Donor-funded projects and statutory books

Many non-profit organisations in Lesotho run projects funded by one or more donors. Each donor has its own budget, reporting format and timetable. At the same time, the organisation must keep statutory books and prepare annual financial statements (AFS) for the whole entity.

These are two different jobs. Problems start when they are mixed up. This article explains how to keep both in order.

Keep a separate ledger for each grant

The simplest rule is that every grant should be traceable on its own.

• Set up a separate project or cost centre code for each grant in your accounting system.
• Code every receipt and payment to the right grant when it is recorded, not at year end.
• Where a donor requires it, keep a separate bank account for the grant.
• Keep the signed grant agreement, the approved budget and any amendments together with the ledger.

If your system cannot track projects, a well-kept spreadsheet that reconciles to the general ledger every month is a workable start. Most modern accounting systems can do this properly, so it is worth checking.

Shared costs

Rent, utilities and some staff costs are often shared between projects. Agree an allocation method that is fair and that each donor accepts. Write it down, apply it consistently and keep the workings. Do not charge the same cost to two donors.

Restricted and unrestricted funds

Money given for a specific purpose is restricted. It may only be spent on that purpose. Money given without conditions is unrestricted.

• Track restricted balances for each grant: opening balance, receipts, spending and closing balance.
• Unspent restricted funds at year end are not free to use elsewhere. Check the grant agreement for what happens to them.
• Show restricted and unrestricted funds clearly in the AFS, in line with the reporting framework you use.

Donor reports and statutory financial statements

Donor reports and the AFS answer different questions.

A donor report shows how one grant was spent against its budget, for the donor's chosen period. It may be on a cash basis. It may use the donor's own categories and currency.

The statutory AFS cover the whole organisation for its financial year. They are prepared under an accounting framework, such as IFRS for SMEs, and usually on an accruals basis.

Because of these differences, the totals will not always match. That is normal. What matters is that you can reconcile each donor report to your ledger, and explain every difference. Keep a short reconciliation with each report you submit.

Audits and agreed-upon procedures

Two kinds of external work are common.

• Statutory audit. The auditor gives an opinion on the AFS of the whole organisation. Any requirement for this comes from law or your constitution.
• Project audit or agreed-upon procedures. A donor may ask for an audit of its grant, or for agreed-upon procedures. In an agreed-upon procedures engagement, the practitioner carries out specific checks agreed with the donor and reports the findings. It does not give an opinion.

Read each grant agreement early. Note what assurance it requires, who may perform it and when the report is due. Then plan the work alongside your statutory audit where you can, to avoid testing the same records twice.

Practical habits

• Hold a short monthly review of each grant: spending against budget, restricted balance and upcoming reports.
• Keep a calendar of donor reporting dates and the statutory year end.
• Keep supporting documents for every payment, filed by grant.
• If you are VAT registered, remember that your invoicing obligations, including Lekuka, apply in the normal way.
• Brief programme staff on coding and documents. Most errors start outside the finance office.

How we can help

We can help set up grant ledgers, reconcile donor reports to your books, prepare AFS and carry out statutory audits and agreed-upon procedures engagements, subject to our independence rules.

This article is general information, not professional or tax advice. Please speak to us about the requirements that apply to your organisation.