Finance and Accounting in First Nation Communities: Understanding Financial Reporting

The Purpose of Financial Reporting

Hello everyone. My name is Sergio Saccucci and I will be the instructor for this course which is Finance and Accounting in First Nation Communities. In today’s session, session one, we will be looking at the financial statement. The four learning objectives are as follows. The reasons for financial reporting, looking at why we do all the work to compile and record financial data. The second learning objective is the accounting equation. This here equation is how we balance all the financial data with respect to the balance sheet. The third learning objective, we will be looking at the four main financial statement types and the fourth item, we will be looking at the characteristics of the accounting information. Looking at the guiding principles of the accounting information.

There are many purposes for financial reporting and these could differ from situation to situation. What’s listed here are five of the main reasons we undertake financial reporting. To Keep Shareholders/Stakeholders Informed The first is to keep the shareholders/stakeholders informed. We listed shareholders and stakeholders because not every situation you may have a shareholder. For example, you may have a First Nation Band that a lot of the Band members are interested in the economic activities that the Band may have. They may not be a direct owner, but they are very interested in the economic venture and how it is performing. One way to make sure that they stay informed is by presenting financial data. For financial data to be presented, it needs to be compiled and we will be looking at those mechanisms, we’ll be looking at the way the data is compiled in order to have a report. By having that report and having that report at the disposal of the shareholders and stakeholders they become aware of the situation either good or bad.

Sometimes you may think that it may be negative to show bad information or show information that shows a financial loss. Which is quite the contrary, because you want to show the shareholders/stakeholders that you are on top of the situation. You want to be just as quick to inform them of good information as is bad. For example, if there is a situation that needs to be addressed it’s a financial loss, some negative instance has occurred, how do you show the shareholders/stakeholders that you are on top of the matter? By addressing it early, by explaining the situation and then discussing a course of action, a plan of action, a response - how are you going to address the situation? For the Bank, Lenders, Creditors.

Budgeting and Forecasting (Internal Use)

Another purpose for financial reporting is for creditors, like lenders [and] Banks. [In] most cases economic activities, businesses, organizations, government, non-government, Band offices typically have some form of Banking/lender/creditor arrangements and typically these Banks/lenders/creditors want to know what is going on financially. How are they going to know what is going on financially? Typically, by the financial reports.

Those financial reports that are produced will enable the Bank/lenders/creditors to be aware of what the financial status of the situation is. It’s not always the most important thing, there are also non-financial items that are important. But as a lender, as a Bank, for them to protect their resources they will want to stay on top of the situation. And again, how do you stay current on the situation? By being able to view the financial reports. It does not show very well if an organization is unable to provide financial reports because then it shows that there are very poor financial controls. Again, good or bad, you want to be on top of the situation and show that if there are good things happening, how are you going to continue with that. If it’s something negative, then how are you going to address that negative situation, how are you going to overcome it, why the strategy that you want to suggest.

The third purpose is budgeting and forecasting. This is typically for internal use, however, the Bank/lenders may want to ask for your budget just to see how the next year is looking. But typically organizations will do this more for internal reasons to see how the next year, or the next period is going to shape up and if there is going to be any need for financing they want to plan ahead. One of the worst things to do, is to not plan ahead, a situation happens and you are scrambling to develop a solution. Prudent management, management that is on top of the situation usually will know in advance that at this time we could have a cash flow problem and we want to address it. So if youknow in December that there is going to be a cash flow issue, then it would be prudent by in September to have discussions with your Bank, to have a solution for December. The worst thing to do is you have a problem December 1st and on December 1st you approach the Bank because then there is not enough time to negotiate a solution. So that budgeting forecasting this will enable you, as best as possible again it’s hard to predict the future 100%, but at least by doing budgeting forecasting you are attempting to alleviate most of the common problems. Because in many cases organizations do know when they are going to experience the common issues that they do. So that budgeting forecasting alleviates some of that stress.

Investment Decisions (Internal and External)

The fourth item that we have with respect to purpose and financial reporting is investment decisions. These are very common in the organization business. On a regular basis the organization is faced with decisions. Do we, for example, buy a new piece of equipment or continue using the old piece? There’s pros and cons and usually the new piece of equipment involves a financial price. So the old piece is paid for, there is no debt on it however the new piece may make our business venture more viable, more financially profitable. So then you look at the cost benefit analysis of purchasing this new piece of equipment. But you need to have the financial reports available, you need to have them current enough, where you can undertake this investment decision and provide a response. Usually an invest decision requires the collaboration of many individuals and for that collaboration to happen they most likely would like to have financial reports available to them where they can follow your thinking.

The statement of retained earnings is a summary for a period of time of all the non-operating transactions that increase or decrease owners’ equity. You’ll see the equity of a business will get depleted if the organization takes out too much money. So for example if an organization has a net income of 100 thousand dollars and the ownership group withdraws 200 thousand, well that is going to have a direct impact on the retained earnings, on the equity of the company. That’s a non-operating transaction. It wasn’t because of a sale that happened and that’s the reference with respect to non-operating transaction. The profitability, year after year, that this organization accumulates you will see that in the retained earnings of the balance sheet. The statement of retained earnings either it might be part of the balance sheet or it can stand on its own.

Verifiability, is the information that we recorded, the transactions that we recorded is there a backup for those transactions?

Timeliness, we want to make sure the financial reports are completed on a timely basis. Typically, you like to see reporting no more than six months old. If it is greater than six months, then it does come into question, is this financial data any value especially for making decisions against it.

Is it neutral? is the information recorded in a prudent manner? Meaning that, does it show the revenue when it was truly earned? Does it show the expenses when they were truly incurred, when they truly happened?

Our last item, with respect to characteristics, are the items recorded at the historic cost, the original cost? Are revenue and expenses matched within the same period of time and are we using the accrual basis of recording versus the cash basis? Are we recording the revenue when it happened? Are we recording the expense when it incurred? That is the accrual basis of accounting versus the cash basis which only records the revenue or expenses when cash has [been] exchanged.