Accounting for Not-For-Profit Organization: Rotary International - Essay Example

Accounting for Not-For-Profit Organization: Rotary International Not-for-profit organizations are known to be expenditure driven such that they determine a need and find the requisite resources to meet it. As such, fund accounting forms a crucial part of their activities. In this paper, Rotary International, RI would be the not-for-profit, NFP organization to be evaluated. The background of the organization would be discussed including its mission and directorship. The core of this paper would however be the analysis of accounting for RI based on its latest financial results covering the financial period ending June 30, 2013. Rotary International is a not-for-profit organization that was founded on February 23, 1905 by the Chicago attorney, Paul P. Harris. The Rotary Club of Chicago provided a platform where diverse professionals would exchange ideas, forming meaningful and lifelong relationships. The name, “Rotary” came from the fact that earlier members used to rotate in each others’ offices for meetings. With its growth, Rotary International aimed at bringing together professional and business leaders so as to render humanitarian services, promote utmost ethical standards in various vocations and foster global goodwill and peace, this being in line with its motto of “Service above self.” In its structure are Rotary clubs, Rotary International and Rotary Foundation. This paper focuses on the Rotary International, RI which is the umbrella body supporting Rotary clubs across the globe and coordinates global campaigns, programs and initiatives. The mission of RI is to “provide service to others, promote integrity, and advance world understanding, goodwill, and peace through its fellowship of business, professional, and community leaders” (Rotary International, 2014). It is therefore a model of a charitable organization seeking to promote social interests in various communities around the world. RI has its world headquarters based in Evanston, IL in the US. It has international offices in Zurich, New Delhi, Tokyo, Yongdungpo-gu, Parramatta, São Paulo and Buenos Aires serving Europe/Africa, South Asia, Japan, Korea, South Pacific and Philippines, Brazil and Southern South America regions respectively. They also have offices in Great Britain and Ireland. Through this network, Rotary International, RI (2014) documents a current membership of 1.2 million people. These regions contribute towards the total donation income of RI. The presidency is the topmost position in RI. According to RI (2014), the president leads and motivates the members, ensuring they feel valuable, connected to each other and inspired. Ron D. Burton is the RI president, 2013/14 having retired in 2007 from a similar position at the University of Oklahoma Foundation Inc. He also served as the vice president of the Last Frontier Council of the Boys Scouts of America, receiving the Silver Beaver Award. Burton is a member of the American Bar Association. This Rotarian from Rotary Club of Oklahoma has served in various capacities in Rotary International since 1979 and The Rotary Foundation. He has won several accolades from his service to the organization. RI has twenty directors from diverse backgrounds but all of whom are members of their respective Rotary clubs. Other than the president, there is Gary C. K. Huang, a Rotarian from Rotary club of Taipei, who is the president-elect 2014/15. Anne L. Matthews is the serving vice president, Andy Smallwood, the treasurer and John Hewko, the general secretary. Other directors include Ann-Britt Asebol, John Boag, Jacques Di Costanzo, Celia De Giay, Mary Selene, Seiji Kita, Holger Knaack, Larry Lunsford, Takeshi Matsumiya, Gideon Peiper, P. T. Prabhakar, Bryn Styles, Michael Webb, San Koo Yun and Steven Synder (RI, 2014). These are Rotarians from diverse geographical regions and also encompasses directors from both genders, portraying the diversity of RI. They are professionals in various fields, either employed or self-employed. Of these, only the president, treasurer and general secretary are employees of RI. The total expenses for RI for the financial year ending June 30 2013 was $296,138,000. Donations, given as contributions in RI’s consolidated statements of activities amounted to $234,196,000 for the same period. Thus, the ratio of expenses to donations would be given by: Total Expenses/Donations = $296,138,000/$234,196,000 = 1.2645. This is a bad indication. Basically, the ratio of expenses to donations shows the extent to which the NFP organization used the resources donated to it (Ruppel, 2007). Thus, a ratio of 1.2645 for RI implies that the NFP organization spent 1.2645 times of its donations. As such, RI spent more than it received as donations. This could be a negative indication as it could mean that the organization risks entering into liquidity for lack of resources to honor its debt. On the other hand, and as has been widely appreciated, such a ratio is a positive indication of RI’s use of donations, further supplementing these donations for its missions. It is not wholly dependent on donations but has its own initiatives to finance its mission. RI’s ratio of expenses to donations indicates that the organization spends more than it receives in donations, hence the need to evaluate its other sources of income. Rotarians and friends of Rotary made a donation of $24 million while Bill & Melinda Gates Foundation gave a donation of $70 million in 2012/13. Other partners according to RI (2014) include the Aga Khan University, Centers for Disease Control and Prevention, Mercy Ships, UNICEF, World Health Organization and United Nations among others. Apart from donations, RI (2014) attributes its income to investments, 2012/13 financial period having realized $11.7 million from such investments. The NFP organization observes prudent investment management practices, adopting a diversified investment portfolio mix in global stocks, hedge funds and fixed income securities. These investment funds are managed by professionals in the field. In fact, donors could restrict their funds to investments by RI and the resultant interest and returns used by RI to finance its mission. Thus, RI has a solid income base diversified to donations and investments. RI incurred expenses in fund raising. According to RI (2014), this constituted 9% of RI’s expenditure, thus $ 26,652,420. The ratio of fundraising expenses to donations during this financial period was: Fundraising expenses/Donations = $26,652,420/$234,196,000 = 0.1138. This means that of all donations received, about 11.38% went to expenses related to raising the funds. Though a considerable portion, RI’s fundraising expenditure was reasonable enough not to greatly impact on the total income from donations. RI did not have any capital expenses in the period 2012/13. Its expenses were mainly on programs and members services, but also had a cumulatively considerable expenditure on operations and administration, messaging and communications, HR, legal and audit, governance and executive, international operations and finance. However, it would be noted that there was an increase of about $3,700,000 in its property and equipment values. This does not necessarily imply that the NFP incurred capital expenses but that it could be a result of appreciation of such assets. The unique accounting standards for NFP organizations require that they report their income in unrestricted, temporarily restricted and permanently restricted funds. Donors are responsible for restrictions on funds as noted by Ryan and Irvene (2012). Thus, RI had its permanently restricted funds for the year 2012/13 summing up to $234,713,000. During the same period, its temporary restricted funds were $71,715,000. The unrestricted fund totaled to $654,563,000. Permanently Restricted Funds are funds which donors restrict to designated purpose or for a designated period of time that will never attain expiration. The main purpose for this as argued by Nonprofits Assistance Fund (2009), is to make sure that the principle balance of the contribution forever remains as an investment and making the NFP just utilize the interest accrued and the returns on the investment as is the case with an endowment. Thus, RI was expected by donors to permanently lock and invest $234,713,000 in the 2012/13 financial period and just utilize the returns and interest on this investment. Of its total annual dues of $52,000,000 for the period 2012/13, RI dedicated a greater portion to its mission. As such, the expenditure on programs and member services was $17,820,000, this being about 34% of the annual dues. On administration, RI spent $9,750,000, this being about 20% of the annual dues. This includes operation and IT expenditure. Messaging and communications, international operations, governance and executive, finance and HR, legal and audit spent $9,580,000, $4,830,000, $4,400,000, $3,360,000 and $2,260,000 respectively. Therefore, a considerable portion of RI’s annual dues goes to its mission. However, there is much more spending on administration and related services as compared to the Rotary Foundation which only had 2% of its expenses on administration and 89% went to its mission. Perhaps, this could be because the Rotary Foundation co-shares in RI’s administration. Nonetheless, RI could be required to check on its administration expenses so as to be more effective in the effort towards its mission. Other important ratios to evaluate would be the rate of return on investments, spending ratio, fund ratio balance and discretionary fund balance changes. According to McCarthy, Shelmon and Mattie (2012), the rate of return on investments explains how well the NFP organization manages its investments. An ideal situation would be where this rate is higher implying that only the income from investment would be available for spending. The investment income for RI in 2012/13 was $11,700,000 while the funds that were available for investment totaled $115,100,000. Thus, the return on investment would be given as: Investment income including unrealized gains/Funds available to invest = $11,700,000/$115,100,000. = 0.1017. Thus, RI contributed extra income to supplement the donations received from investments. This desirable return on investments could be attributed to the claim by RI (2014) that its investment committee consists of professionals who work in conjunction with other Rotarians. Thus, this combination of professionalism and oversight ensures value for investments. The spending ratio informs on whether or not an organization spent all the resources accessible to it. This is calculated on the basis of the ratio of total revenues including support and other financing sources to total expenditures including mandatory transfers. A lot of organizations seek to spend less than the inflow, but also seek a balance so that their expenditure is not that low (Ruppel, 2007). Thus, for RI: Spending ratio = Total revenue/Total Expenditure = $392,070,000/$296,138,000 = 1.3239. This spending ratio, being greater than 1, means that RI spends less that it receives. This is ideal for the NFP organization so as to save money to be invested and generate more income for its mission. Furthermore, it indicates the goodwill that donors have on the organization such that from what th NFP receives, it is able to cater for all of its expenses. The fund balance ratio informs of the proportion of the total assets of an organization available for discretionary use. According to Ruppel (2007), this would be calculated by dividing the current year board designated and undesignated dollars by the total assets. Thus, for RI: Fund balance ratio = $960,991,000/$1,092,077,000 = 0.8800. With this ratio being less than 1, it implies that RI has adequate assets for discretionary use. Finally, it would be beneficial to consider if RI increased or decreased its discretionary resources in the given financial year. This would call for determination of discretionary fund balance changes which according to McCarthy et al. (2012) would be calculated by dividing the current year board designated and undesignated dollars by the prior year board designated and undesignated dollars. Thus, the discretionary balance changes for RI would be: $960,991,000/$858,761,000 = 1.1190. Thus, for the financial year under review, the discretionary balance fund grew by 1.1190, implying that the board increased its allocation for discretionary fund. This could be perhaps due to anticipated increase in activities or accrued deficits. It could also be a strategy to grow the fund in proportion to the increase in fund inflow. Therefore, appreciating the requirement for NFP organizations to responsibly maintain their resources, RI has its financial records publicly shared in its website. The 2012/13 financial period saw the NFP organization grow its donations, attracting the highest ever in its history, discretionary fund and also investment income. RI has been noted to be an effective NFP organization, spending all its donations and adopting appropriate strategies, notably investments, to supplement the needs for its mission. This explains the goodwill that RI has received such that it is able to finance all its programs satisfactorily. Despite some challenges with its administration cost as compared to the spending on programs, RI would be said to be financially stable and prudent in its expenditure. References McCarthy, J. H., Shelmon, N. E. & Mattie, J. A. (2012). Financial and accounting guide for not-for-profit organizations (8th ed.). Hoboken, NJ: John Wiley & Sons. Nonprofits Assistance Fund (2009). Managing restricted funds. Retrieved 21 March 2014 from https://nonprofitsassistancefund.org/ Rotary International. (2014). Rotary. Retrieved 21 March 2014 from www.rotary.org/ Ruppel, W. (2007). Not-for-profit accounting made easy (2nd ed.). Hoboken, NJ: John Wiley & Sons. Ryan, C. M. & Irvine, H. J. (2012) Not-for-profit ratios for financial resilience and internal accountability: A study of Australian international aid organizations. Australian Accounting Review, 22 (2), 177-194. Read More