liabilities are a promise to pay - sometimes over many years Capital Assets should be related to long-term debts if applicable

53. Financial Statement Concepts Statement of Income and Expenditure Reports revenue by source i.e. DIAND Reports expenditures by category i.e. salaries Detailed statements for each fund and/or project

54. Financial Statement Concepts Statement of Income and Expenditure Funds and projects shown separately Accrual accounting used Deferred revenue adjustments Readers may not understand that this is not cash basis

55. Financial Statement Concepts Statement of Income and Expenditure � Explain that: Deficits must be funded Surpluses do not mean there is more money to spend Surpluses often misunderstood

56. Presenting Financial Statements FIRST NATION STATEMENT OF OPERATIONS Year Ended March 31, 2003 REVENUE DIAND $3,650,000 Housing rental revenue 945,000 HRDC 315,000 Health Canada 800,000 5,710,000

57. Presenting Financial Statements FIRST NATION STATEMENT OF OPERATIONS Year Ended March 31, 2003 EXPENDITURES Rental housing costs 1,210,000 Administration and community charges 3,000,000 Salaries and benefits 1,500,000 Interest on mortgages 15,000 5,725,000 Deficit for the Period (15,000)

58. Presenting Financial Statements Rent collection is insufficient - less than 1/2 being collected

59. Presenting Financial Statements Rents charged are not sufficient to cover costs

60. Presenting Financial Statements Include in the presentation a comparison of actual results to budgeted results. EXPENDITURES ACTUAL BUDGET Rental housing costs 1,210,000 900,000 Administration and community charges 3,000,000 2,950,000 Salaries and benefits 1,500,000 1,500,000 Interest on mortgages 15,000 15,000 5,725,000 5,365,000

61. Presenting Financial Statements

62. Financial Statement Concepts Notes to the financial statement form part of the statements Notes provide supplemental information, additional detail and disclosures, or original information such as contingent liabilities

63. Presenting Financial Statements Note #5 Mortgage on Housing Project #02 for 24 residential houses from the First Nations Bank, bearing interest at 7% per annum redeemable in 144 monthly installments of $10,000 plus interest, guaranteed by INAC

64. Presenting Financial Statements Keep the presentation: Short Interesting Relevant Understandable

65. QUESTIONS? QUESTIONS?

66. THANK YOU! DAVID BRIGHTEN CAFM CGA HARTEL FINANCIAL MANAGEMENT CORPORATION OTTAWA (613) 837-8282 www.hartel.ca brighten@hartel.ca